The most significant change to the government-sponsored enterprises' policies is that lenders now can get relief from buybacks following a quality control review of a loan within 30 to 120 days. Fannie and Freddie will provide written notice of a successful review. Think of it as a "Get Out of Putbacks Free" card.
Lenders also have the ability to cure loan defects by turning in additional paperwork, a major change that was lobbied for heavily by the Mortgage Bankers Association. And they will no longer be on the hook to repurchase defective loans if a borrower is 30 days late on a mortgage payment once or twice in the first three years after the loan was originated. Previously, if a borrower was late even once on the mortgage during those first three years, the lender had to stand ready to repurchase the loan through the fifth year.
"It's a huge loosening," says Edward Mills, a managing director at FBR Capital Markets. "Lenders have been unwilling to go down the FICO spectrum because they would be stuck with any loans that could default." But now, "You almost wonder if rep and warranties exist anymore."
If lenders can turn in perfect loan files, Mills says, they "will not have any repurchase risk" regardless of the underlying credit quality of the borrower.
The changes were announced Monday at the direction of Fannie and Freddie's regulator, the Federal Housing Finance Agency, whose new director, Mel Watt, explained the strategy in his first major speech Tuesday.
"Lenders believe that too much uncertainty still exists in this area for them to ease their credit overlays," Watt said. "Ultimately, this undermines the goal of improving access to mortgage credit for creditworthy borrowers."
Since 2008, at the height of the housing crisis, lenders have long complained that the threat of repurchases by Fannie and Freddie caused them to impose restrictive credit standards (typically a FICO score of 680 or above) that have kept many borrowers out of the housing market. The changes under Watt remove one of the largest overhangs holding back a housing recovery, analysts say.
Clement Ziroli, president of First Mortgage Corp., an FHA lender in Ontario, Calif., called the changes "a big step in the right direction."
In early 2013, Fannie, Freddie and the Federal Housing Administration introduced quality assurance programs that Ziroli says emphasized "form over substance," led to higher compliance costs and caused many lenders to restrict lending. The government-sponsored enterprises wanted lenders to repurchase loans for defects that had little to do with the reason the borrower defaulted.
"The foot faults just aren't material," he says.
But there is concern that lenders with little expertise dealing with borrowers with sketchy credit will open the floodgates to borrowers with weak credit.
"There is the risk and possibility of a problem that could lead to another housing recession," he says. "Because the lower you go down the credit grade, the more expertise you have to have."
"This is coming at a time when home values are frothy," Ziroli continues. "Do we really want to be putting first-time homebuyers into houses again at the top of the market? We could be replacing private equity funds and cash buyers with the weakest link, first-time homebuyers, at a time when home affordability is diminishing."
Still, he lauds Watt for making changes that could have an immediate impact, since they go into effect in July.
"Watt took a very bold step," Ziroli says. "He was patient and calculated and this is the precursor of many more good things to come."
Rob Hirt, the CEO at RPM Mortgage, a private lender in Alamo, Calif., also praises Watt for "seeing that the pendulum has swung too far in the direction that credit is simply too hard to get for many Americans," though he's dubious that lenders will loosen FICO score requirements any time soon.