After five years in conservatorship, Fannie Mae and Freddie Mac still use separate automated underwriting systems with different credit standards.
These differences in underwriting came as a surprise to officials at the Consumer Financial Protection Bureau when they decided to give GSE-eligible loans qualified mortgage status.
But it is well known in the mortgage industry, including the underwriting exceptions and variances the government-sponsored enterprises grant their largest customers.
Meanwhile, the AU systems continue to be a “black box” as far as most lenders are concerned. And the Mortgage Bankers Association wants to change that.
The AU systems for “both GSEs have always been black boxes masking their standards from their customers,” the MBA says in a new paper on transitioning to a new secondary market regime. “Despite being under government control, Fannie Mae and Freddie Mac are still not fully transparent about their AUS credit standards,” the MBA paper says.
The trade group wants the GSE regulator to direct Fannie and Freddie to employ the same credit underwriting standards. “The MBA believes that Fannie Mae and Freddie Mac should be required to synchronize their underwriting engines by yearend for all mortgage terms and products offered.” Taking these steps will make the mortgage market more competitive, the MBA claims, because lenders will understand the full extent of the credit box.
The mortgage bankers have issued several papers on various GSE issues. These papers suggest steps that can be taken now to improve the mortgage market while Congress continues to work on housing finance reform. The paper issued last week also calls on the FHFA and the GSEs to move toward a new approach to loan repurchases. The current policy allows Fannie and Freddie to demand repurchases of loans where the “purported underwriting defects and the borrower’s default are tenuous at best. In some cases these repurchase demands extend back to 10 years or more.” This approach forces lenders to tighten the credit standard. “Absent a clear and consistent repurchase, this is the only tool lenders have to mitigate repurchase risk,” the paper says.
Speaking at an event last week, MBA president and CEO David Stevens noted that Fannie and Freddie have streamlined their refinancing requirements under the direction of the GSE regulator. HARP has worked “great,” Stevens said at a Bipartisan Policy Center forum on housing finance reform. But HARP refinancings were slow to get out of the box until the FHFA “realized they had to deal with representations and warranties and streamline documentation,” Stevens said. The MBA CEO noted that the FHFA hasn’t made that kind of effort on the purchase side. Reps and warrants “remain overly onerous.”