Even through the Federal Housing Administration has increased Fair Issac & Co. credit score requirements, lenders have largely continued to keep a relatively tight lid on what types of borrower credit they will fund due to potential buyback and compliance risk concerns.
Where industry credit limits stand and why was among the topics discussed by a group of industry executives convened by this publication at the Mortgage Bankers Association’s National Secondary Market Conference in New York.
Mark Fogarty, editorial director of the mortgage group at SourceMedia, and Bonnie Sinnock, editor of Origination News,
In addition to causing conflicts between FHA credit standards and lender overlays, put-back and regulatory risks continue to make lenders cautious in the agency lending market, participants find in this section of the roundtable discussion. Although Fannie Mae and Freddie Mac are planning sunset provisions in reps and warrants to provide lenders with some reassurance that there is a time limit to repurchase risk, these are counterbalanced by precluding language about misstatements, misrepresentations or data errors in those documents that executives in this roundtable called “vague.”
FOGARTY: FHA’s FICOs have certainly increased in the past years. But I think that’s really a public policy question, because they want to reduce the risk of the government and by proxy all of us sitting here, the taxpayers.
FITZPATRICK: I think that—if you look at some of the credit guides and policy guides of Fannie and Freddie—you are seeing lenders now putting more restrictions on top of those. That’s not a policy issue, that’s a fear issue. That’s an issue of lenders, quite frankly, not quite understanding this new FHA framework relative to the reps and warrants. When we start looking at things like misstatements and misrepresentations—what does that mean? Nobody really knows what the means, they are catchall phrases that, quite frankly, were designed
to say: “Hey lenders, relax a little bit, take the overlays down, it’s going to be OK.” But I don’t see that happening. I see lenders more fearful. I see lenders who would rather sell to an aggregator than go to Fannie and Freddie, because there’s an extra layer of protection for them from a potential
PALLOTTA: I completely agree. I work with a lot of lenders where it is a cottage industry right now to fight put-backs. And it’s aggressive—it’s happening on both sides. So you have one part of the lending institution that may say, as Deborah said (earlier in the discussion): “Why don’t we take a look and expand the box a little bit?” And then the people who are in the put-back group say: “You have to be out of your mind! We did everything to the letter a year ago, now we’re getting a put-back because of something we didn’t understand?” There is something that I think needs to be addressed here—it is fear. It is absolutely fear, on the lenders part, of not opening up that box. There was a time when the lenders stepped over the line. There was a time when lenders stayed on the line. Lenders are standing so far back behind the line right now, it has become restrictive.
IMURA: There are two factors driving this issue. One is compliance—it’s a lot more complicated and the penalties for noncompliance have gone up post-crisis. The other is capital. If you look at what the fear of buybacks is it is that it is going to (result in) a hit on your balance sheet and I think that is driving a lot of behavior. This drives lenders to be concerned. When you look at the hurdles of buying a home today it is much tougher and it is understandable.
HURT: There is a problem with the unknown. So you’re walking into this dark void of what your new life is going to be like as you start to bring loans to market and to securitize, and the usual gestation time for something to be a critical massive problem is probably anywhere from 18-36 months. And so, just as you mentioned, you have to start reserving for that now. So you are taking a hit to your balance sheet before you even have the problem and you do not even know what it might look like in three years. So, I think that unknown is as big as a problem as anything else.
SINNOCK: Does the sunset features that the agencies are saying they want to put into the reps and warrants—do they ease that concern at all?
FITZPATRICK: One thing that does not sunset: any misstatements, misrepresentations or data errors. Can anybody can explain to me exactly what that means? If they could, I think that would ease some fear.
HURT: That fear is exacerbated on what the definition may be three years from now.
PALLOTTA: You don’t need to go much further on the news that came out this week on (New York attorney general Eric) Schneiderman suing Wells and Bank of America on a settlement that was signed last year. I didn’t read a lot of the details about it, but the rules change—it seems like—all the time.
FOGARTY: A rolling disaster. It should have been over last year with the settlement, but it’s not.
PALLOTTA: And you think when you sign a settlement you’re done, and now they’re coming back—it doesn’t end.
FITZPATRICK: The consequences for noncompliance are very high. And it’s not just potentially repurchases. It could be something involving the Department of Justice, as we’ve seen. I think the people—if they had the choice between the Department of Justice and the repurchase, they’d probably raise their hand for the repurchase, but the fact is they don’t want either one. So if you look at consequences from regulatory perspective and a credit perspective, the consequences for noncompliance are very, very high in the industry, which is creating a lot of that fear. So, although the new securitization framework is critical, I think it’s a very good idea that it’s being looked at, we really have to move a little bit further into the production cycle and say: “How are we producing loans today? What are these public policies? What are some better definitions around this rep and warrant framework that we’re look at?” Those issues have to be looked at and resolved. In the meantime, lenders really need belt-and-suspenders approach from a quality and credit perspective. Really overlaying their production and almost re-underwriting and relooking at credit and compliance all the way through on every loan is a belt-and-suspenders approach.
HURT: Brian makes a good point, there are tools, there are processes, and there are capabilities to do all this upfront. In fact, there are vendors that are out there that can write insurance behind that, so you can put that off the table, at least on the rep and warrant side. Some of the things that would be associated with unwitting misrepresentation—I hate to use the big F word, the fraud word, let’s call it bad actor misrepresentation. But it’s the witting and the knowing process, the misrepresentation that is never going to be covered. But, to me, that would be what would bring the Department of Justice in. So when you get into the bad actor world, which is where a lot of people have had problems and put-backs, in valuation particularly, I think you can get that off the table now and you can vet some of that stuff. Even with that, it is still that unknown that’s limiting a lot of people from getting in the market, because you just don’t know what’s going to happen in two to three years because, as Frank said, rules change. And they come back and say: “We really meant this as well.” So you can take the fraud off the table from the most part, from the rep and warrant. But what you can’t take is somebody coming in and saying: “You didn’t properly counsel the borrower. You didn’t properly do that.” And when you move outside in that QM world, you then get into this plausible denial sort of a process and you can end up with a loan anyways. A lot of people are really worried about that.
FITZPATRICK: Dave makes a really good point about it. I don’t think it’s the fraud. Absolutely, there should be every consequence. What they know they’re doing wrong becomes—as you say—it’s the unknown. It’s the fear. It’s tripping over something you don’t know you’re even tripping over. And part of the issue right now is that there are a lot of rules that are undefined. And I don’t think there is any unwillingness for lenders to play according to the rules of the game. They just need to understand the rules. And they need to be very, very well defined so that they can set up their processes and their procedures accordingly. We can add all the technology, all the services in the whole entire world, but if we don’t understand the rules it’s very difficult to play the game.
STURGES: And the clock is ticking towards January 2014.
FITZPATRICK: Absolutely One thing we do know is that the game has changed.
