There are differing views regarding clarifications to the government-sponsored enterprises' regulatory framework under which lenders and the GSEs operate with respect to the purchasing and selling of mortgages.
Some claim that this could signal an end to regulations that mortgage bankers claim have prevented them from providing home loans to thousands of otherwise qualified individuals. Others argue that these changes may have negative implications for Americans.
1. Repeating of the Past
The most obvious negative repercussion of loosening regulations is the potential of a return to a housing bubble, wherein untrustworthy lenders provide loans to borrowers for houses which consumers cannot afford, increasing the likelihood of a default on the property. The argument that supports this thought is that the loosening of regulations is not necessarily the solution to increasing the number of first-time homebuyers or mortgages in general. The alternative would be to create an economic environment that allows borrowers to be put in the financial position to make mortgage payments.
2. Repercussions to Taxpayers
Changes to the Federal Housing Finance Agency's representations and warranties framework for the GSEs it regulates have drawn strong criticism from the FHFA's Office of the Inspector General. The OIG stated that the new framework has been implemented "despite significant unresolved operational risks to the Enterprises." According to the OIG, the changes were implemented without allowing either of the GSEs to develop and implement a system of procedures and processes to deal with the new framework. Further, the OIG claims that the FHFA was aware that the GSEs were not ready in time for the rollout of the changes. (Fannie and Freddie were still in the process of final implementation of these systems. Fannie had most systems released by the end of 2013. However its quality assurance system was not completed until the summer of 2014, and its relational data warehouse system is slated to be completed and released in 2015. Freddie Mac is further behind the curve. Most of their systems to support the framework were slated to be completed at the end of 2014 with release dates to run into 2015.)
"FHFA directed the Enterprises to implement the new framework without allowing sufficient time for them to fully implement and test pre- and post-loan delivery risk assessment tools, systems used to track loan information related to the new framework, and systems that support the Enterprises' quality control processes. As a result, there is potentially unmitigated risk of errors in the new loan review framework and the Enterprises may experience credit losses that otherwise could have been avoided both by the structure of the framework and the systems and processes employed to implement it," the report said.
When former FHFA director Ed DeMarco announced the implementation of this regulatory framework in September 2012, he asserted that it will better protect taxpayers from future losses. However, it is unclear whether this happened. Critics note that if Freddie and Fannie are allowing a minimum number of "bad" loans to be identified before triggering repurchase, the GSEs will likely suffer a loss, especially if the lender is unable to buy back the loans. They further argue that when the GSEs begin to suffer losses, so do taxpayers.
3. Public Sector Involvement
According to discussion at a Senate Banking Committee meeting with the FHFA on Nov. 19, 2014, Sen. Elizabeth Warren, D-Mass, believes that the FHFA should take responsibility for helping homeowners underwater on their homes. Warren claims that since the administration's duties are to "conserve the assets of Fannie and Freddie" and to "implement a plan that seeks to maximize assistance for homeowners and take advantage of available programs to minimize foreclosures," Watt should pursue principal reduction. Furthermore, Warren cited studies that show a principal reduction plan could save Freddie and Fannie $2.8 billion to $4 billion.
FHFA chairman Melvin Watt defended his decision not to implement principal reduction based upon the need for lenders to perform due-diligence and ensure that the procedure is done in a responsible and equally beneficial manner. He further stated that an undertaking at this level would have to be a "win-win" for Freddie Mae, Fannie Mac and homeowners across the board. Some compare principal reduction to giving away money to those in debt, and argue that removing debt from homeowners across the board simply to decrease foreclosure rates could actually increase Fannie and Freddie's losses if it encourages more debtors to request government relief from their debts than otherwise would.
4. Private Sector Involvement
Since the private sector originates mortgages, some of which may be "bad" loans, some ask whether there should be an expectation for the private sector to foot the bill when loans go sour. With the ever-changing regulations coming from Capitol Hill, some companies are seeking to protect themselves and taxpayers by proactively using technology designed to reduce risks related to looser lending practices and regulations.
For example, Digital Risk's mortgage analytics platform, Veritas, models systemic and operational risk, allowing users to better mitigates repurchase risk. Veritas offers repurchase insurers a method for understanding risk at its root cause - whether systemic or operational - and the ability to predict future risk with significant more accuracy than the single-scoring methodology. This level of repurchase insurance offers lenders peace of mind and protects them from devastating loan buyback costs.
Regardless of the loosening of regulations relating to the mortgage industry, one thing is certain: regulatory bodies, lenders, originators, and all other stakeholders must collaborate to create a housing market that will grow and prosper by learning from the mistakes that led to the meltdown of the mortgage industry.
