Mortgage lenders will benefit from a reduced risk of loan buybacks, owing to the easing of borrower performance measures that are mandated by the Federal Housing Finance Agency, a new report from Fitch Ratings says.
Fitch says increased certainty around repurchase risk will likely increase mortgage lending to credit-worthy borrowers. The FHFA announced the newly eased standards this week as part of a review of its 2014 strategic priorities.
The FHFA's actions are expected to encourage lenders to offer credit to borrowers that may have been viewed as more susceptible to delinquencies, particularly borrowers with the middle tier credit scores and higher loan-to-value ratios.
Many lenders have applied credit overlays to Fannie Mae and Freddie Mac guidelines to minimize their repurchase liability, limiting lending to a small segment of super prime quality borrowers.
Fitch’s report says analysts don’t believe that the expanded relief will introduce additional systemic risk to the residential market.
“Our analysis of the GSEs' operational risk reviews and risk-sharing transactions indicate they have robust lender approval and monitoring programs, strong underwriting and loan acquisition processes, an improved credit risk management structure and an expanded loan quality control platform,” the report says.
The FHFA's announcement this week was Director Melvin Watt’s first directive.
“The directive did not have meaningful impact on the FHFA's anticipated strategy in overseeing the conservatorship of the GSEs, but it did note that the GSEs would increase risk transfers of guarantees to $90 billion in unpaid principal balances in 2014, up from $30 billion in 2013,” the report says.
The report goes on to say that beginning on July 1, U.S. banks transferring mortgage risk to the GSEs will have two alternatives for relief from repurchases. In one option, if after 36 months borrowers have made 36 consecutive payments and neither been delinquent for 60-days nor more than two 30-day periods, banks will be eligible for relief from repurchase.
Alternatively, if the loan is deemed acceptable following a loan file quality control review, repurchase relief will be provided regardless of whether the loan has an acceptable payment history. Loans found to have deficiencies as a result of a quality control review that are cured by the lender to the GSEs' satisfaction also will be eligible for relief.