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Mel Watt and Julian Castro announce housing policy changes

MBA calls the policy changes "extremely positive"

Federal Housing Finance Agency Director Met Watt and U.S. Secretary of Housing and Urban Development Julian Castro announced their plans to address some of the housing finance industry pain points in what MBA CEO David Stevens called "extremely positive" policy steps.

Speaking at the Mortgage Bankers Association Annual Convention & Expo on Monday, Watt and Castro outlined changes that would reduce confusion and risks for lenders.

"We know that access to credit remains tight for many borrowers, and we are also working to address this issue in a responsible and thoughtful manner," Watt said. "Additionally, FHFA continues to evaluate ways to refine and improve the loss mitigation and foreclosure prevention policies at the Enterprises, because we understand that many individuals and families are still facing the possibility of foreclosure and are looking for alternatives to stay in their homes."

Watt said that the FHFA was clarifying the Representations and Warranty Framework to help reduce repurchases.

"We know that the Representation and Warranty Framework did not provide enough clarity to enable lenders to understand when Fannie Mae 
or Freddie Mac would exercise their remedy to require repurchase of a loan. And, we know that this issue has contributed to lenders imposing 
credit overlays that drive up the cost of lending and also restrict lending to borrowers with less than perfect credit scores or with less conventional financial situations."  
Watt said the FHFA's changes include clearly defining life-of loan exclusions, which fall into six categories:
1.  Misrepresentations, misstatements and omissions
2.  Data inaccuracies
3.  Charter compliance issues
4.  First-lien priority and title matters
5.  Legal compliance violations
6.  Unacceptable mortgage products

For loans that have already earned repurchase relief, Watt said that only life-of-loan exclusions can trigger a repurchase under the Reps and warranties framework.

In one of the most significant policy changes, Watt announced that the FHFA is setting a minimum number of loans that must be identified with misrepresentations or data inaccuracies to trigger the life-of-loan exclusion, so that the GSEs will be responding to a pattern of misrepresentations or data inaccuracies, not just outliers.
The FHFA is also adding a "significance" requirement to the misrepresentation and inaccuracies definition so that GSEs can factor in whether the inaccuracy would have prevented funding the loan at the front end. 

Watt said the GSEs would be announcing more details on changes related to reps and warranties in the near future, including:

  • Developing an independent dispute resolution process
  • Identifying cure mechanisms and alternative remedies for lower-severity loan defects
  • Servicing representations and warranties
  • Modifying compensatory fees and foreclosure timelines.
"We have started to move mortgage finance back to a responsible state of normalcy – one that encourages responsible lending to creditworthy 
borrowers while maintaining safety and soundness of the Enterprises," Watt said. "While there is still more to do, FHFA and the Enterprises have 
demonstrated the willingness and commitment to develop a better Representation and Warranty Framework for all parties.
"I hope our actions provide sufficient certainty to enable your companies to reassess existing credit overlays and more aggressively make responsible loans available to creditworthy borrowers. This will result in a housing market that is not only better for borrowers, but also better for the Enterprises and lenders and beneficial to our country, Watt said.
Watt also announced that the FHFA and GSEs are working to develop "sensible and responsible guidelines" for mortgages with loan-to-value ratios between 95% and 97%. 

Watt said the The FHFA and GSEs are in the process of creating the Common Securitization Platform, which will create a shared securitization infrastructure for Fannie Mae and Freddie Mac that will operate under the Common Securitization Solutions corporate structure. The FHFA will be naming a CEO to the CSS by the end of the year, Watt said.

"The CSP is more than a simple technology project, and it will require significant changes to each of the Enterprises’ business practices," Watt said.
The director also asked mortgage banker's to comment on the membership requirements of Federal Home Loan Banks during the extended comment period. "I want to emphasize that getting input and feedback from stakeholders is a crucial part of FHFA’s policymaking process. So give us your input, not only on our FHLB Proposed Rule, but on other policy initiatives and decisions we are evaluating," Watt said.
Julian Castro began his speech by reiterating that HUD understands the importance of credit availability.

"Credit is the lifeblood of the housing industry," Castro said. "It’s in our entire nation’s interest to help more responsible Americans succeed in the housing market by expanding access to credit." 

Castro outlined HUD's plan to expand access to credit with its Blueprint for Access initiatives:

  • Overhauling the Single Family Housing Policy Handbook to give lenders clarity on policies and compliance
  • Launching the Supplemental Performance Metric to capture a more in-depth view of a lender's portfolio performance, comparing lenders on their performance with others doing business in specific credit score ranges
  • Redrafting the Loan Defect Taxonomy to streamline 99 different codes into nine categories of loan defects
  • Initiating a Ginnie Mae pilot program to give smaller lenders more access to the secondary market

The policy changes from Watt and Castro were anticipated from comments made last week, as HousingWire covered in a report from the Wall Street Journal. Stevens and other leaders also referenced the changes in their speeches this morning, challenging the regulators to ease the incredibly strict underwriting standards now required to originate a mortgage loan. 

Following the announcement, Compass Point analysts said in a note to clients, "We view this development with cautious optimism as it reinforces our belief that policymakers are willing to embrace initiatives aimed at increasing the flow of mortgage credit." Compass Point listed the biggest winners of this kind of credit box expansion as originators, private mortgage insurers and home builders. 

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