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FHFA director announces changes to open Fannie, Freddie credit boxes

Clarifies lending liability in reps & warranties, increases LTV ratios

Federal Housing Finance Agency Director Mel Watt announced a number of policy steps aimed at increasing mortgage credit availability at the Mortgage Bankers Association Convention & Expo on Monday.

Watt didn’t provide a great deal of specifics, but said that the FHFA will be taking steps to further clarify lender liability in representations & warranties. He also said that he supports the return of the 97% loan-to-value product at the GSEs, Fannie Mae and Freddie Mac.

The following is from Watt’s prepared remarks.

On access to credit:

“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. 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. I want to assure you that we are hard at work and making good progress on all these issues, several of which I will highlight in my remarks today.”

On reps & warranties:

“Let me start by talking about one of FHFA’s key initiatives, revising and clarifying the Representation and Warranty Framework (Framework) under which lenders and the Enterprises operate. As you know, these representations and warranties provide the necessary assurances that allow Fannie Mae and Freddie Mac to purchase loans in an efficient and responsible manner without checking each loan individually or being at each closing. They also provide the Enterprises remedies to address situations where a lender’s obligations to meet the Enterprises’ purchase guidelines have not been fully met.

“Over the last several years, we have worked to refine the Representation and Warranty Framework and to have the Enterprises place increased attention and resources on upfront quality control reviews. As part of this process, we have listened closely to your concerns about the impact that loan repurchases have had on your businesses, and we understand that addressing these concerns in ways that are mutually satisfactory to you and the Enterprises is critical to ensuring that there is liquidity in the housing finance market and to providing access to credit for borrowers.

“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.”

On liabilities:

“To address this problem, FHFA and the Enterprises have worked to revise the Framework to ensure that it provides clear rules of the road that allow lenders to manage their risk and lend throughout the Enterprises’ credit box. These revisions are consistent with our broader efforts to place more emphasis on upfront quality control reviews and other risk management practices that provide feedback on the quality of loans delivered to the Enterprises earlier in the process.”

On the Framework:

“The first improvements to the Framework went into effect in January of 2013. These improvements relieved lenders of representation and warranties obligations related to the underwriting of the borrower, the property or the project for loans that had clean payment histories for 36 months. In May of this year, FHFA and the Enterprises announced additional refinements to provide greater clarity around this 36-month benchmark. These changes included:

  • Revising the payment history requirement to allow up to two 30- day delinquencies in the first 36 months after acquisition;
  • Providing loan level confirmations when mortgages meet the 36- month performance benchmark or pass a quality control review; and
  • Eliminating automatic repurchases when a loan’s primary mortgage insurance is rescinded.”

On LTVs and other steps:

“To increase access for creditworthy but lower-wealth borrowers, FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97 percent. Through these revised guidelines, we believe that the Enterprises will be able to responsibly serve a targeted segment of creditworthy borrowers with lower-down payment mortgages by taking into account “compensating factors.” While this is a much more narrow effort than our work on the Representation and Warranty Framework, it is yet another much needed piece t the broader access to credit puzzle. Further, details about these new guidelines will be available in the coming weeks as we continue to advance FHFA’s mission of ensuring safety, soundness and liquidity in the housing finance markets.”

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