This is why Fannie and Freddie mortgage initiatives won’t work

MBA declarations are feel-good, but temporary

Several newsworthy events have occurred over the past several days that would seem to indicate that the housing “recovery” is picking up steam.

While that would be welcome news for our country in general and our industry in particular, these reports are tempered by the potential unintended consequences of certain actions either taken or not taken.

I am certain that I am not alone when shaking my head at some of the news coming out of the Mortgage Bankers Association Annual Convention & Expo. For example, apparently Fannie Mae will soon buy 97% loan-to-value mortgages, which was reported this week by HousingWire. At the conference, Fannie Mae CEO Timothy Mayopoulos stated that the GSE is working closely with the FHFA to offer this type of product to Fannie associates.

Mr. Mayopoulos said that increased underwriting quality and improving representations and warranties will allow Fannie Mae to buy these low-down payment loans.

Sure, this is a boon to mortgage lenders and will most certainly enable more American’s to purchase a home.

But no matter how much the “quality” of underwriting has increased, over time a loosening of underwriting guidelines will open the door for more low quality loans being sold to low-income individuals and families – particularly by nonbanks.

Fannie Mae’s announcement at the MBA Conference came on the heels of FHFA Director Mel Watt’s speech of the same day when he indicated that his agency is clarifying the Representations and Warranty Framework to help reduce repurchases, which was no doubt music to the ears of the lenders in attendance – as it should be on the surface of it.

As quoted in HousingWire by Sarah Wheeler, Mr. Watt said, “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 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 institutions.” This is a good thing.

But my favorite quote from Director Watt’s speech as he touched on the potential of the above-reference 97% LTV ratio was, “To increase access for creditworthy but lower wealth borrowers [emphasis mine], FHFA is also working with the Enterprises to develop sensible and responsible guidelines for mortgages with loan-to-value ratios between 95 and 97%.”

"Lower wealth borrowers? "

Only members of the federal government can so easily and intentionally turn a phrase or name on its head, i.e., “Man Caused Disasters,” when we all know terrorism when we see it, and “Leading From Behind,” as if there was such a thing.

Lower wealth borrowers are in many cases low-income borrowers.

That is a fact.

Those who serve the mortgage default servicing industry, especially real estate professionals who are experienced in REO management, marketing and disposition would be wise, while they are diversifying their service offerings (since foreclosures have been steadily decreasing), to keep an eye on events unfolding.

While one can make a case for an improving economy because of reported unemployment numbers of less than 7%, an even stronger case can be made that the real unemployment/underemployment numbers exceed 10%. Some analysts put that number above 12%. Until that number comes down sharply, it is hard to imagine that we have a strong economy.

More news intended to uplift readers just before a major election cycle included the MBA’s Weekly Mortgage Applications Survey for the week ending October 17, 2014 that stated that mortgage applications increased 11.6% from the prior week.

But again, this news should be tempered by the quote in HousingWire’s story, written by Trey Garrison on Oct. 22, from Mike Fratantoni, MBA’s Chief Economist, about continuing concerns about weak economic growth in Europe.

This caused a flight to quality into US Treasuries, leading to sharp drops in interest rates.

This is a very temporary situation. Interest rates are going to rise.

When they do it will be quite noticeable and this will negatively impact originations, FHFA-led housing reform or not.

One must look beyond one’s nose to see what is on the horizon. But, I'm not holding my breath waiting for others to do the same.

There is little doubt, it would seem, that those who helped cause the housing crash have learned very little from their past actions.

Therefore, it is my belief that very soon after the elections in November, the landscape will look much different without the recent tendency to wear rose-colored glasses.

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