After Federal Housing Finance Agency Director Mel Watt announced his plans to change some of the housing finance industry lending standards to expand the credit box, he went to next source of strengthening homeownership: Realtors.
During the National Association of Realtors Convention & Expo, Watt emphasized to Realtors that now is a great time for real estate agents to be actively encouraging their customers to become homeowners.
This comes just a couple weeks after Watt and U.S. Secretary of Housing and Urban Development Julian Castro spoke at the Mortgage Bankers Association Annual Convention & Expo where they outlined changes that would reduce confusion and risks for lenders, including clarifying the Representations and Warranty Framework to help reduce repurchases.
The FHFA is also 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.
At the same conference, Fannie Mae CEO Timothy Mayopoulos said the government-sponsored enterprise will soon begin offering a 97% loan-to-value mortgage. And Freddie Mac is not too far behind with the same announcement.
So when addressing attendees at the NAR conference, rather than repeat everything he previsouly said, Watt said that he did want to emphasize that the FHFA is working to have the enterprises place increased attention and resources on conducting quality control reviews and providing lenders access to automated appraisal tools to detect problems with mortgage purchases early on, even before the loan is purchased.
“In addition, we believe that these revisions and clarifications to the Framework will reduce lender uncertainty about when the enterprises will require repurchase of a loan and, as a result, will pave the way for lenders to lift some of their current credit overlays and reduce the cost of credit to borrowers without compromising the safety and soundness of the Enterprises,” Watt said.
Since Watt first announced the 97% LTV product, details have been scarce, but a Compass Point Trading & Research noted that this speech provided the first update to the proposal.
"We know that the size of a down payment – by itself – is not the most reliable indicator of whether a borrower will repay a loan. As a result, the guidelines will require that borrowers have “compensating factors” and risk mitigants – such as housing counseling, stronger credit histories, or lower debt-to- income ratios – in order to make the mortgage eligible for purchase by Fannie Mae or Freddie Mac. This approach builds on the Enterprises’ experience using compensating factors and risk mitigants," Watt said.
But this feat does not come without its own set of challenges. These are just a few factors Watt mentioned are keeping homeowners on the sideline:
- Millennials are choosing to remain renters. “Signs suggest that many millennials want to own a home in the future, but are holding off on purchasing for a number of reasons,” Watt said.
- Student loan debt. John Burns Real Estate Consulting has quantified the true measure of this dismal reality: Student debt will cost the housing industry approximately $83 billion in sales in 2014.
- Down payment problems. “Prospective borrowers other than young people and millennials are also facing challenges in accumulating enough money to make a large down payment and cover closing costs,” Watt said.
- Low credit scores. Although some people have recovered since the crisis, their credit scores are still scarred, blocking they ability to return to homeownership.
“Bottom line, there is no lack of rational explanations for why demand for homeownership is down, and these explanations will continue to change and evolve in the months and years ahead,” Watt said. “While things will not change overnight, it is my hope that many creditworthy individuals and families who are currently renters – but have the ability to pay a mortgage and become homeowners – will have the opportunity to pursue homeownership and will decide to do so.”