True Stories: Hybrid, eNote and RON Implementation

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Fannie Mae: Mortgage lenders unnecessarily restrict credit

Higher credit scores, additional documentation most common

It appears the post-recession mantra of mortgage lenders is "better safe than sorry."

Despite pushes from the Federal Housing Finance Agency and the Federal Housing Administration, many mortgage lenders are still applying additional credit overlays to loans delivered to Fannie Mae and Freddie Mac, a new survey of lenders showed.

The survey, conducted by Fannie Mae’s Economic & Strategic Research Group and based on responses from senior mortgage executives in May 2015, found that approximately 40% of lenders who deliver loans to the GSEs or Ginnie Mae reported applying credit overlays that are more stringent than what the GSEs or Ginnie Mae require.

Fannie Mae’s quarterly Mortgage Lender Sentiment Survey also found that 64% of lenders who deliver loans to the GSEs or Ginnie Mae said that credit overlays are applied on a “limited basis,” which is 20% or less of their loan originations.

The prevalence of credit overlays still persists despite efforts from both the FHFA and FHA to reduce the practice of applying stricter mortgage approval standards than the guidelines set by investors.

In Nov. 2014, Fannie Mae and Freddie Mac both announced changes to their respective representation and warranty policies, following through on an announcement made by FHFA Director Mel Watt in October.

Watt said that the FHFA was planning to clarify Fannie and Freddie’s representations and warranty policies 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,” Watt said at the time.

“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."

The FHA engaged in similar efforts, with former Assistant HUD Secretary and FHA Commissioner Carol Galante telling HousingWire in August that the FHA wanted to create a transparent blueprint for lenders so that they have more underwriting confidence and can remove some of their credit overlays and lend to a broader credit box for FHA-backed loans.

But credit overlays are still taking place, especially among wholesale channels, Fannie Mae’s survey showed.

According to the survey, about 60% of lenders who originate or acquire loans through wholesale channel said they apply credit overlays through these channels.

The Fannie Mae survey also showed that the most common type of overlay applied is higher credit score (47%), followed by additional documentation requirements (21%).

The survey also touched on loan denial rates. According to the lenders surveyed, there was a median 10% denial rate for both the purchase and refinance markets over the past year.

The lenders cited high debt-to-income ratios, low credit scores, and documentation quality as the most common reasons for purchase loan application denials.

For a different look at the Fannie Mae lender survey, click the image below.

Fannie Mae lender survey July 2015

(Image courtesy of Fannie Mae)

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