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Fitch: New tools from Fannie Mae, Freddie Mac will make mortgages safer

Changes to appraisals, verification of borrowers’ finances strengthen underwriting

Mortgage underwriting is getting stronger and safer for both borrowers and lenders thanks to new tools introduced in recent years by Fannie Mae and Freddie Mac, Fitch Ratings said in a new report.

According to Fitch, new approaches to appraisal valuation and income verification are “improving these government-sponsored enterprises’ ability to assess credit risk, while reducing costs for sellers and borrowers.”

One of the specific tools mentioned in Fitch’s report is the GSEs' use of the Uniform Collateral Data Portal, which allows lenders to electronically submit appraisal reports for conventional mortgages that are delivered to Fannie Mae or Freddie Mac.

“The information is aggregated and tracked in a rapidly growing database that currently includes more than 20 million appraisals, an unprecedented amount of property valuation detail,” Fitch writes.

Gathering that much appraisal data allows Fannie and Freddie to “assess valuations on new loans with greater confidence by referencing details of nearby properties or a prior appraisal of the borrower's property.”

According to Fitch, having that much appraisal data also allows the GSEs to grant representation and warranty relief to lenders in some cases, as is the case with Fannie Mae’s Day 1 Certainty Program.

Additionally, the appraisal data horde enables the GSEs to waive the need for a new appraisal in some cases, as noted last year.

Fitch’s report also notes another feature of Fannie Mae’s Day 1 Certainty program: direct verification of borrowers’ income, assets, and employment.

“In addition to the changes occurring with appraisal valuations, Fannie Mae recently introduced a process of directly verifying a borrower's income and assets by using third-party vendor data, allowing for greater certainty on the accuracy of borrower-provided information,” Fitch writes. “Lenders and borrowers benefit through shorter processing times and less required paperwork, as well as representation and warranty relief for lenders.”

Fitch notes that Freddie Mae has not yet implemented third-party direct verification of income and assets, but plans to roll it out soon.

All of these changes strengthen mortgage underwriting and have benefits for borrowers, lenders and investors, Fitch writes.

“Fitch views the representation and warranty relief as only adding modest risk to investors due to the limited circumstances in which it is provided,” Fitch adds.

“Additionally, for Fannie Mae risk-sharing transactions, the relief provided to sellers does not add any risk to investors as Fannie Mae will repurchase loans subsequently identified as having an underwriting defect, even if the original lender is not obligated to repurchase the loan from Fannie Mae,” Fitch concludes.

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