Mortgage

FHFA: Here are 10 things the GSEs did to improve access to credit in 2017

Agency releases annual scorecard on Fannie, Freddie

The Federal Housing Finance Agency released its annual progress report summarizing the activities of the GSEs in 2017.

As part of the 2014 Strategic Plan for the Conservatorships of Fannie Mae and Freddie Mac, the companies have three requirements they must meet each year.

1. Maintain, in a safe and sound manner, foreclosure prevention activities and credit availability for new and refinanced mortgages to foster liquid, efficient, competitive, and resilient national housing finance markets.

2. Reduce taxpayer risk through increasing the role of private capital in the mortgage market.

3. Build a new single-family securitization infrastructure for use by the Enterprises and adaptable for use by other participants in the secondary market in the future.

“This is the fifth annual report detailing the significant steps taken by FHFA, in collaboration with Fannie Mae, Freddie Mac and Common Securitization Solutions, to meet our conservatorship objectives,” FHFA Director Melvin Watt said. “It also underscores our continuing commitment to transparency and to meeting these objectives in a safe and sound manner.”

Objectives in the 2017 scorecard required the enterprises to continue to assess opportunities to address credit access and develop recommendations for improvement, improve the effectiveness of pre-purchase counseling and homeownership education through technology, data analysis and other opportunities and conclude assessment of updated credit score models for underwriting, pricing and investor disclosures, and plan for implementation. Here are 10 things the GSEs did in 2017 to reach these goals.  

1. Student debt

The GSEs pointed out student debt has remained a major hindrance as it makes it difficult for borrowers to meet certain underwriting requirements related to assessing their ability to repay the mortgage.

To combat this, both companies revised their student debt related calculations concerning potential payment shocks, debt paid by others and treatment of student loans as a contingent liability. The revised calculations were published in Fannie Mae’s Selling Guide and Freddie Mac’s Seller/Servicer Guide.

2. Credit invisible

Back in May, Freddie Mac updated its automated underwriting system to process applications from borrowers who don’t have credit scores, or the credit invisible. The change improves access to credit for mortgage applicants who do not have sufficient credit history to compute a credit score, while still requiring sufficient compensation factors to obtain an approval recommendation.

Fannie Mae also made several changes in September, allowing both enterprises to accept delivery of eligible loans for credit invisible borrowers.

3. Low income borrowers

Fannie Mae also worked to develop a series of tailored pilot programs to increase its purchase or securitization of loans made to low income and other underserved borrowers. The company increased to a 95% maximum loan-to-value ratio allowed for adjustable rate mortgages.

And both Fannie Mae and Freddie Mac identified circumstances where they will permit certain debts paid by others to be excluded from the debt-to-income calculation.

4. Mortgage education

Early in 2017, Fannie developed a strategy to build awareness of its affordable housing programs among real estate agents and lenders and to educate future borrowers of its low down payment mortgage options and down payment assistance programs offered by third parties. The strategy includes outreach at conferences and events in high opportunity markets as well as a marketing campaign to direct potential borrowers to more detailed information online.

Later in the year, Freddie Mac began planning its own marketing campaign to increase awareness of borrower training and other resources available through its CreditSmart financial education curriculum and borrower help centers. Its borrower help centers are national nonprofit intermediaries that offer pre-purchase homebuyer education and foreclosure prevention counseling to borrowers with Freddie Mac-owned mortgages.

5. Language barriers

The 2017 Scorecard also required the enterprises to identify major obstacles for borrowers with limited English proficiency in accessing mortgage credit, analyze potential solutions and develop a multi-year plan to support improved access. As a result, the GSEs put for the Improving Language Access in Mortgage Lending and Servicing Request for Input in May. It received more than 200 responses.

After going through its review process, the FHFA announced it would include a question on the revised uniform residential loan application to find out an applicant’s preferred language. The new question will standardize lender collection of language preference data. On November 20, 2017, the Consumer Financial Protection Bureau granted its approval of the redesigned URLA under the Equal Credit Opportunity Act.

6. Housing counseling

Both companies continue to work to improve their pre-purchase and early delinquency counseling by outreach to housing counselors, working to better track results of housing counseling and homeownership education efforts through technology.

In November, Freddie launched its Loan Product Advisor for housing counselors, enabling agencies to access its automated underwriting system through their own case management systems. This allows counselors to assess a client’s readiness for home ownership before referring them to lenders.

Fannie is collaborating with housing counseling agencies to develop a new client case management system that will connect with its underwriting products, Desktop Originator and Desktop Underwriter to assess a client’s mortgage readiness. The company expects the new system to be available by the end of 2018.

7. Credit score models

The FHFA began working with the GSEs to assess their current credit score requirements. They looked at credit scores produced by three models including Classic FICO, FICO 9 and VantageScore 3.0. The FHFA says it desires to update from the Classic FICO model, it has yet to decide which new model to use as a replacement.

In December, FHFA issued Credit Score Request for Input to gather feedback on the options under consideration. The RFI presents four credit score options under consideration. Each option presents implementation, operational and competition considerations, which are reflected in the questions included in the RFI. The deadline for submitting feedback to the RFI is March 30, 2018. The FHFA expects to make a decision on which new model to use as some point in 2018.

8. Minority borrowers

In an effort to support credit access for minority borrowers, Fannie Mae engaged in community outreach and provided training to three major minority trade associations at town hall events. It also launched a marketing campaign with the National Association of Real Estate Brokers to support the “Black Homeownership Matters” campaign.

Freddie continued the use of its pilot programs to support expansion of access to credit to minority borrowers. The company engaged in extensive outreach to minority real estate professional organizations, including the National Association of Hispanic Real Estate Professionals, to raise awareness of mortgage loan products with low down-payment requirements.

9. High LTV refinances

The GSEs announced in August a new refinancing program aimed at borrowers with high-LTV loans. The new offering will give borrowers with high-LTV loans who are current on their mortgage an opportunity to refinance. The GSEs explained that these borrowers are typically unable to refinance when their LTV ratio is higher than the limits on other existing refinance products.

However, by giving underwater and highly leveraged borrowers the opportunity to refinance, not only will it benefit the borrower, but also lowers the default risk of such loans – a risk the enterprises already own.

In order to qualify for the new high-LTV offering, a borrower must have a mortgage originated on or after October 1, 2017, not have missed any mortgage payments in the previous six months and not have missed more than one payment in the previous 12 months, have an LTV for the new mortgage that exceeds the maximum allowable LTV ratio for a limited cash-out refinance and receive a benefit from the refinance such as a reduction in their monthly mortgage payment.

10. Multifamily

The 2017 Scorecard put loan production caps on each of the GSE’s multifamily business to further the goal of maintaining multifamily activities while not impeding on the participation of private capital. The cap set for both companies in 2017 was $36.5 billion.

However, the FHFA designed exclusions from the cap to support affordable and underserved multifamily segments of the multifamily market, saying these segments are not being adequately served by the private sector. Exclusions include financing for subsidized affordable housing, manufactured housing communities and small multifamily properties, between five and 50 units.

Additional exclusions include financing for affordable properties in rural areas, energy efficiency improvements in Enterprise-financed properties, and market-rate units that are affordable to very low, low and moderate-income tenants in standard, high-cost and very-high cost rental markets.

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