Freddie Mac and Fannie Mae have two separate automated underwriting systems, which are the primary tools used to establish the credit standards for the enterprises.
Mortgage lenders use Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector to determine whether loans are eligible for purchase and financing through the government-sponsored enterprises.
However, both systems have always been 'black boxes,' masking their standards from their customers, according to the Mortgage Bankers Association’s latest paper.
The MBA believes this situation needs to change so lenders have the confidence to lend to the full range of qualified borrowers.
As Congress and the Federal Housing Finance Agency consider the future of the secondary market, the development of transparent and consistent credit underwriting boundaries will be the key to a competitive, robust mortgage market.
"If we are to have a fully functioning secondary market that provides sustainable access to credit for qualified borrowers, then the development of transparent and consistent credit underwriting standards are of the upmost importance," said Debra Still, chairman of the MBA.
She added, "Any reform of the secondary mortgage market must have clear, outer boundaries of sustainable credit and clear representations of warranties to insure a vibrant, competitive, marketplace."
Additionally, the MBA is voicing for a common standard for representations and warranties, which would ensure that lenders have the confidence to lend to the full extent of the credit box.
While private capital can be encouraged to compete in the mortgage market with appropriate regulatory oversight, there should not be two different, government backed, underwriting system, the paper noted.
Instead, the FHFA should set the parameters for acceptable underwriting criteria by both GSEs and then allow them to offer credit terms within this outer boundary.
The FHFA has already taken steps in this direction by confirming that the ability-to-repay and qualified mortgage rulemaking not only applies to the enterprises, but that both will be limited to buying QM loans going forward.
Additionally, Fannie Mae and Freddie Mac should be required to synchronize their underwriting engines by year-end for all mortgage terms and products offered.
"This step would eliminate unnecessary differences and level the playing field across all lenders who deliver loans to either enterprise," MBA members noted.
They added, "Without an identical match across all variables, market players would still find ways to take advantage of differences, leading to adverse selection for whichever enterprise has the weaker standards."
Overall, aligning the GSEs’ credit underwriting standards and establishing clearer standards for reps and warrants will allow lenders to make better credit decisions, which is another step in increasing private capital and access to credit for homebuyers.
"Confusion and uncertainty around representations and warranties standards continues to cause lenders to add their own overlays to the existing GSE credit standards," said Bill Cosgrove, vice chairman of the MBA.
He concluded, "As a result, lenders are only offering mortgages to those with the most pristine credit for fear that any borrower default will trigger costly repurchase requests. This is a major contributor to the tight credit environment that is holding back the housing recovery."