Are the GSEs returning to subprime lending?
Mel Watt announced a number of changes designed to loosen the credit box and stimulate lending. This doesn’t mean a return to subprime.
Those of us who watched the housing bubble and bust and detailed it’s causes are greatly concerned about returning to the disastrous lending practices of the past. Although some degree of credit loosening was inevitable, the last thing any of us should want to see is a return to irresponsible subprime lending, particularly now that the US Taxpayer is liable for all the losses.
Yesterday’s announcement of loosening standards at the GSEs excited everyone in the housing industry. Lenders, realtors, and homebuilders all rejoice the opportunity to close more deals, but before they celebrate, they should take a good look at what was really announced because none of it will have much impact on the market.
Sarah Wheeler, October 20, 2014
… Watt said that the FHFA was clarifying the Representations and Warranty Framework 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. 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.”
Watt said the FHFA’s changes include clearly defining life-of loan exclusions, which fall into six categories:
1. Misrepresentations, misstatements and omissions
2. Data inaccuracies
3. Charter compliance issues
4. First-lien priority and title matters
5. Legal compliance violations
6. Unacceptable mortgage products
For loans that have already earned repurchase relief, Watt said that only life-of-loan exclusions can trigger a repurchase under the Reps and warranties framework.
In one of the most significant policy changes, Watt announced that the FHFA is 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.
The FHFA is also adding a “significance” requirement to the misrepresentation and inaccuracies definition so that GSEs can factor in whether the inaccuracy would have prevented funding the loan at the front end.
- Developing an independent dispute resolution process
- Identifying cure mechanisms and alternative remedies for lower-severity loan defects
- Servicing representations and warranties
- Modifying compensatory fees and foreclosure timelines.
… “I hope our actions provide sufficient certainty to enable your companies to reassess existing credit overlays and more aggressively make responsible loans available to creditworthy borrowers. This will result in a housing market that is not only better for borrowers, but also better for the Enterprises and lenders and beneficial to our country, Watt said. …
Castro outlined HUD’s plan to expand access to credit with its Blueprint for Access initiatives:
- Overhauling the Single Family Housing Policy Handbook to give lenders clarity on policies and compliance
- Launching the Supplemental Performance Metric to capture a more in-depth view of a lender’s portfolio performance, comparing lenders on their performance with others doing business in specific credit score ranges
- Redrafting the Loan Defect Taxonomy to streamline 99 different codes into nine categories of loan defects
- Initiating a Ginnie Mae pilot program to give smaller lenders more access to the secondary market
These changes will be greeted with a lot of fanfare in the industry and marginally increase lending as it clarifies the boundaries, but it doesn’t materially change anything.
Somewhat more disconcerting is the return of 3% down loans with GSE backing.
The regulator of Fannie Mae and Freddie Mac said on Monday it was developing rules to let Americans buy homes with down payments as low as 3 percent, part of a push to boost access to credit.
Mel Watt, director of the Federal Housing Finance Agency, pledged the new guidelines for the two taxpayer-owned firms would be “sensible” without putting the safety of financial markets at risk.
“(They) will be able to responsibly serve a targeted segment of creditworthy borrowers with lower down payment mortgages,” he said in a speech. …
He said the lower down payments would be allowed when taking into account “compensating factors” without specifying what those factors would be.
I’m not worried about this announcement because some lender still has to originate these loans and accept the consequences of buy-back losses, so we won’t see a sudden surge in 3% down loans. In all likelihood, the private mortgage insurance associated with these loans will be as expensive as FHA insurance making this option no better than going FHA.
It was tempting to write an alarmist post (like this one), but I believe there is less to this than people make it out to be. The policies do little to loosen the credit box; mostly, they clarify where the boundaries are, but these policy clarifications do little to move the boundaries of the credit box.
New FHFA Rules Won’t Lead to Easier Mortgage Restrictions Soon
by John Carney, Oct. 20, 2014 4:27 p.m. ET
No matter how many times Lucy pulled the football away, she always managed to persuade Charlie Brown to trust hope over experience and try to kick again. Federal housing-finance regulators are attempting a similar feat as they try to expand access to home loans.
The problem: Big banks may not be so eager to trust that the ball will remain in place.
At issue is the ability of Fannie Mae and Freddie Mac to require banks to repurchase loans that don’t meet their standards.
Put-back requirements are the check-and-balance in the system. If lenders know they have to buy back their bad loans, they are much less likely to originate bad loans. Put-backs make banking function like the old days when lenders held loans on their own balance sheets. When lenders know their own money is at risk, they are far more diligent in verifying a borrower’s qualifications.
In recent years, firms such as Bank of America and J.P. Morgan Chase have faced tens of billions of dollars of such repurchase demands. They have paid tens of billions more to settle litigation over sales of faulty mortgages.
To avoid such costs in the future, banks have put in place lending standards that intentionally overshoot Fannie and Freddie requirements. The result of these so-called credit overlays is tighter mortgage lending than regulators would like.
In a speech Monday, Federal Housing Finance Agency head Mel Watt sought to persuade banks to reassess the overlays. Specifically, he said Fannie and Freddie will provide details on what faults can trigger a repurchase even after a loan has entered a so-called safe-harbor after three years.
This kind of rule tinkering isn’t likely to loosen credit availability noticeably, at least in the short term. Banks are twice shy, while also looking at loans through the prism of what they would be willing to keep on their own books.
This is exactly what we want, isn’t it? Do we want lenders to make loans to anyone with a pulse and pass the losses on to the US taxpayer? Well, we know lenders, homebuilders, and realtors do, but the rest of us would rather not pay the bills when such irresponsible behavior blows up the housing market again.
What’s more, bank executives are well aware that they face scrutiny not just from FHFA, but other overseers not bound by its decisions, such as the Justice Department.
So Mr. Watt can hold out the ball and say all the right words. But he can’t make banks charge down the housing field.
Great! Reflating the housing bubble at taxpayer expense should not be a goal of public policy.