Brian Koss serves as EVP for the Mortgage Network. Koss discussed with MReport some recent changes the GSEs have made to their programs and how those changes will affect lenders. On October 24, Fannie Mae announced the launch of its Day 1 Certainty Initiative with the goal of helping lenders who use Fannie Mae’s Desktop Underwriter and Collateral Underwriter to proactively correct errors in underwriting, property appraisals, and inspections. Also on October 24, Freddie Mac announced changes to its Loan Advisor Suite that are designed to reduce origination costs. Those changes include: a no-cost automated appraisal alternative, automated borrower income verification, automated asset verification, and automated assessment of borrowers without credit scores. The collateral representation and warranty relief offered by both programs will significantly relieve mortgage lenders of the possibility of buybacks due to defects in the appraisals.
How will these changes impact lending and credit availability?
I think it will help because one of the things they're focusing on was the overlays. There's a lot of fear and anxiety from 2008 and the fall out of loans coming back to you. The ability to give any kind of comfort that says up front, “if you do these things, then you will be good with us and these loans won't come back to you” will be a benefit. It definitely allows some of the most cautious lenders an opportunity to not necessarily take more risks but to let their guard down a little more—as long as they pay attention to the regulation, the way the guides are written, and deliver accordingly. It's not a big change, but it should loosen things up around the edges and allow some interpretation to occur, and not take the worst case every time.
What other changes can lenders anticipate from the GSEs going forward?
One thing that's good to see, with the new suite, is the attention to cost. It's not just compliance costs and fear costs. If we continue to make it easier—less paperwork, less hands touching a loan, and faster, cleaner approvals—it will bring costs down. I think they realize that it's gotten to a point where many banks and credit unions as well as lenders are getting out of the business or getting out of certain areas because of that cost. It's only bad for the consumer, because the costs get passed on to some extent. Are there better efficiencies using technology that would allow lenders to manufacture loans at a lower cost? I think the GSEs understand that and are working with all of us toward that goal.
How well have lenders and the industry in general addressed the lack of available credit, do you think?
Since 95 percent of loans are going to a government agency, it’s really hard to really create more products. You can't. A guideline is a guideline. The only thing that we see lenders doing is removing some belt and suspenders that they were using out of fear of their compliance or credit risk. I think we all can see these loans are performing beautifully. The lenders are starting to take down that extra caution flag and allow agencies to read their findings the way they see them, and not to over-think it and be in fear of something that's not there. That's the biggest part.
Also, lenders are more willing to embrace pilot programs as they come out, such as you saw recently with some of the lower-down payment programs. That has allowed more flexibility, but these programs have to be done in tandem with the agencies. Unless you're doing the non-QM stuff—which is, frankly a very, very small portion of the process—that's the only creativity you see out there. The non-QM activity is really sort of old school subprime, and most people are avoiding that. I don't think that's going to drive the market as much as the agencies working to come up with more creative options. Lenders have to work with the agencies to pilot those programs and help get to the bottom of why millennials aren't buying and how to help create more sellers trading down. Part of the issue we're having is lack of inventory. People aren't selling, and they aren't selling because they don't know what to buy next. We need to figure out how to fix that as well.
What other factors may cause credit availability to open up next year?
I think it’s a matter of taking some of these risks and using some of the new technologies to verify incomes and assets, so there are no “gotchas” out there. If that works and works well, it will be successful. I don't think we have to do much more than that. It's very rare that we look at a loan that should be done and find it can't be done and that we're surprised. Where we do see it the most though is among the higher net worth borrowers. Frankly, it’s harder for the rich to get a loan than the poor. When you have little to no money down, it can be easier than getting a loan with 50 percent down.
We're still doing FHA, VA, rural housing, state bonds, which all allow zero to 3 percent down. Nothing has changed in those programs other than some of the overlays slowly coming down, but the guidelines are still there. It's the guy who has 3 million in the bank but doesn't have a job. We used to be able to do that loan, but you can't do that with ATR because you have issues. There are people who might be more willing to trade up if they could get a loan. We're seeing those loans mostly being driven by banks and putting them in portfolio which we are fortunate to have access to.
What could really open things up would be the non-conforming securitization platforms, and having that market open up and getting comfortable. If the high end is working and those folks are able to get jumbo loans with lower down payments and more flexibilities, that might free up homes and create inventory. It's not the classic housing affordability issues that are holding things back from our side as lenders. Qualifying on the upper end is still the biggest issue you'll hear mortgage bankers talk about.