The Federal Housing Finance Agency (FHFA) is working to expand availability for mortgage credit in an attempt to give the housing market a lift, and is also working on ways to mitigate risk to GSEs Fannie Mae and Freddie Mac, FHFA Director Mel Watt said in a speech delivered on Monday.
Lenders have been faced with increased pressure from lawmakers in recent months to lower their standards for approving mortgage loans, including lending to those with lower credit scores. The industry's critics say the tough lending standards are preventing the housing market from making a full recovery because of the many would-be homeowners that are being excluded.
"As lenders, you play a central role in the overall housing market, and the work you do touches borrowers in communities across the country," Watt said in his speech. "You help individuals and families become homeowners. For many of them, this is the single largest investment they will ever make. To fulfill both sides of our shared responsibility, 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 that FHFA and the GSEs are all working together to revise the Representation and Warranty Framework in order to find that balance where lenders can manage their risk and the GSEs' credit box will be expanded at the same time. Revisions to the Framework that went into effect in May included allowing up to two 30-day delinquencies within 36 months of acquisition; providing loan level confirmations when mortgages either reach that 36-month benchmark or pass a quality control review; and eliminating automatic repurchases when the primary mortgage for a loan is rescinded, according to Watt.
The FHFA has continued to address the issue of life-of-loan exclusions, which are in place to protect the GSEs from fraud or non-compliance and they currently allow Fannie Mae and Freddie Mac to require lenders to repurchase the loan at any time during the life of the loan, Watt said. The current life-of-loan exclusions currently in place are open-ended and make it difficult for the lender to predict when one of the GSEs will enact them, Watt said, which is why a clearer definition of life-of-loan exclusions is needed. He said an agreement had been reached in principle to more clearly define life-of-loan exclusions.
"These changes are a significant step forward that will result in a better Representation and Warranty Framework and facilitate market liquidity without compromising the safety and soundness of the Enterprises," he said. "First, we are more clearly defining the life-of-loan exclusions, so lenders will know what they are and when they apply to loans that have otherwise obtained repurchase relief."
Watt said these exclusions fit 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; and 6) unacceptable mortgage products.
"Second, for loans that have already earned repurchase relief, we are clarifying that only life-of-loan exclusions can trigger a repurchase under the Framework," Watt said. "This is a straightforward clarification, but one that we believe will reduce confusion and risks to lenders."
FHFA is working with GSES to develop guidelines for loan-to-value ratios between 95 and 97 percent, Watt said.
"We know that access to credit remains tight for many borrowers, and we are also working to address this issue in a responsible and thoughtful manner," Watt said. "Additionally, FHFA continues to evaluate ways to refine and improve the loss mitigation and foreclosure prevention policies at the Enterprises, because we understand that many individuals and families are still facing the possibility of foreclosure and are looking for alternatives to stay in their homes."