Watt: Lending rules changes aimed at freeing up credit to more borrowers

The mortgage industry expressed support for a move by one of the nation’s top housing regulators that would ease credit requirements and boost the housing market’s recovery. 

Federal Housing Finance Agency Director Mel Watt, who oversees mortgage giants Fannie Mae and Freddie Mac, said Monday that he is making changes aimed at shaking loose the clogged up mortgage market by making loans available to more homeowners. 

{mosads}David Stevens, head of the Mortgage Bankers Association, said Watt’s comments at his group’s conference in Las Vegas “represent significant progress in the ongoing dialog” between the industry, FHFA and Fannie and Freddie “to address several of issues that are causing the tight credit conditions that have prevented a more robust recovery in the housing sector.”

Watt said the FHFA will offer lenders more clarity around the regulator’s representations and warranties policy by simplifying under what circumstances Fannie and Freddie would require the repurchase of a loan. 

Lenders have said that the uncertainty of when FHFA may require a repurchase because of mistakes or fraud amid the possibility that the loan could go bad in the future, led them to loan mostly to borrowers with excellent credit scores.

Under current rules, Fannie or Freddie can require a lender to repurchase a loan at any point during its term, making it difficult to know when or if it will happen.

“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.

Watt said the policy change is “critical to ensuring that there is liquidity in the housing finance market and to providing access to credit for borrowers” and is aimed at convincing banks to lend to higher-risk credit-worthy borrowers. 

Banks have tightened up their lending standards after years of being forced to repurchase loans that soured through the mid-2000s and that the FHFA deemed were violations of representations and warranties policies.

The banks have shelled out billions to cover the costs of shoddy mortgage practices. 

“These revisions are consistent with our broader efforts to place more emphasis on upfront quality control reviews and other risk management practices that provide feedback on the quality of loans delivered to the Enterprises earlier in the process,” Watt said.

National Community Reinvestment Coalition President and CEO John Taylor said Watt’s comments represent positive steps but “these steps alone are not enough.”

“We urge Director Watt to continue the effort to expand credit access through the FHFA’s forthcoming affordable housing goals rulemaking.”

U.S. Mortgage Insurers said the restoring access to loans that would require only a 3 percent downpayment, down from 5 percent, “will help credit-worthy borrowers — especially first-time homebuyers — gain access to affordable homeownership.”

FHFA guarantees more than half of the nation’s mortgages. 

Under the new policy, the life-of-loan exclusions will be slimmed down into six categories to make it easier for lenders to understand when they might expect to buyback a loan.

Plus, for loans that have already earned repurchase relief, the FHFA said that only those exclusions can trigger a repurchase.  

“Lenders will know what they are and when they apply,” Watt said. 

Watt said the changes “are a significant step forward” that will improve the representation and warranty framework and will “facilitate market liquidity without compromising the safety and soundness of the Enterprises.”