Melvin L. Watt, the overseer of Fannie Mae (FNMA) and Freddie Mac, is loosening rules that have forced banks to buy back billions of dollars worth of flawed home loans in an effort to spur the housing market.
Watt, who took over in January as head of the Federal Housing Finance Agency announced in a speech a series of steps intended to stimulate lending. More than six years after the housing bubble burst, lenders remain cautious about making home loans to borrowers with less-than-perfect credit because they could end up absorbing losses if the loans default.
The banks’ reticence has kept first-time homebuyers and others with weak credit out of the real-estate market and created a drag on the fragile housing recovery. Fannie Mae and Freddie Mac (FMCC) have forced banks to repurchase defaulted home loans with a balance of $81.2 billion between 2011 and 2013 alone. Lenders say that is a major reason they’re still requiring credit scores averaging about 740 on loans they sell to the government-owned mortgage companies, far above the sub-700 average before 2007.
The new rules announced in Washington are a first step in a long-term effort to clarify loan-buyback policies and ease lender concerns. Banks will be freed of liability for mortgages with three years of steady payments even if borrowers send their checks late twice during that time. They’ll also be off the hook for loans that pass underwriting spot-checks before the three years are up. Fannie Mae and Freddie Mac will begin notifying lenders in writing when they’re relieved of responsibility for each loan.
The changes are important steps towards balancing safe and sound lending with improving access to credit. These changes should provide the lending community with additional clarity and confidence in making their lending decisions.”
The steps are just the beginning of the effort to ease lenders’ concerns. The FHFA is also considering allowing banks to fix some curable defects such as missing paperwork instead of automatically requiring buybacks when such flaws are found. The agency may also set up an independent arbitrator to weigh in when lenders and Fannie Mae or Freddie Mac can’t agree whether a loan is defective enough to require a repurchase.
Even so these agencies do not purchase Jumbo loans we feel if they ease up on credit it will flow down to the Jumbo lenders as they always seem to follow Fannie and Freddie. Also recently there has been a huge drop in new loan originations which adds extra pressure to loosen up guidelines across the board from a $100,000 loan to $5,000,000 loan.
The importance of certainty around how we manufacture loans, and what constitutes a defect, is part and parcel to bringing back the mortgage market that we all want to have.