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Underwriting Innovations, Constrictions

Mortgage panelists at MBA secondary conference

May 22, 2007


NEW YORK -- Fannie Mae and Freddie Mac have recently tightened their underwriting guidelines, according to executives speaking at an industry conference yesterday. And tighter underwriting was among factors cited for a resurgence in mortgage insurance.

Fannie has already eliminated underwriting for loans with the lowest credit scores and highest loan-to-values, panelist Charles Rumfola, Fannie vice president, project management and development, said while speaking at the Mortgage Bankers Association's Secondary Marketing Conference. DesktopUnderwriter was modified to end "DU boosts," which bumped up loans to a higher category. The poorest quality loans were moved from the MyCommunityMortgage program to its Expanded Approval.

A new DU release makes Expanded Approval available to all lenders, the executive for the Washington, D.C.-based company said. After Aug. 1, a one point price adjustment will be added to MyCommunityMortgages in an effort to manage the program's explosive growth -- which saw a 300 percent increase from 2005 to 2006. And 2007 volume has already exceeded last year's figures.

"We will continue making tweaks to products over time," Rumfola said. "This is not first time for changes, and I don't expect it to be the last."

Although Fannie expects $2.6 trillion overall originations this year -- 5 percent lower than last year, refinances will increase slightly, he said. "There's still a lot of business to be done out there," he said. "We need to give more help to borrowers out there."

In the question-and-answer session, a conference attendee asked if MyCommunityMortgage had become the "new subprime."

"I don't think subprime turned into [MyCommunityMortgage]," Rumfola countered, pointing out that refinances account for only 2 percent of its volume. "It's a highly subsidized product. We have to stem that volume."

Freddie has also tightened its guidelines -- eliminating no-income, no-asset loans, and restricting stated-doc loans, according to Tricia McClung, its vice president, housing and community investment.

"Clearly, we're concerned," she said.

Yet the situation is not completely bad.

"A lot of [debt-to-income ratios] are still very low. They should be successful in fixed-rate products," McClung added.

Last month, Fannie's chief executive officer, Daniel H. Mudd, testified to the U.S. House Financial Services committee that the government sponsored housing enterprise had relaxed its credit requirements for its HomeStay program -- which was launched to help mitigate an expected wave of subprime foreclosures this year. He noted it is part of the mortgage finance giant's mission to help borrowers who don't have perfect credit.

At the same hearing, Freddie CEO Richard F. Syron testified the company will this summer offer consumer-friendly subprime mortgages that will include 30-year and, perhaps, 40-year fixed-rate mortgages and ARMs with reduced margins and longer fixed-rate periods.

But a tightening in underwriting guidelines industrywide has helped prompt explosive growth for mortgage insurance, according to conference panelist Lisa Weaver, an executive for Genworth Mortgage Insurance.

Weaver said expanded underwriting guidelines had led to an increase in combination first and second lien loans, or piggybacks.

But now the tables have turned.

With delinquencies rising, loan performance -- especially for second mortgages -- worsening, and underwriting guidelines tightening, lenders are turning to mortgage insurance in recognition of the safety it provides. Nontraditional mortgage guidance has helped that "flight to quality," Weaver said.

In addition to being used for more loans, MI is being used with higher values, she said. Another advantage for MI is that it is now tax deductible and, depending on Congressional action, may remain so.

Panelist David Travis, senior vice president for HSBC Bank USA, agreed mortgage insurance is seeing a rebound. HSBC's use of MI will be up 70 to 80 percent over last year, he predicted.

"I think it's a great alternative," Travis said. "We tend to stay away from seconds. I don't understand them enough to take the risk."

Some lenders using combination loans, he said, "thought they were smarter than people who had been in the business for 30 years. We all know what happened."

State housing finance agencies are using taxable and nontaxable bonds in "Subprime Rescue" programs, Weaver said, predicting an increase in nontaxable bonds because of the lower interest rates they can provide. The housing finance agencies are offering longer terms, interest-only products, as well as temporary and permanent buydowns. The "Shared Appreciation Rescue," a "heavy rescue" in which the lender writes off part of the loan, is designed for borrowers in particularly dire straits.

In those kinds of rescues, the homeowner qualifies for a first mortgage amount that's lower than their current mortgage. The difference is covered by a second mortgage that's sold separately, she explained.

Michael Kling is a seasoned mortgage journalist and the former editor of Secondary Marketing Executive.

e-mail: [email protected]

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