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GSEs to Lift LTVs, Lower Repurchase Uncertainty

A plethora of positive news about government-sponsored enterprise lending emanated today from the crème de la crème of mortgage conferences.

Among the bearers of good news was Federal Housing Finance Agency Director Melvin Watt, who spoke Monday at the Mortgage Bankers Conference in Las Vegas.

Watt acknowledged how industry anxiety over repurchase liability on loans sold to Fannie Mae and Freddie Mac has limited access to credit, according to a copy of his prepared remarks.

He noted that the problem was first addressed in January 2013 with a revised representations and warranties framework that relieved lenders of repurchase liability after 36 months of on-time payments.

Additional refinements that increased clarity about the 36-month benchmark were issued in May 2014 that allowed two 30-day late payments within 36 months of acquisition. They also provide for loan level confirmations upon meeting the 36-month performance benchmark or passing a quality control review.

One other change from the May updates was the elimination of automatic repurchases when a loan’s primary mortgage insurance is rescinded.

Watt, a former congressman from North Carolina, explained that life-of-loan exclusions can trigger a repurchase if a loan has already earned repurchase relief — something that has been a concern for lenders because they make it difficult to predict if Fannie or Freddie will use them.

“So, we have continued to address this issue, and I can report that we have reached an agreement in principle on how to clarify and define the life-of-loan exclusions,” Watt said. “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.”

It has been agreed that exclusions must fall into one of six specific buckets: misrepresentations, misstatements and omissions, data inaccuracies, charter compliance issues, first-lien priority and title matters, legal compliance violations, and unacceptable mortgage products.

A new “significance” test requires the GSEs to determine through their automated underwriting systems that a loan would have been ineligible for purchase had the correct information been presented.

MBA President and Chief Executive Officer David Stevens said Watt’s comments represented “significant progress” in dialogue addressing tight credit conditions.

Stevens said the better clarity will hold lenders accountable while offering some relief for minor mistakes.

“There still remains more work to be done on our representation and warranty framework,” Watt stated. “On the origination side, FHFA is already focused on developing an independent dispute resolution process. We are also identifying cure mechanisms and alternative remedies for lower-severity loan defects. FHFA also continues to make progress on issues concerning servicing representations and warranties, and we have reached an agreement in principle on modifying compensatory fees and foreclosure timelines.

“The enterprises will announce details on these changes in the near future.”

Watt said that FHFA is working with Fannie and Freddie to develop guidelines for loan-to-value ratios of between 95 and 97 percent. Credit worthy borrowers with less money for a down payments would be considered based on compensating factors.

Timothy J. Mayopoulos, the president and CEO of Fannie, told attendees that the Washington-based company will again offer a 97 percent LTV program to all customers. The offering will be executed through Fannie’s Desktop Underwriter.

Mayopoulos explained that the product will be competitively priced with Federal Housing Administration-insured programs.

“We want this business,” he said of FHA loans. “We are working now with FHFA to finalize the details of our offering and gain regulatory approval to proceed.”

MBA’s Stevens said, “Rationalizing the GSEs’ compensatory fee policies will further encourage lenders to expand lending in a meaningful yet responsible way, and return of loan programs that allow downpayments between three and five percent should be of particular help to low and moderate and first-time homebuyers.”

Mortgage insurance companies applauded the return of higher-LTV products.

“Return of a 97 percent LTV mortgage purchased by the GSEs for all creditworthy borrowers would expand access to credit while providing substantial first-loss protection for taxpayers provided by private capital,” the U.S. Mortgage Insurers said in a written statement.

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