FHFA Director to Roll the Dice on Lending Standards

By Ryan Dosen

 

Mel Watt, the acting director of the Federal Housing Finance Agency (FHFA), delivered a strong message early this week indicating that he is going to continue his crusade to help loosen lending standards and open the door for more would-be homebuyers to qualify for mortgages. Delivering his speech from the Mortgage Bankers Association annual convention in Las Vegas, one can’t help but notice the irony that Watt is more than ready to take a gamble on less credible buyers for the sake of supporting our housing market.

 

The Federal Housing Finance Agency

The FHFA describes itself on its website as an independent regulatory agency that oversees “vital components of the secondary mortgage market including Fannie Mae, Freddie Mac and the Federal Home Loan Banks.” The mission of the FHFA, they say, is to “ensure that the housing government sponsored enterprises operate in a safe and sound manner so that they serve as a reliable source of liquidity and funding for housing finance and community investment.”

Simply put, the FHFA regulates Fannie Mae and Freddie Mac. Fannie Mae and Freddie Mac decide what types of loans will be deemed “conforming” loans. “Conforming” loans do not have to be kept “on the books” by a bank and can be packaged and sold off. The advantage to banks of selling off their loans is that if they didn’t package and sell off their loans, the banks would be limited in their lending abilities by the amount they held on deposit. The ability to package and sell their loans keeps banks continually in the lending game, as long as they adhere to FHFA standards for lending.

 

Tight Lending Standards

In the wake of the real estate and economic collapse of the 2000s, many banks faced steep penalties for their roles in packaging and selling mortgage-backed securities containing residential mortgages from subprime or higher-risk borrowers. Bank of America was forced into a $17 billion settlement over its role in the sale of the doomed mortgage-backed securities.

Banks have responded by tightening credit standards and going above and beyond FHFA standards to help assure that (a) the loans they give don’t go bad and (b) they are not held accountable in the future for issuing bad loans. For example, the Washington Post and Moody’s Analytics reports that the average credit score on a loan backed by Fannie Mae and Freddie Mac today is close to 745, versus about 710 in the early 2000s.

To address the banks’ concerns, Watt said on Monday that Fannie Mae and Freddie Mac will provide clearer definitions for the conditions for loan repurchases (i.e. when banks are required to buy back bad loans). He says that loan repurchase will only be pursued against lenders showing a pattern of “misrepresentations and inaccuracies….”

 

Smaller Down Payments

Watt said that in order “to increase access for creditworthy but lower-wealth borrowers,” the FHFA is working with Fannie Mae and Freddie Mac “to develop sensible and responsible guidelines for mortgages with loan-to-value rations between 95 and 97 percent.” Essentially, he wants more people to be able to buy homes while putting up 3 or 5 percent, as opposed to the more common 10 to 20 percent.

When banks are lending 97 percent of the value of home, that doesn’t leave a lot of room for error if there is a hiccup in the market.  Still, Watt is willing to push the envelope to get banks lending more, to get people into new houses, and to improve the housing market.

 

Interest Rates and Fannie’s Fees

Fannie Mae and Freddie Mac are paid fees by lenders that issue conforming loans. In return for those fees, the institutions guarantee the loans in the event of default. An increase in these fees was scheduled to happen around the time Watt took over at the FHFA in early 2014. He delayed the increase, possibly in an effort to delay the increased cost of lending, which would have been passed on to consumers in the form of higher interest rates.

To his credit, again, Watt is doing what he can to help people get loans to buy houses. However, is he taking a justifiable and/or safe risk?

 

Rolling the Dice on Riskier Home Buyers

Mel Watt took the stage at the Mandalay Bay in Las Vegas and announced that he fully intends to roll the dice on riskier home buyers because he wants to give them a shot at home ownership. Whether his gamble is a sound one or whether he should back away from the tables is a discussion for another time and column. The upshot for the near-term housing market is that this is relatively good news if you are a buyer or seller.

Mel Watt’s throwing a party and a lot of you are invited. You may not be on the banks’ VIP lists, but Watt is telling the bouncer to go take a break and he’s pulling back the velvet rope.

 

— Ryan Dosen manages The Wayne Megill Real Estate Team of Keller Williams Brandywine Valley in West Chester. Contact Ryan Dosen for buyer or seller representation or for more perspective on the local and national real estate market by emailing rdosen@megillhomes.com or calling 610-399-0338. Please also visit The Wayne Megill Team blog at www.PAHomesAndRealEstate.com.

 

This article was published by 21st Century Media and the Daily Local News (West Chester, PA). To read this article on the the newspaper’s site, please visit the Daily Local News.

 

 

To view all of Ryan Dosen’s 21st Century Media real estate columns, visit http://www.dailylocal.com/search?text=dosen.