Federal Housing Finance Agency (FHFA) Director Mel Watt recently gave a speech at the Mortgage Bankers Association’s Annual Convention. In his remarks, Director Watt previewed forthcoming revisions to GSEs’ lending standards. These revisions have been long advocated by the mortgage banking industry which has complained that the threat of repurchases by Fannie Mae and Freddie Mac caused lenders to impose restrictive credit standards, which in turn has caused tight credit conditions. Director Watt highlighted the following upcoming revisions to the GSE lending standards:
- Representation and Warranty Framework: First, the GSEs will more clearly define the life-of-loan exclusions, “so lenders will know what they are and when they apply to loans that have otherwise obtained repurchase relief.” These exclusions fall into six categories: 1) misrepresentations, misstatements and omissions; 2) data inaccuracies; 3) charter compliance issues; 4) first-lien priority and title matters; 5) legal compliance violations; and 6) unacceptable mortgage products. For loans that fall into the first two categories, Director Watt said Fannie Mae and Freddie Mac would not force repurchases of mortgages found to have minor flaws if the borrowers have near-perfect payment histories for 36 months. He also said flaws in reporting borrowers’ finances, debt-to-income ratios and loan-to-value would not trigger buy-back demands so long as the borrowers would have qualified for loans had the information been reported accurately. Second, for loans that have already earned repurchase relief, the GSEs will clarify that only life-of-loan exclusions can trigger a repurchase under the Framework
- Compensatory Fees – Director Watt indicated that FHFA and the GSEs have agreed to reduce the percentage of loans that would be subject to compensatory fee assessments.
- Low Down Payment Loans – Director Watt also confirmed that FHFA is working with the GSEs to develop “sensible and responsible guidelines” for mortgages with loan-to-value ratios between 95 and 97 percent. This will allow the GSEs to serve a targeted segment of borrowers with low-down payment mortgages by taking into account “compensating factors.” Director Watt did not expound on what these “compensating factors” are, but indicated that further guidelines will be announced the coming weeks.
- Common Securitization Platform -- Director Watt also provided an update on the Common Securitization Platform (CSP). Director Watt announced that FHFA and the GSEs have revised the governance structure and operating agreement for Common Securitization Solutions (CSS). CSS is a joint venture owned by both Fannie Mae and Freddie Mac and is the corporate entity that we expect ultimately to house and operate the CSP. According to Director Watt, a governance structure for management of the CSP has been created and a CEO will be announced shortly. Further, Director Watt reiterated that the CSP will use industry standards and technology to ensure it will be usable by other secondary market participants in the future.
Director Watt’s remarks garnered significant attention, but there remains debate as to whether these proposed revisions will result in expanded lending operations