Agencies consider mortgage reform
WASHINGTON — Two federal agencies with influence over the mortgage market are working on how to encourage private lenders to ease up on their underwriting restrictions.
Both the Federal Housing Finance Agency, which oversees giant investors Fannie Mae and Freddie Mac, and the Federal Housing Administration, which runs the low-down-payment program, are considering steps they might take to persuade lenders to open the mortgage spigots a little wider. The focus of their reform projects: the "overlay" rules many lenders have adopted that lump extra fees, larger down payments and higher credit-score requirements onto home loans than Fannie, Freddie or FHA require.
Some banks require full appraisals, credit checks and add-on fees. Other lenders may limit eligibility for the program to customers they already service, despite the fact that FHA allows borrowers to seek streamline refinancings from any FHA-approved lender.
Why are lenders making it tougher for creditworthy applicants to obtain a mortgage? Tops on the list: "defensive lending." "Defensive lending is the mortgage equivalent of defensive medicine," where doctors run more tests than needed to reduce litigation risk, says Brian Chapelle, principal at Potomac Partners in Washington, D.C. "Mortgage lenders are adding underwriting requirements and program restrictions to avoid overstepping a sometimes ambiguous line" that will trigger penalties from Fannie, Freddie or FHA.
Even minor technical infractions in underwriting or documentation can cause "buyback" demands by Fannie or Freddie when loans go into default, with costs per loan for the lender sometimes soaring to hundreds of thousands of dollars. Plus the Justice Department is putting pressure on major banks to pay millions to settle allegations of flaws in their mortgage practices — settlements the banks consent to not on the merits but to avoid protracted litigation and hits to their stock prices.
Banks and other originators also are uncertain about upcoming mortgage regulations that will spell out the rules for future lending.
What to do? The two agencies are mum about specifics but are expected to announce reforms in the coming weeks.
Lenders, on the other hand, know precisely what they'd like to see. Steve O'Connor, senior vice president of the Mortgage Bankers Association, says lenders want several key changes in current procedures, including clear, point-by-point guidance on how the agencies will define reasonable grounds for buybacks or indemnifications going forward. Lenders also need assurance that after an agreed-upon period of time, they will not be blamed for deficient underwriting on a loan that goes belly up.
FHA lenders, said Chapelle, also want greater fairness in the way they're treated when loans default.