New home-loan rules aim to promote lending

Daily Business Review

By: Clea Benson

The U.S. overseer of Fannie Mae and Freddie Mac, seeking to reduce the threat that banks will have to buy back flawed loans from the two firms, laid out new rules designed to spur lending and east the housing crunch.

The new system will apply to future mortgages, not those that are the subject of current bank complaints that the two taxpayer-owned companies are being too aggressive in forcing them to buy back loans made at the height of the housing bubble, Edward J. DeMarco, acting director of the Federal Housing Finance Agency, said Monday in a speech to bankers in North Carolina.

The new system, which takes effect on Jan. 1, should give banks more certainty about future costs by flagging potentially faulty mortgages earlier, he said. Fannie Mae and Freddie Mac will use data collected on the loans they purchase to spot potential defects, and will review samples of loans within three months of buying them instead of waiting until borrowers default, DeMarco said.

“Lenders want more certainty about their risk exposure, and the enterprises want to ensure the quality of the loans delivered to them,” DeMarco said in the prepared text of the speech.

Regulators including FHFA and the Federal Reserve have said that banks are shutting out otherwise eligible borrowers and demanding higher credit scores than necessary because they are afraid Fannie Mae and Freddie Mac will force them to buy back the loans if they become delinquent.

MARKET LIQUIDITY

Fannie Mae and Freddie Mac provide liquidity to the home-loan market by buying mortgages from originators and packaging them into securities on which they guarantee the interest rate. They also buy some mortgages to hold on their books.

Under the new rules, the two taxpayer-owned companies won’t force lenders to repurchase defaulted loans if the borrowers have made 36 months of consecutive, on-time payments. Banks will be protected from buyback requests after only 12 months of payments for certain types of loans, such as those originated under the federal government’s Home Affordable Refinance Program, DeMarco said in the speech in Raleigh, North Carolina.

While the change is a “step in the right direction,” lenders could see more audits in the near future as the system ramps up, said Tim Rood, managing director of the Collingwood Group, LLC, a Washington-based consulting firm.

‘MORE AUDITS’

“What you’re going to see is a surge in more audits, rather than less, just as companies are getting comfortable that the worst is behind them,” Rood said in a phone interview.

“Ultimately, better quality loan originations and underwriting, along with consistent quality control, will help maintain liquidity in the mortgage market,” DeMarco said.

In the aftermath of the housing bubble, the government-sponsored enterprises have been reviewing files on defaulted loans originated between 2005 and 2009 for signs that the underwriting was faulty. In the first two quarters of this year, Fannie Mae and Freddie Mac asked banks to buy back mortgages with an unpaid principal balance of $18.9 billion.

Banks usually end up paying about half of the unpaid principal balance when a putback demand is successful, according to the companies.

Washington-based Fannie Mae and McLean, VA-based Freddie Mac were taken over by the U.S. government in 2008 after investments in risky mortgages brought them to the brink of bankruptcy. They’ve received about $190 billion in aid since then and the battle with banks over repurchases is part of their efforts to minimize losses.

BUY-BACK COSTS

Bank of America Corp., Wells Fargo & Co., JP Morgan Chase & Co., Citigroup Inc. and Ally Financial, Inc., set aside almost $3 billion to buy back bad home loans in the first half of 2012, according to data compiled by Bloomberg. Regional lenders including Sun Trust Banks Inc. said they set aside at least $1.3 billion for such loan repurchases in the same period, exceeding their total for all of 2011.

In his speech at the American Mortgage Conference, DeMarco outlined future steps FHFA will take to shrink Fannie Mae and Freddie Mac’s footprint in the mortgage market.

The fees the enterprises charge to lenders to guarantee loans, which will have increased by 20 basis points by the end of the year, will continue to be raised, he said.

FHFA will also seek public input in October on a plan for creating a single platform for packaging loans into securities, he said. Currently, each company has its own platform.

The refinancing program for borrowers who owe more than their homes are worth will be updated by the FHFA, DeMarco said. “As we continue to gain insight from the program, we will make additional operational adjustments,” he said.Daily Business Review

By: Clea Benson

The U.S. overseer of Fannie Mae and Freddie Mac, seeking to reduce the threat that banks will have to buy back flawed loans from the two firms, laid out new rules designed to spur lending and east the housing crunch.

The new system will apply to future mortgages, not those that are the subject of current bank complaints that the two taxpayer-owned companies are being too aggressive in forcing them to buy back loans made at the height of the housing bubble, Edward J. DeMarco, acting director of the Federal Housing Finance Agency, said Monday in a speech to bankers in North Carolina.

The new system, which takes effect on Jan. 1, should give banks more certainty about future costs by flagging potentially faulty mortgages earlier, he said. Fannie Mae and Freddie Mac will use data collected on the loans they purchase to spot potential defects, and will review samples of loans within three months of buying them instead of waiting until borrowers default, DeMarco said.

“Lenders want more certainty about their risk exposure, and the enterprises want to ensure the quality of the loans delivered to them,” DeMarco said in the prepared text of the speech.

Regulators including FHFA and the Federal Reserve have said that banks are shutting out otherwise eligible borrowers and demanding higher credit scores than necessary because they are afraid Fannie Mae and Freddie Mac will force them to buy back the loans if they become delinquent.

MARKET LIQUIDITY

Fannie Mae and Freddie Mac provide liquidity to the home-loan market by buying mortgages from originators and packaging them into securities on which they guarantee the interest rate. They also buy some mortgages to hold on their books.

Under the new rules, the two taxpayer-owned companies won’t force lenders to repurchase defaulted loans if the borrowers have made 36 months of consecutive, on-time payments. Banks will be protected from buyback requests after only 12 months of payments for certain types of loans, such as those originated under the federal government’s Home Affordable Refinance Program, DeMarco said in the speech in Raleigh, North Carolina.

While the change is a “step in the right direction,” lenders could see more audits in the near future as the system ramps up, said Tim Rood, managing director of the Collingwood Group, LLC, a Washington-based consulting firm.

‘MORE AUDITS’

“What you’re going to see is a surge in more audits, rather than less, just as companies are getting comfortable that the worst is behind them,” Rood said in a phone interview.

“Ultimately, better quality loan originations and underwriting, along with consistent quality control, will help maintain liquidity in the mortgage market,” DeMarco said.

In the aftermath of the housing bubble, the government-sponsored enterprises have been reviewing files on defaulted loans originated between 2005 and 2009 for signs that the underwriting was faulty. In the first two quarters of this year, Fannie Mae and Freddie Mac asked banks to buy back mortgages with an unpaid principal balance of $18.9 billion.

Banks usually end up paying about half of the unpaid principal balance when a putback demand is successful, according to the companies.

Washington-based Fannie Mae and McLean, VA-based Freddie Mac were taken over by the U.S. government in 2008 after investments in risky mortgages brought them to the brink of bankruptcy. They’ve received about $190 billion in aid since then and the battle with banks over repurchases is part of their efforts to minimize losses.

BUY-BACK COSTS

Bank of America Corp., Wells Fargo & Co., JP Morgan Chase & Co., Citigroup Inc. and Ally Financial, Inc., set aside almost $3 billion to buy back bad home loans in the first half of 2012, according to data compiled by Bloomberg. Regional lenders including Sun Trust Banks Inc. said they set aside at least $1.3 billion for such loan repurchases in the same period, exceeding their total for all of 2011.

In his speech at the American Mortgage Conference, DeMarco outlined future steps FHFA will take to shrink Fannie Mae and Freddie Mac’s footprint in the mortgage market.

The fees the enterprises charge to lenders to guarantee loans, which will have increased by 20 basis points by the end of the year, will continue to be raised, he said.

FHFA will also seek public input in October on a plan for creating a single platform for packaging loans into securities, he said. Currently, each company has its own platform.

The refinancing program for borrowers who owe more than their homes are worth will be updated by the FHFA, DeMarco said. “As we continue to gain insight from the program, we will make additional operational adjustments,” he said.