Mortgage lenders finally got what they wanted from Washington.
In the last few months Federal Housing Finance Agency Director Mel Watt has struck a conciliatory tone with mortgage lenders, seeking input on housing policy and changing loan-buyback rules to be more favorable to the industry. Watt's actions stand in stark contrast to those of former acting FHFA director Ed DeMarco, who helped Fannie Mae and Freddie Mac return to profitability but antagonized mortgage lenders with staunch buyback demands.
It's a clear signal that the administration, six years after the financial crisis, has concluded it needs bankers' help to jump-start the tepid housing recovery.
"I think this is a joint win," said Jim MacLeod, president and chief operating officer at the $404 million-asset CoastalStates Bank in Hilton Head Island, S.C. "Things need to be done to open access to credit and create more of a partnership, instead of the adversarial relationship of the last six years."
MacLeod is one of the dozen or so bankers and mortgage lenders who attended a White House meeting in mid-October with about 25 government officials and regulators. He also has taken part in lender discussions with Watt aimed at loosening buyback rules. By 2012, lenders had been forced to repurchase $129 billion of loans from the GSEs, according to the last estimate by FBR Capital Markets, which included projected losses.
Mike Heid, the president of Wells Fargo Home Mortgage, who also attended the White House meeting and has been a leader in discussions with the FHFA, framed the issue as one of access to credit. Lenders have claimed they were forced to require higher credit scores and lower debt-to-income ratios from homebuyers far above the government-sponsored enterprises' minimum guidelines to protect themselves from costly buybacks.
"The problem everybody was trying to solve for was evidence that credit availability in America was constrained compared to past cycles," Heid said. "It was an area ripe for good, thoughtful problem-solving."
The proposed policy changes might seem esoteric to anyone outside the mortgage industry. But they follow years of rancor and hostility between lenders and Fannie Mae and Freddie Mac, which have been making concessions to the industry since 2012.
Last week FHFA, the conservator of Fannie and Freddie, proposed changes to the GSEs' so-called representation and warranty framework that were lobbied for heavily by mortgage lenders. The new guidelines require that any inaccuracy or fraud in a loan file would have to be "significant" to trigger a repurchase.
The FHFA also is developing an independent dispute-resolution process to give mortgage lenders in conflicts with Fannie or Freddie a hearing from an independent third party. Lenders also will have the opportunity to cure minor loan defects.
And Fannie and Freddie will create programs allowing lower down payments of just 3% to 5% for some homebuyers. Those loans will require increased scrutiny, higher fees and a mortgage insurance premium to protect taxpayers from losses if the borrower defaults.
Bill McCue, the president of McCue Mortgage in New Britain, Conn., said he explained at the White House meeting that "things were not getting better and there needed to be changes."
"I'm encouraged by Watt providing direction and guidance," he said. "When you're in the hinterland like I am, you have to think about how it affects the guy I'm giving the loan to and how it bleeds down."
The FHFA's proposed changes would not only reduce lenders' risk of buybacks for minor loan defects caused at origination. The changes also would cut costs for mortgage servicers that have shelled out millions of dollars in what are known as compensatory fees to Fannie and Freddie for foreclosure delays.
Heid at Wells Fargo explained that the FHFA's proposed changes were designed to work in tandem.
"When you talk about extending credit more broadly, it's definitely going to move into zones where there are higher risks of delinquency," Heid said.
The compensatory fees were another area that created a Catch-22 for mortgage servicers. On the one hand, the government has urged lenders to help troubled borrowers stay in their homes. On the other, Fannie and Freddie hit servicers with hefty fees when servicers fail to foreclose in a timely manner.
The proposed changes raise questions about whether the government has gone too far in weakening the legal protections that hold lenders accountable for home loans. Watt already gave lenders a three-year sunset period that relieved lenders of some repurchase risk on loans, even allowing borrowers up to two 30-day delinquencies in 36 months.
Sandra Thompson, the FHFA's deputy director of the division of housing mission and goals, said the agency has been continuously trying to provide clarity on reps and warrants. Far from loosening, she believes the changes taken as a whole "improve Fannie and Freddie."
"Lenders are doing more upfront quality control and we have more certainty in what they deliver," Thompson said. "We are requiring a lot of changes to help mitigate concerns. There are reps and warranties on both sides of the transaction, origination and servicing. And we are exploring alternatives to repurchase on both sides. Repurchase shouldn't be the answer to every single issue."
The proposed changes were designed to get banks and mortgage lenders to reduce credit score "overlays," such as a minimum credit score of 680, which is far above GSE requirements. Yet not all consumer advocates are convinced the changes will make any difference.
"The banks are back in charge," said Bruce Marks, the CEO of Neighborhood Assistance Corp. of America, a nonprofit consumer advocate. "They're panicked at the White House because lenders aren't lending. But Fannie and Freddie are doing only high-end, perfect-credit score borrowers. You'll see no impact to low and moderate income people, working people."
"The credit box has been shrunk due to the fact that there is a question with regard to whether that loan is going to come back to you in the future, and that's really the issue," said MacLeod, at CoastalStates Bank. "If the FICO [score minimum] is 720, let's make it 730. If [maximum debt-to-income] is 43%, let's make it 41% just to be certain. If you have to have two years of employment in the same job, let's make it three years. I think the whole issue of certainty around reps and warrants has clearly skinnied down the credit box and has resulted in good loans not being made."
After 30 years of various lending crises from the savings and loan scandal of the 1980s to defaults in Rust Belt states in the early 1990s McCue said, lenders and the GSEs have finally returned to basic underwriting. That includes assessing the value of the property, as well as the assets and employment history of the borrowers and "a fair assessment of how they manage their finances."
"This isn't simple," McCue said.