WASHINGTON - In its clearest statement yet on the new technology initiatives at Fannie Mae and Freddie Mac, the Office of Federal Housing Enterprise Oversight has confirmed what many lenders have said all along.
The automated underwriting systems and related technologies that the agencies are developing will shift many of the functions now performed by lenders to the agencies. In so doing, the new technologies will alter the relationship between the primary and secondary markets, the report says.
"Lenders will continue to originate all mortgages, but may perform fewer of the steps in the origination process," according to the agency regulator's annual report to Congress, submitted Wednesday.
"Fannie Mae and Freddie Mac will directly underwrite many conforming loans and, increasingly, will collect much of the information used in the underwriting process," the report added.
Currently, lenders market to potential borrowers, prequalify them, collect and verify data on their income, employment, and assets, order property appraisals and mortgage credit reports, underwrite loan applications, and process loans that have been approved.
While mortgage lenders who already have their own automated underwriting systems may continue to underwrite loans, "many lenders may limit their operations to sourcing loans, submitting applications to the enterprises for underwriting, reviewing referred applications, and then processing approved loans," the report said.
In its analysis, the regulator depicts the agency initiatives as forward-looking strategies designed to increase market share, improve credit quality, and generate new fee income.
"Lenders that are satisfied with one enterprise's system may not install the other's and may shift their business toward the former enterprise," the report said.
In comments to lenders, the agencies have cited savings to consumers through automation as the primary driver for the new technology.
In its report, the regulator agreed with the agencies that substantial savings should follow, as time and paper are cut out of the process. Also, if credit quality improves, the agencies could lower guarantee fees, the regulator said.
According to the agency regulator's estimate, lenders may initially achieve savings of about $300 on many applications. For savings to reach the $1,000 level that Fannie Mae has spoken about, almost all the steps of the origination process would have to be automated, the report said.
This would require national data bases of title information, appraisals, or sales prices, as well as links to employers and banks to verify employment and bank account balances.
As the agency charged with overseeing the safety and soundness of Fannie Mae and Freddie Mac, the oversight office is examining the effect of the new technologies in three areas, according to the report.
It is evaluating the credit quality of the loans underwritten by the new systems and purchased by the enterprises.
It is also keeping an eye on the potential business risks associated with providing technology products and services to lenders, and the effects on the agencies of related changes in the industry structure.
Overall, the regulator said its initial examinations of Fannie Mae and Freddie Mac "revealed no significant concerns involving financial safety and soundness."
Both Fannie and Freddie declined to comment on details of the report.