The Federal Housing Finance Agency, the regulator of Fannie Mae and Freddie Mac, plans to help banks avoid being forced to buy back mortgages as it becomes concerned that lenders are tightening standards even for the most creditworthy home buyers.
The FHFA will detail flaws that would trigger a putback request, Stefanie Johnson, a spokeswoman for FHFA, said in a statement. The regulator also is standardizing the data Fannie Mae and Freddie Mac collect on each loan so they have more information when buying mortgages from lenders, she said.
Banks are requiring credit scores on government-backed loans that are between 100-200 points higher than the minimums set by Fannie Mae, Freddie Mac and the Federal Housing Administration, after the government-controlled agencies demanded lenders repurchase more than $80 billion in flawed loans over the past three years.
"The lenders perceive the pendulum has swung too far, and they're being held accountable for things beyond their control," said Brian Chappelle, a partner at the bank consulting firm Potomac Partners. "Their reaction is going to be to tighten up."
PNC Financial Services Group Inc. said June 12 it's increasing reserves by $350 million to cover demands, while Bank of America Corp., the second-biggest U.S. lender, said in May it will buy back $330 million of home loans from Freddie Mac "because the valuation method used at origination did not meet the investor's technical requirements," Dan Frahm, a spokesman for the Charlotte, North Carolina-based bank said at the time.
"If lenders perceive that minor errors can result in significant losses from putback loans, they may respond by being more conservative in originating those loans," Federal Reserve Governor Elizabeth A. Duke told an audience of Realtors in Washington last month, noting that an April Federal Reserve survey of loan officers found that a significant number cited buyback risk as a reason they wouldn't lend.
Bank of America rose 5 percent to $8.15 at 10:31 a.m. in New York today, the highest level since May 3, and is up more than 46 percent this year. PNC increased 1.9 percent to $59.14.
Stricter lending standards are restraining the housing rebound, even as the Federal Reserve pushes down borrowing costs to record lows. A Commerce Department report today in Washington showed housing starts dropped 4.8 percent to a 708,000 annual pace from a revised 744,000 rate in the prior month that was the highest since October 2008. The median forecast of 77 economists surveyed by Bloomberg News called for a 722,000 pace.
The average rate on a 30-year, fixed-rate mortgage reached a record low of 3.67 percent in the first week of June, according to Freddie Mac.
Fannie Mae and Freddie Mac, which own or guarantee more than half of U.S. mortgages, are currently demanding lenders repurchase faulty loans with unpaid principal balances totaling $15.3 billion, according to their earnings statements for the first quarter. The two companies 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 minimize losses.
"I would expect any effort to clarify or reduce putback liability to have a corresponding effect on the standards for underwriting" Fannie Mae and Freddie Mac loans, Duke said.
Banks usually end up paying about half of the unpaid principal balance when a putback demand is successful, according to the companies.
FHFA is working with Fannie Mae and Freddie Mac to develop a framework that will provide lenders a higher degree of certainty and clarity around repurchase exposure and liability as well as consistency around repurchase timelines, incentives and remedies," the FHFA's Johnson said in a statement. She said the agency hasn't yet determined when that guidance would be provided.
The FHFA is suing 17 banks on behalf of the GSEs, alleging that they misrepresented the quality of loans in mortgage-backed securities Fannie Mae and Freddie Mac purchased for their own portfolios.
The Federal Housing Administration, a government mortgage insurer, also will clarify some of its rules on mortgage originations in the next 60 days to counter lender concerns about liability risk, the agency's acting director, Carol Galante, said in an interview. The FHA will probably take a series of steps, such as specifying how quickly a borrower who's gone through a short sale or foreclosure can qualify for a new FHA loan, she said.
The FHA doesn't make repurchase demands because it doesn't buy loans, though it may also be having a chilling effect on lending.
The FHA has increased efforts to reach legal settlements with lenders including Citigroup Inc.'s mortgage unit and Deutsche Bank AG, alleging that the banks fraudulently claimed that mortgages submitted for FHA insurance met the agency's underwriting standards. The agency's inspector general has been probing the extent of fraudulent activity and has subpoenaed records of insured loans from lenders including MetLife Inc.
"We are working internally to look at ways that we can create a clearer path for lenders and perhaps a clearer path for borrowers to eliminate some of what we see as excessive" credit tightness, Galante said.
The FHFA and FHA are trying to persuade lenders to increase lending even as they improve standards. Fannie Mae and Freddie Mac require a minimum credit score of 660 for most home buyers. The FHA, which was created during the Great Depression to help borrowers who couldn't otherwise get loans, requires a minimum credit score of 500.
Lenders are asking for much more: The average loan backed by Fannie Mae in the first quarter had a 763 credit score; at Freddie Mac the typical borrower had a credit score of 758. The average FHA loan has a score near 700. That means only about 40 percent of potential borrowers can qualify for a GSE loan, while less than half qualify for an FHA loan.
Shaun Donovan, secretary of the Department of Housing and Urban Development, has said between 10 and 20 percent of creditworthy borrowers are being shut out of the market.
So far, federal attention is directed at minimizing the risk that newly originated loans will eventually be the subject of repurchase requests or fraud lawsuits. They don't address the concerns of lenders who are trying to determine just how much more their balance sheets will be affected by bad loans issued during the years of loose credit standards.
Officials at Fannie Mae and Freddie Mac dispute the characterization that they have been more aggressive than necessary in forcing lenders to repurchase loans and also question whether there's a link to current credit standards.
"Repurchase complaints aren't new and unexpected," said Chris Mock, vice president of quality control at Freddie Mac. "The enforcement in the current environment may just be driving more seller-servicers to be more vocal about it."
Fannie Mae has spent the last few years ramping up its capacity to go through files of loans originated between 2005 and 2008, when loan standards were particularly lax. Only about one in five defaulted mortgages ends up being the subject of a repurchase request.
"When we discover loans were delivered to us that did not meet our underwriting and eligibility requirements, we make demands for lenders to repurchase these loans or compensate us for losses we've sustained on them," Andrew Wilson, a spokesman for Fannie Mae, said in an e-mail. "Fannie Mae pursues repurchase requests to protect the interests of the company and to prudently manage the resources we have been provided by the taxpayers."
People familiar with the company's loan-review process said Fannie Mae limits buyback requests to mortgages that clearly violate underwriting standards. Fannie Mae could be about two- thirds of the way through the backlog of loans originated at the peak of the housing bubble, the people said.
The companies have an appeals process; in the first quarter of this year, Freddie Mac rescinded about $1.3 billion in repurchase requests after obtaining additional information from lenders.
Fannie Mae and Freddie Mac officials also note that they have been trying to help lenders and the housing market by waiving liability for repurchase risk on loans they service when they refinance them through the government's Home Affordable Refinance Program.
There are things the GSEs could be doing to mitigate lenders' anxiety about repurchase risk on existing loans, said Potomac's Chappelle.
Chappelle, who consults with banks in some buyback disputes, said it would help if the companies developed a clear standard saying they won't request putbacks on minor technical violations of underwriting standards, such as improperly completing paperwork. They should also consider implementing a sunset date beyond which they won't go back and re-open old loan files.
"It is the biggest issue that's affecting the purchase market today," he said.