According to Laurie Goodman, the Director of the Urban Institute’s Housing Policy Finance Center, lenders can be making a lot more loans without taking too much more risk (Credit Risks). The question is what is considered “too much risk”?
The belief is that many consumers, although they fall within the credit guidelines of either the Agencies or FHA, are not receiving the opportunity to buy a home because lenders are a little reluctant to lend. This is mainly because of recent actions by Fannie, Freddie and FHA toward repurchases and indemnifications on non-performing loans. Up until now, it has been better to be safe than sorry.
The hope is now that Fannie and Freddie have issued new guidelines intended on clarifying a lender’s risk for such actions, lenders will ease their underwriting to allow consumers access to capital so they may enter the housing markets. This could be a good thing for everybody if done the right way.
The “risk” however remains. There is still the rule of ATR, and the requirements by the agencies for legally compliant, performing and quality loans. The relief provided lenders from the reps and warrants depends largely on the credit quality of the loan, AND the documentation provided to support the loan’s approval and closing. Even if a lender receives relief, they still may subsequently found to be liable for a repurchase or indemnification under one of the “life of loan” reps and warrants. These deal with misstatements, misrepresentations, omissions and data inaccuracies, including but not limited to fraud.
Although a loan may pass an initial QC audit and/or perform satisfactorily for the required period, Fannie or Freddie may still require repurchase if the loan quality is found to be defective. I suggest you read Fannie Announcement SEL-2014-14 on these issues (SEL-2014-14).
So what does it all mean? I believe it means that yes; lenders have opportunities to increase business by taking a little more risk and lending to those consumers who will qualify within current underwriting guidelines, albeit on the fringe. I also believe that new opportunities will soon arise in light of recent announcements about lower down payments and loosening of credit standards.
However, when lending in these arenas, lenders need to do their homework; follow the tried and true methods and rules of approving a loan; the 3 C’s of Credit, Capacity and Collateral (remember ATR); and document, document, document. The quality of the loan originated will go a long way toward its performance and acceptance by the loan’s buyer.
Fannie, Freddie, FHA, VA and all secondary market players want loans that will perform. Quality goes a long way toward that end. In ensuring the quality and integrity of the loan data a lender will also ensure it meets credit quality and is compliant with all applicable law.
For now, the days of mass producing mortgage loans are gone. It’s time to pay attention to the quality of the loans produced to maximize profits and minimize expense. Quality loans move through the approval process quicker, have fewer problems at closing, are delivered and funded without delays and perform better in the long run. Plus, they will get you relief from the agency reps and warrants.
This is better for the originator, the secondary market, the consumer and the industry as a whole. So, pay attention to quality, the investment is well worth the returns.