GSEs To Aggressively Lend A Helping Hand
Whether or not your credit union offers mortgages, you got some good news yesterday. Former North Carolina Congressman turned head of the Federal Housing Finance Administration Mel Watt used his first major address since taking over in January to signal that Fannie and Freddie will move aggressively to help prop up the U.S. housing market. Considering that economic gurus as important as Janet Yellen have signaled that continued weakness in the housing market remains a key threat to a sustained economic growth, the fact that Fannie Mae and Freddie Mac are going to more aggressively try to jump start the housing market even though they are both in conservatorship is big news.
Among the steps announced by Watt are that:
- The size of mortgage loans that can be purchased by Fannie and Freddie will not be reduced. He explained that this decision was “motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market.”
- Fannie and Freddie will increase the circumstances under which they will purchase mortgages that exceed a 43% debt to income ratio. Keeping in mind that any mortgage that Fannie and Freddie will purchase is considered a qualified mortgage, this has the potential of giving lenders greater underwriting flexibility.
- Fannie and Freddie will expand the use of more flexible buy back requirements. This may sound like boring stuff, but Fannie and Freddie have taken such a hard line when it comes to making lenders buy back mortgages with even minor regulatory defects that many lenders have imposed stricter lending requirements than they have to in order to ensure they comply with Fannie and Freddie guidelines. Remember when it comes to selling mortgages to Fannie and Freddie, it’s seller beware, not buyer beware.
- Fannie and Freddie will continue to move toward consolidating their securitization platform. Remember that Fannie and Freddie buy mortgages and then sell them in packages of mortgage-backed securities. Although we are a long way from finalizing housing reform, all parties seem to agree that whatever entity replaces Fannie and Freddie should be streamlined to avoid needless duplication.
As important as the specifics outlined in yesterday’s speech are is what the change in tone signals about the goals of Fannie and Freddie. The primary responsibility of the FHFA is to conserve Fannie and Freddie after they were bailed out by the American taxpayer, Watt’s predecessor Edward DeMarco emphasized the conservatorship responsibilities of the agency by, for example, resisting pressure from the Administration to loosen lending standards. Fannie and Freddie have become more not less important to the U.S. housing market in the last five years.
Critics will argue that yesterday’s speech is yet another example of government not of law but of regulation since the FHFA’s primary goal should be to wind down the GSEs. Proponents of yesterday’s announcements will argue that with Congress unable to formulate a coherent housing policy, regulators should use whatever powers they have to get the housing market going again. Both sides have a point and sooner or later, Congress has to come to consensus about what it thinks a “post-Fannie and Freddie” world should look like.