Fannie Mae, Freddie Mac Tout New Programs to Boost Access to Credit

Freddie Mac and Fannie Mae came to the Mortgage Bankers Association’s Annual Convention & Expo here yesterday to announce initiatives designed to cut loan origination costs, offer collateral representation and warranty relief and shift credit risk from taxpayers to private investors.

Freddie Mac CEO Donald Layton announced new capabilities on the way for Freddie Mac’s Loan Advisor Suite software expected to reduce loan origination costs. Scheduled for spring 2017 delivery, the new capabilities include: 

–A no-cost automated appraisal alternative;
–Automated borrower income verification;
–Automated borrower asset verification; and
–Automated assessment of borrowers without credit scores.

Freddie Mac Single-Family Executive Vice President David Lowman said the GSE plans to expand Loan Advisor to broadly offer collateral representation and warranty relief in early 2017. “It’s intended to significantly relieve mortgage lenders from the risk of loan repurchase due to appraisal defects,” he said. “Currently, Freddie Mac offers collateral representation and warranty relief in select circumstances.”

President and CEO Timothy Mayopoulos said Fannie Mae’s Day 1 Certainty initiative will offer borrower income, asset and employment validation services to lenders through Fannie Mae’s Desktop Underwriter mortgage underwriting system. In addition, Fannie Mae will provide “freedom” from representations and warranties on appraised values through its Collateral Underwriter system and enhanced property-inspection requirement waivers on refinances.

“Ultimately, we want our customers to have the confidence to lend so that more qualified borrowers have access to affordable mortgage credit,” Mayopoulos said.

On Friday, Fannie Mae announced its first front-end credit insurance risk-transfer transaction. Front-end credit risk transfers occur before or when the GSEs acquire a mortgage as opposed to current back-end credit risk transfer structures such as Fannie Mae’s Connecticut Avenue Securities and Freddie Mac’s Structured Agency Credit Risk.

Upon completion, Fannie Mae’s pilot will be the first credit insurance risk transfer transaction done on a “flow” basis, meaning the risk transfer will have been committed before Fannie Mae acquires the covered loans and the insurance coverage will be effective as soon as the GSE acquires the loan.

Fannie Mae expects the loan pool to be filled over the next six months beginning with fourth quarter deliveries.

Fannie Mae Vice President for Credit Enhancement Strategy & Management Rob Schaefer said the structure will shift a portion of the credit risk on $3.7 billion of single-family loans away from taxpayers. “Through our partnership with several approved mortgage insurers and their affiliates, we are able to bring to market a new structure that leverages the enhancements that were pioneered in our existing Credit Insurance Risk Transfer program, including a streamlined operational process, improved certainty of coverage and enhanced counterparty protections,” he said.

In the pilot transaction, Fannie Mae will retain risk for the first 35 basis points of loss on the loan pool, Schaefer said. If this nearly $13 million retention layer is exhausted, the participating mortgage insurance affiliates will cover the next 265 basis points of loss on the pool up to a nearly $98 million maximum.

In June, FHFA requested input on the GSEs’ credit risk transfer programs, which are designed to transfer single-family mortgage credit risk from the GSEs to private investors, thus protecting the taxpayer. MBA told FHFA this month that any rules regarding Fannie Mae and Freddie Mac credit risk transfer programs should ensure a level playing field for all lenders and should improve transparency.

Freddie Mac announced its new front-end risk transfer offering, Freddie Mac Deep MI CRT, last month. Through a forward credit insurance policy by a panel of mortgage insurance company affiliates, this pilot structured transaction provides additional coverage beyond the primary mortgage insurance on 30-year fixed-rate mortgages with 80-95 percent loan-to-value ratios placed immediately upon their sale to Freddie Mac. Transactions are executed via a competitive and transparent auction process, said Freddie Mac Senior Vice President of Credit Risk Transfer Kevin Palmer.

“The pricing certainty provided by day one coverage offers us an economically sensible way to transfer mortgage credit risk away from taxpayers,” Palmer said. “Deep MI CRT embodies all the core elements of our single-family credit risk transfer program and also helps us expand our important relationships with mortgage insurers.”

Also yesterday, Federal Housing Finance Agency Director Mel Watt said Fannie Mae and Freddie Mac should be doing more toenhance their efforts to increase access to credit and affordable housing.

“We want the enterprises to intensify their research and analysis about barriers to access to credit and opportunities that could help overcome those barriers,” Watt said. “Based on the work they have already done and this additional research, we’ll be asking them to begin well-researched pilots and initiatives that are calculated to move the access needle safely and soundly, but hopefully also significantly.”

FHFA has served as the GSEs’ safety and soundness regulator since 2008, when the federal government placed Fannie Mae and Freddie Mac under conservatorship.