Fitch: New GSE Tools Improve Mortgage Underwriting

Fitch Ratings, New York, said Fannie Mae and Freddie Mac’s efforts to manage and verify data have improved the overall mortgage underwriting process.

In a commentary, Fitch noted Fannie Mae and Freddie Mac–which acquire the majority of mortgage loans in the U.S. secondary market–have taken new approaches of managing and verifying data. These methods have improved their ability to assess credit risk, while reducing costs for sellers and borrowers, said Fitch Managing Director Roelof Slump.

“These improvements are credit positive for the credit risk sharing transactions issued by Fannie Mae and Freddie Mac,” Slump said.

Fitch noted the appraisal valuation process is evolving primarily through introduction of the Uniform Collateral Data Portal, through which lenders electronically submit appraisal reports for conventional mortgages delivered to Fannie Mae or Freddie Mac. The information is aggregated and tracked in a rapidly growing database that currently includes more than 20 million appraisals, providing an “unprecedented” amount of property valuation detail.

“The improved appraisal data availability allows Fannie Mae and Freddie Mac to assess valuations on new loans with greater confidence by referencing details of nearby properties or a prior appraisal of the borrower’s property,” Fitch said. “The benefits of the tools that leverage the database are passed on to lenders through representation and warranty relief and to borrowers by waiving the need for a new appraisal in some cases.”

Fitch also noted Fannie Mae recently introduced a process of directly verifying a borrower’s income and assets by using third-party vendor data, allowing for greater certainty on the accuracy of borrower provided information. “Lenders and borrowers benefit through shorter processing times and less required paperwork, as well as representation and warranty relief for lenders,” Fitch said.

The report views representation and warranty relief as only adding “modest risk” to investors due to the limited circumstances in which it is provided. “Additionally, for Fannie Mae risk-sharing transactions, the relief provided to sellers does not add any risk to investors as Fannie Mae will repurchase loans subsequently identified as having an underwriting defect, even if the original lender is not obligated to repurchase the loan from Fannie Mae,” Fitch said.