NEW YORK--(BUSINESS WIRE)--
US residential mortgage lenders will benefit from a reduced risk of loan buybacks thanks to an easing of borrower performance measures mandated by Federal Housing Finance Authority (FHFA), according to Fitch Ratings. Less uncertainty around repurchase risk should increase mortgage lending to creditworthy borrowers, which will support the housing market recovery. The FHFA announced the measures this week as part of a review of its 2014 strategic priorities.
The FHFA's actions should encourage lenders to extend credit to borrowers that may have been viewed as more susceptible to delinquencies, particularly borrowers with the middle tier credit scores and higher loan to value ratios. Many lenders have applied credit overlays to Fannie Mae and Freddie Mac (the GSEs) guidelines to minimize their repurchase liability, thereby limiting lending to a small segment of super prime quality borrowers.
Fitch does not believe that the expanded relief will introduce additional systemic risk to the residential market. Our analysis of the GSEs' operational risk reviews and risk sharing transactions indicate they have robust lender approval and monitoring programs, strong underwriting and loan acquisition processes, an improved credit risk management structure and an expanded loan quality control platform.
The FHFA's announcement was the first directive of Melvin L. Watt, who was appointed as the agency's Director in January 2014. The directive did not have meaningful impact on the FHFA's anticipated strategy in overseeing the conservatorship of the GSEs, but it did note that the GSEs would increase risk transfers of guarantees to $90 billion in unpaid principal balances in 2014, up from $30 billion in 2013.
Beginning on July 1, US banks transferring mortgage risk to the GSEs will have two alternatives for relief from repurchases. In one option, if after 36 months borrowers have made 36 consecutive payments and neither been delinquent for 60-days nor more than two 30-day periods, banks will be eligible for relief from repurchase. Alternatively, if the loan is deemed acceptable following a loan file quality control review, repurchase relief will be provided regardless of whether the loan has an acceptable payment history. Loans found to have deficiencies as a result of a quality control review that are cured by the lender to the GSEs' satisfaction also will be eligible for relief.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
- Fitch Ratings
Ilya Ivashkov, CFA
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Matthew Noll, CFA
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Brian Bertsch, +1 212-908-0549
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