Mel Watt weighs in on REITs and housing reform at Brookings (Part 4 of 4)
A major concern of the government has been credit availability
To explain how the government can influence credit availability, a little background is in order. For a loan to be considered “conforming,” it must adhere to certain basic requirements in order to be securitizable. For instance, the government has minimum requirements on a borrower’s credit rating, has caps on loan-to-value, et cetera. These requirements are specified on Fannie Mae’s site and Ginnie Mae’s site. As long as the loan “fits in the box,” it’s securitizable.
That said, while Fannie Mae may permit a 95% LTV loan with a credit score of 621, that doesn’t necessarily mean a lender would be willing to make that loan. Just because a loan is securitized and sold, that doesn’t mean the lender doesn’t have any residual exposure. In fact, they still have a lot of residual exposure.
Reps and warranty relief
When a lender securitizes a loan or sells it to Fannie Mae, it certifies that the loan is compliant and that the borrower will repay the loan. If the borrower immediately defaults, Fannie can force the lender to buy back the loan. This provides the incentive to make sure that lenders aren’t just writing dodgy loans and pushing them out the door.
FHFA will now relax the payment history requirement by allowing two delinquent payments in the first three years. Previously, one delinquent payment was enough to force the lender to buy back the loan. Secondly, FHFA will work on finding ways to cure deficiencies as opposed to forcing a buyback.
Implications for lenders
This is good news for the big lenders like Wells Fargo (WFC) and J.P. Morgan (JPM) as well as the smaller names in the origination business like PennyMac (PMT), Redwood Trust (RWT), and Nationstar (NSM). This will reduce their tail risk of a big financial conflagration, where buyback requests almost sunk some of these banks.
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