No HARP 3, But Mortgage Lending Should Get Looser Under Mel Watt

May 15, 2014 No Comments »
No HARP 3, But Mortgage Lending Should Get Looser Under Mel Watt

Despite being nominated about a year ago, it wasn’t until this week that Mel Watt finally gave his first speech as the new chief of Fannie Mae and Freddie Mac.

But his first public remarks didn’t disappoint, as he provided quite a few clues about how things will run under his watch.

He outlined three objectives for Fannie Mae and Freddie Mac – maintain, reduce, and build.

In short, he wants the GSEs to continue providing liquidity to the mortgage market, while simultaneously reducing taxpayer risk and working to rebuild a new single-family securitization platform.

Lower Risk of Mortgage Loan Buybacks

Perhaps the biggest takeaway from his speech at the Brookings Institution Forum was that Fannie Mae and Freddie Mac will ease their rules related to loan buybacks.

This means banks and lenders that sell or securitize their mortgages to the pair won’t have to worry as much about loans going bad and winding up back in their hands.

The current rules have made lenders uneasy about extending credit because of the costs involved with buying back bad loans.

After the housing bust, this forced many to lend to only the most creditworthy borrowers, while imposing overlays above the rules Fannie and Freddie permit.

But beginning July 1st, as long as a borrower has made 36 consecutive payments, and has never been delinquent for 60-days or for more than two 30-day periods, banks won’t have to worry about buybacks.  The 36th monthly payment cannot be delinquent either.

Lenders can also get rep and warranty relief if the mortgage passes a quality control review, regardless of payment history.

Additionally, even loans found to have deficiencies during the quality control review can be cured by the lender and made eligible for relief.

Finally, the GSEs will eliminate automatic repurchase requests when a loan’s primary mortgage insurance is rescinded.

Long story short, lenders will be able to originate loans with a lot more confidence knowing they’ll be less likely to have to buy them back, which should boost volume throughout the industry.

Watt also noted that the current conforming loan limits will not be lowered, which means the pool of eligible borrowers will not shrink in that respect.

This came in response to a proposal released by the FHFA last year suggesting that it could use its authority to reduce the mortgage amounts eligible for guarantee by Fannie Mae or Freddie Mac.

No HARP 3, Really This Time

Lastly, I wanted to highlight his remarks regarding HARP 3, which many in the industry have speculated about for what feels like years now.

Despite some indications that HARP 3 would come along sooner or later, and could actually add some meaningful numbers to the successful government refinancing program, it looks to be dead in the water. For real this time.

Many thought Mel Watt would be the guy to introduce it, given his open-minded approach to mortgage lending, but that doesn’t appear to be the case.

He noted that changing the eligibility date (again) or adjusting HARP eligibility parameters wouldn’t add enough borrowers to make such a move worthwhile.

I do kind of wonder when they determined that, now that mortgage rates have fallen to 2014 lows and could even dip back toward record levels again. Surely that would boost the number of in-the-money borrowers.

However, he did say they’ll work to retarget HARP outreach to inform the roughly 750,000 borrowers who qualify under the current rules. So if you’ve never heard about HARP, and it could benefit you, perhaps you will soon.

(photo: NCDOTcommunications)

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