PRO FinReg: Regulators Look to Revive the Mortgage Market
Last update: 24/02/2016 By Joe Light
In the immediate aftermath of the financial crisis, top federal housing regulators worried about helping struggling borrowers threatened with foreclosure and punishing lenders seen as recklessly irresponsible. In 2016, they are more focused on broadening access to mortgages and getting more private investment into the market.
Early in President Barack Obama's presidency, his administration unveiled programs that tried to give struggling homeowners relief by changing mortgage terms to lower monthly payments, or to refinance at lower rates even when they normally wouldn't be eligible.
Now, the Federal Housing Finance Agency, which regulates Fannie Mae and Freddie Mac, said that this year would likely be the last the mortgage-finance companies participate in the program. The FHFA said that before the program expires, Fannie and Freddie will come up with long-term options to replace them, but they are likely to be less generous to borrowers.
In the meantime, the FHFA and the Federal Housing Administration, an agency that guarantees low-down-payment mortgages, are continuing to work to try to persuade lenders to make more mortgages to riskier borrowers.
After the housing crisis, Fannie, Freddie and the FHA hit lenders with billions of dollars in penalties for mortgage-related errors. That made some lenders uncertain of whether and when they might face penalties in the future, and they reacted by eschewing loans to less-creditworthy borrowers, even if those borrowers were eligible for government backing.
Fannie Mae and Freddie Mac concluded an effort to clear up those concerns earlier this year, a move that some lenders have lauded. On the other hand, the FHA is still trying to address the issue, and some lenders, frustrated with progress, have pulled back significantly from lending to some borrowers as a result. The FHA plans to release final guidelines by this spring.
Also to broaden mortgage access, the FHFA has told Fannie and Freddie to study using new credit-scoring models that are friendlier to some borrowers than the model they currently use. Some lawmakers have also proposed legislation for such a move, and the FHFA might decide on the issue in the first half of the year.
The U.S. Treasury Department and FHFA are also trying to bring more private capital into the mortgage market.
Before the crisis, many loans were made by private lenders without taxpayer backing and wrapped into private mortgage-backed securities. However, since 2007, that market has been mostly dead, in part because mortgage investors felt they were misled by lenders and ratings agencies when those loans went bad.
For more than a year, the Treasury has led an effort to bring investors and lenders back to the table to hash out new private mortgage-backed securities, or MBS, documents and structures that both parties feel could restart the market. That effort is winding up early this year.
In lieu of a private-label MBS market, the FHFA has directed Fannie and Freddie to sell to private investors new securities that offload the risk of mortgage defaults from the mortgage-finance companies to private investors. In 2016, the FHFA is requiring Fannie and Freddie to sell to private investors the credit risk on 90% of the unpaid principal balance of new loans.
The agency this year is also planning to study whether Fannie and Freddie should transfer more risk to mortgage-insurance companies, a move that the insurance companies argue could save borrowers money.
Despite the FHFA and Treasury Department efforts, most observers believe taxpayers will remain on the hook for the majority of mortgage defaults for years.
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