After several years of ultra-tight mortgage standards, there may be a break in the clouds for borrowers with less-than-perfect credit soon. Mortgage giants Fannie Mae and Freddie Mac put into place new guidelines for home loan lenders that took effect December 1 and several big banks are already preparing to make some significant changes to their credit requirements.
The Fannie and Freddie guideline adjustments were made in response to uncertainty in the rules about when the two loan-guarantors would require lenders to buy back soured loans. Since the mortgage meltdown six years ago, Fannie and Freddie made banks repurchase billions of dollars’ worth of home loans that defaulted, a move that obviously cost lenders a fortune and made them very wary of originating loans to all but the most qualified home buyers.
The new Fannie and Freddie guidelines narrow the reasons they could require a loan buyback. Now lenders can only be forced to repurchase a mortgage if the lender broke a consumer protection law or if a loan default would create a liability or infringe on Fannie or Freddie’s rights on the loan.
"Addressing these concerns by providing tighter definitions and clarity should encourage sellers to serve a broader range of qualified borrowers," said Dave Lowman, Freddie Mac's executive vice president of single-family business in a statement.
With reduced legal responsibility for bad loans, some lenders are ready to lower their credit standards for borrowers. Wells Fargo, the largest U.S. mortgage lender, already reduced its credit-score requirements and will require less detailed credit documentation going forward. SunTrust Banks Inc. has also eased its lending standards because of Fannie and Freddie’s move.
Some analysts predict that if more banks follow suit with lower credit requirements, there could be as many as 1.2 million more home loans originated each year to potential homeowners. The latest S&P/Case-Shiller Index found that U.S. home prices only rose 4.8 percent in the 12 months ending in September, the slowest pace in two years and a sign that strict mortgage standards are holding the housing market back from a full recovery.
The new guidelines should also help conventional loans better compete with FHA loans which have dominated the mortgage landscape for years. These FHA loans allow for low down payments but come with pricey mortgage insurance price tags. Less expensive conventional loans may start to gain in popularity if lenders can offer them to buyers with lower credit scores and lower down payments in the near future.
"There are qualified borrowers who are not being served in today's market,” said Andrew Bon Salle, Fannie Mae's executive vice president of single-family underwriting, pricing and capital markets, in a statement.” With this clarity, lenders should have greater confidence in lending to Fannie Mae's full credit standards and making mortgages available to more borrowers.”