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Finding Your Way Around the New Mortgage Rules

by James F. McClister

New measures from regulators promise to help ease lending standards, but are they enough?

The recent announcement by federal regulators to enact an assortment of measures aimed at easing lending standards has thrown many in the mortgage industry into a kind of frenzy. Despite many criticizing the impotence of the changes, like Jay McCanless of Sterne Agee telling The Wall Street Journal the new rules “had all the sizzle of a wet firecracker,” experts have been relatively shy in speculating on how they’ll ultimately affect the process.

By examining the most impactful portions of the measures, we speculate on how the addition will impact lending standards.

Lower Down Payments

As we covered in October, one of the most eye-catching changes from Fannie Mae and Freddie Mac is the restoration of a program allowing lenders to secure guaranteed loans with down payments as low as 3 percent, compared to the 5 percent currently required by Fannie and Freddie, and the 3.5 percent by the Federal Housing Administration.

The minutiae surrounding the program’s implementation is still a bit cloudy, such as whether mortgage insurance companies will require higher credit scores for borrowers with such a low down payment, so it’s difficult to postulate its future impact. But, from what we do know, it’s unlikely the change will provide any sort of overwhelming assistance to people currently having trouble securing a loan, especially considering how widely available the 3.5 percent option from FHA is and was throughout the housing crisis. This is doubly true for Millennials, who, as we recently reported, maintain an average savings of -2 percent.

However, that’s not to say there are no benefits. With a lower down payment option on a guaranteed loan, potential borrowers intending to move into homeownership may be allowed to take the leap sooner than they might have otherwise. Not a huge boon, but slowly, over time, it could ease a larger pool of homebuyers into the market.

Insurance for Lenders

Following the downturn in 2007, Fannie and Freddie began urging lenders to repurchase loans they had previously issued but were since found to have had serious underwriting defects that may have eventually led to default and foreclosure. In response, mortgage lenders tightened their standards, incorporating additional steps and documentation into the lending process. While the steps helped provide insurance against future Fannie and Freddie “put-backs,” they lengthened the process and put added pressures on borrowers.

In hopes of leading lenders away from progressively tightening lending standards, regulators clarified what qualifies a loan worth of a put-back, a move that shows promise moving forward, but does little to address the scars left from years of costly repurchases.

Jim Vogel, an analyst with FTN Financial, told WSJ, “The scars from put-backs remain deep,” referring to repurchase demands on loans dating back to the early 2000s.

Retention Through Risk

Moving out of the recession, in 2010, lawmakers passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, more commonly referred to as simply Dodd-Frank. In 2011, an amendment was proposed to the original bill stipulating that all lenders issuing asset-backed securities make certain investments into that security, effectively tethering the organization to the fate of that particular security. It didn’t pass.

Last week, regulators revived the requirement, bringing together a team of specialists to determine which mortgage packages should be affected and which exempt, with one key difference: no specified down payment requirement.

As far as borrowers go, the new risk retention rules should have little effect. For lenders, this could be a step towards shared responsibility. However, the changes proposed in 2011 were never finalize, so what impact it will have on loosening standards is hard to say.

It is important to note that many of the mortgages that proved most problematic were not included on the exemption list.

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