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Did Mortgage Lending Just Get Easier?

by James F. McClister

With Fannie and Freddie’s new mortgage rules coming into effect, the industry questions the impact they’ll truly have.
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Earlier this month, new lending guidelines previously announced by Fannie Mae and Freddie Mac came into effect, and now the industry is abuzz with what impact these changes will really have – if any at all.

In the wake of the mortgage crisis, as the housing market lay ruined under a literal mountain of foreclosures and delinquencies approaching foreclosures, Fannie and Freddie, who had guaranteed many of the loans, began forcing banks to repurchase billions of dollars in loans that they claimed failed to meet their lending standards.

With little option, banks acquiesced the two mortgage giants. However, in the years since, banks have gone on to blame Fannie and Freddie for the historically tight credit standards currently keeping many out of home ownership. Lenders claim murky guidelines have made it difficult to discern what constitutes an acceptable mortgage loan. Fannie and Freddie’s new standards promise to clear up that confusion.

Three New Rules

As I wrote in November, the new rules will address three primary issues: lowering down payment requirements; clarifying put-back guidelines; and risk retention. Following Fannie and Freddie’s announcement of these rules, the mortgage community has been divided on how impactful these changes will really turn out to be.

In a conversation with The Wall Street Journal, Laurie Goodman, director of the Housing Finance Policy Center at the Urban Institute, said that new lending guidelines were going to be “big,” but added that it may be some times before the full effect is realized.

The Impact

The reaction to the new rules has been mixed. A number of larger banks, like Wells Fargo and SunTrust, have come out as major optimists and claimed that Fannie and Freddie’s changes will impact the industry almost immediately, leading to faster turnaround times on mortgages in as little as a few weeks. Some have even suggested lenders will soon be able to expand the spectrum of borrowers who’ll be eligible for a loan – a result of reducing credit score requirements and allowing for more leniencies in the approval process.

However, as our own Peter Ricci wrote in a recent article, not everyone is so enamored with the changes. While promised lower down payments will surely help housing, he points out that the loans will require higher payments and extend the homeowner’s timeline for building equity.

Richard Davis, chief executive of the U.S. Bank, in a recent interview with the Journal admitted he’s also not convinced of the impact Fannie and Freddie’s new rules will have.

“Unless we are convinced that the rules are going to be permanent and there is not going to be a look back or a reach back in future times…we are simply going to stay on the sidelines in the concerns of both compliance risks and other uncertainties,” he said.

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