Fannie And Freddie Lower Standards For Mortgages Leading To Major Foreclosures (#GotBitcoin?)
Housing-finance regulator aims to shake-up credit scores for mortgages. Fannie And Freddie Lower Standards For Mortgages Leading To Major Foreclosures (#GotBitcoin?)
One firm’s dominance over the credit scores used to vet many U.S. mortgages is getting a shake-up.
Fannie Mae and Freddie Mac , two mortgage-finance firms that back nearly half of U.S. mortgages, will have to consider credit-score alternatives to Fair Isaac Corp.’s FICO score when determining a mortgage applicant’s creditworthiness, under a new rule issued on Tuesday by the mortgage-finance giants’ federal overseer.
The move by the Federal Housing Finance Agency is seen as a win for VantageScore, a credit-score system by VantageScore Solutions LLC, which is owned by the three large credit-reporting firms: Equifax Inc., TransUnion and Experian PLC.
“One of my priorities is to ensure that the American people have a safe and sound path to sustainable homeownership, which requires tools to accurately measure risk,” FHFA Director Mark Calabria said in a written statement. The new rule “is an important step toward achieving that goal,” he added.
Regulatory rollback legislation signed into law last year required the FHFA to set new standards for Fannie Mae and Freddie Mac to approve credit-score models.
Many nonbank lenders—who approve mortgages to individuals and initiate the bulk of mortgage dollars issued in the U.S.—have asked for the ability to use a credit score provided by VantageScore. These lenders say the alternative score would open the mortgage market to a greater number of people and lead to more mortgage approvals, helping to boost home sales and the economy.
Some lenders view FICO scores as an impediment since they tend to be more cautious than alternatives.
Credit scores help determine who gets a mortgage and on what terms. They played a role in the last housing boom and bust as lenders lowered credit-score requirements, extending hundreds of billions of dollars of mortgages to subprime borrowers—creating a crushing number of defaults.
After the financial crisis, lenders tightened requirements for potential home buyers. As part of this, they required higher credit scores that reduced the number of people who qualified for a mortgage.
That led some lenders to seek new kinds of scores that could be used to expand the lending pool.
Since Fannie and Freddie back roughly half of U.S. mortgages, by buying mortgages originated by others, their requirements have huge sway over the mortgage market.
VantageScore has long said its score could help approve more mortgage applicants, in part because it can assign a score to consumers who haven’t used credit in more than six months. FICO said that VantageScore’s approach, which seeks to give credit scores to people with stale or thin credit files, would lead to less predictive scores and riskier loans.
“Competition is critical for markets to operate efficiently and we are confident this decision will benefit consumers, lenders and the economy at-large,” said Barrett Burns, president and chief executive of VantageScore Solutions, in a written statement.
Tuesday’s final rule is a boon to VantageScore because it eliminates language from a December proposal that would have prohibited any credit score models developed by a company related to a credit-reporting firm. The FHFA eliminated that restriction amid pushback from the credit-reporting industry and congressional lawmakers.
The measure goes into effect 60 days after its publication in the Federal Register.
Mortgage Market Reopens to Risky Borrowers
Strict lending requirements that were put in place after financial crisis are starting to erode.
The Risky Mortgage Is Making A Comeback
More than a decade after home loans triggered the worst financial crisis in a generation, the strict lending requirements put in place during its aftermath are starting to erode. Home buyers with low credit scores or high debt levels as well as those lacking traditional employment are finding it easier to get credit.
The loans have been rebranded. Largely gone are the monikers subprime and Alt-A, a type of mortgage that earned the nickname “liar loan” because so many borrowers faked their income and assets. Now they are called non-qualified, or non-QM, because they don’t comply with postcrisis standards set by the Consumer Financial Protection Bureau for preventing borrowers from getting loans they can’t afford.
Borrowers took out $45 billion of these unconventional loans in 2018, the most in a decade, and origination is on track to rise again in 2019, according to Inside Mortgage Finance, an industry research group. Such mortgages aren’t guaranteed by government agencies and typically charge higher interest rates than conventional loans.
Proponents of unconventional loans argue that mortgages became too hard to get in the aftermath of the crisis and that their proliferation will open the housing market to sound borrowers who had been shut out of it. But some worry that the competition for customers could drive lenders to loosen standards too much.
“There are some weakening standards and weakening practices,” said Eric Kaplan, director of the housing finance program at the Milken Institute. “It doesn’t rise to the same level yet, to my knowledge, of some of the things taking place just prior to the crisis. But we have to be vigilant.”
Right now, unconventional loans are largely being extended by nonbank mortgage lenders. But big banks have found another way in: JPMorgan Chase & Co., Credit Suisse Group AG and Citigroup Inc. have in recent months been arranging mortgage bonds backed by unconventional loans.
Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007, according to Inside Mortgage Finance. There was $1.9 billion worth of subprime mortgage bonds in the second quarter.
Banks Warm To Mortgage Bonds That Burned Them In 2008
Citigroup, Goldman Sachs and Wells Fargo are getting back into the business
Banks are getting back into the business of building mortgage bonds, laying the groundwork for a market that stands to grow as the Trump administration tries to reduce the government’s role in housing finance.
Citigroup Inc., Goldman Sachs Group Inc., Wells Fargo & Co., and JPMorgan Chase & Co. over the past year have restarted or expanded the business of spinning fresh pools of mortgages into securities.
They are adding a jolt of energy to efforts to revive the so-called private-label market for mortgage bonds, which virtually disappeared after it blew up during the financial crisis of 2008. Smaller operators have long tried, but mostly failed, to rebuild what was once among the most significant businesses on Wall Street.
Last year, some $70 billion of mortgages ended up in private-label mortgage bonds, according to the Urban Institute. Though that is far below a peak of more than $1 trillion in precrisis years, it is the most since 2007. And this market could continue to grow if Fannie Mae and Freddie Mac shrink, traders and executives say, opening up more room for private players to take over this middleman role of packaging and selling mortgages. The Trump administration this month proposed privatizing the two government-sponsored mortgage giants, and the administration is expected to shrink them even if it can’t return them to private hands.
The fact that many investors say they are once again getting comfortable buying these bonds also underscores the broader market’s search for yield. Instead of viewing these bonds as toxic reminders of the financial crisis, many money managers see them as an opportunity to generate more income in a low-rate world.
Fannie and Freddie don’t make loans. Instead, they buy mortgages, package them into securities and sell them to investors. Investors view these securities as safe because the government-backed mortgage giants assume much of the default risk. The bonds packaged and sold by the banks don’t have the same protection, so investors demand higher yields to compensate them for taking on more risk.
Many banks soured on making mortgages after the financial crisis. Today, the majority of U.S. mortgages are made by nonbanks, which are less regulated than their bank counterparts and sometimes thinly capitalized. Even so, banks still see an opportunity to make money by supporting the infrastructure that underlies the U.S. mortgage system.
Citigroup, for example, recently purchased a pool of 932 mortgages from a nonbank lender called Impac Mortgage Holdings Inc. and used them to back bonds worth more than $350 million. The deal closed last month.
While some banks never fully extricated themselves from the private-label market, they typically issued bonds in the years after the crisis only to package odds and ends, such as old loans that had defaulted and been modified in some way. Some deals were done to help out important clients.
What is different now is that banks are also stepping into the role of buying loans from third parties and underwriting the securities they piece together. This more closely resembles the precrisis days when banks would bid on loans that were up for sale by the lenders that made them.
Banks today are buying both mortgages that are eligible to be sold to Fannie and Freddie as well as ones that aren’t because they are too large or they are considered riskier—often because they use alternative documentation to approve the borrower.
These are baby steps back into the market, to be sure. Largely gone are the complex derivatives once overlaid on these deals. And the market is tiny compared with precrisis days: In the first half of this year, 2.1% of mortgages went into private bonds. That is up from 2009, when private-label issuance was virtually nonexistent. But private bonds made up 41% of the market at a peak in 2005, according to the Urban Institute.
One problem with precrisis deals was that data about the underlying mortgages was often difficult to come by, even for the bankers originating the deals. In the Impac deal, Citigroup is working with startup dv01 Inc. to provide data to investors about the underlying mortgages, according to a report by ratings firm DBRS Inc.
JPMorgan restarted its private-label program several years ago but has recently broadened it. In April, the nation’s largest lender by assets did a deal with a group of its own mortgages that didn’t qualify to be bought by Fannie and Freddie.
Wells Fargo introduced its first postcrisis deal last October and has done more since. Goldman Sachs, which did one deal in 2014, stayed out of this market until March, but since then has done three deals. Bank of America Corp. hasn’t reintroduced its own mortgage bonds, but aggregates loans that are issued through Chimera Investment Corp. , a real-estate investment trust, according to people familiar with the matter.