Concerns about home prices are not stopping Fannie Mae and Freddie Mac from loosening standards to regain share in the mortgage securitization market, where their onetime near-duopoly has vanished in a few short years.
The latest changes also reflect pressure on the government-sponsored enterprises to meet escalating affordable-housing goals.
For instance, each GSE is dropping the $500 minimum cash contribution that borrowers must pay toward down payments or closing costs for single-family loans in its "suite" of products for low- and moderate-income individuals and communities. Each is also tossing out the requirement that borrowers receive outside counseling before a loan from the suite is funded.
In a letter last week to lenders, Fannie also said it will put its MyCommunityMortgage suite into its standard guide; doing so will make the loans available to all of its seller/servicers without special approvals, allocation limits, or negotiated contracts.
And Freddie also said Monday that it plans to waive fees for "caution" responses from its automated underwriting system on the first submissions of loans - and to make behind-the-scenes changes that would make it easier to get approvals through the system.
When the GSEs have expanded their purchases in the past, they have often said that a better understanding of expected loan performance allowed them to do so.
But James Cotton, Freddie's vice president of single-family marketing and outreach, said a new view was not the reason for the changes made in recent weeks to its Loan Prospector underwriting engine. Rather, he said in an interview Monday, Freddie has decided to be more accepting of risk in pursuit of specific housing-goal credits.
He could not give "an exact percentage" for the increase in approvals that should be expected. However, "it's definitively a change that will be noticeable in the market," he said. "We have actually had lenders call up and ask us," as the change was rolled out, if their systems were behaving correctly.
Patti Parsons, a director of product development at Fannie, also could not estimate its recent changes' impact, but said updates to MyCommunityMortgage last summer, particularly lower mortgage insurance requirements, continue to yield in higher volumes.
She, too, mentioned the housing goals, calling them "certainly an underpinning for our whole effort." She also noted "offering some of the kind of competitive options that are in the marketplace" also will help with its market share.
After peaking at 70.4% in 2003, mortgage-bond issuance by the two GSEs fell to 40.7% of the market last year and 40.3% in the first quarter, according to the newsletter Inside Mortgage Finance.
Updates to the GSEs' affordable-housing goals for 2005 through 2008 have built-in increases to the percentage of their business that should aid needy individuals and communities, as well as new subgoals for purchase mortgages. Fannie has said it believes it missed some of the subgoals last year.
In its annual report to Congress this month, the Office of Federal Housing Enterprise Oversight expressed concern over the GSEs' readiness to manage the risk of following the market by dealing with higher-risk loans. Yet it also bemoaned their inability to keep up because of their accounting woes.
Other changes to Fannie's suite include the addition of 40-year terms and adjustable-rate and interest-only loans, and pricing with fewer factors that can raise costs.
For the suite, it also plans to accept more temporary interest rate buydowns, eliminate the need for borrower contributions and 3% down payments on condominiums, and lowering the mortgage insurance required on cooperative units. It is also letting borrowers who need to use nontraditional credit histories do so even if they do not use their rental-payment history as an alternative.
In underwriting their affordable products, both GSEs also plan to treat certain second mortgages given by government housing programs, nonprofits, or employers with forgiving terms as gifts, rather than as loans that will affect loan-to-value ratios.
