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Theres no question that that banking industry owes a solid to government policymakers for bailing them out of the crisis. Whats still much in dispute is whether the Dodd-Frank Act and the various other salves that have been applied to stave off another calamity will work as intended.
September 23 -
Fannie Mae and Freddie Mac are about to get tougher on banks and other lenders that cut corners when originating mortgages and try to sell them to the government-sponsored enterprises.
September 17
Editor's note: A version of this post originally appeared on
The federal government had a clear message for mortgage bankers at an industry conference in Phoenix this month. It intends to hold them accountable for maintaining the highest standards in underwriting each and every home loan. Except, that is, for the millions of borrowers for whom Uncle Sam wants them to toss standards out the window and offer subprime mortgages.
When it comes to financing the average middle-class American, our government-backed mortgage entities will accept nothing but the most pristine standards. Just what qualifies as pristine is a complicated business. Government-sponsored mortgage insurer
Whats more, Fannie and its sibling, Freddie Mac, are for the first time creating formal programs to flag defective loans and assess risks in lenders mortgage processes. If loans have flaws, Fannie and Freddie will require lenders to repurchase them immediately.
"We dont buy defective loans," declared Steve Spies, vice president for loan quality at Fannie Mae, during a presentation to mortgage risk managers at the Phoenix gathering. Spies recommended that industry officials bookmark Fannies portal page listing the 200 loan defect categories.
Finding quality time to spend with Fannies defects might prove challenging to mortgage officials, given everything else thats on their desks these days. That includes the qualified mortgage rule, drafted to make lenders responsible for ensuring that borrowers have the ability to repay their mortgage loans.
Separately, the
Complying with a mass of new regulation to make sure every loan is sound and defect-free is only part of what the government expects of mortgage lenders. It also wants them to chuck these standards of care out the window to lend to what it deems as disadvantaged borrowers.
Specifically, the government is enforcing with great vigor a range of so-called fair-lending provisions. The gist is that lenders are to ignore all the talk about fat down payments, ensuring borrowers' ability to repay and the like when it comes to fair-lending applicants.
The
One Phoenix conference speaker expressed shock that Shaun Donovan, the secretary of Housing and Urban Development, which runs the FHA, has referred to these low-down-payment mortgages to recently failed borrowers as "plain vanilla" loans that can be made safely.
Most of those loans are passing through the FHA and Veterans Administration before getting packaged into mortgage bonds by Ginnie Mae, the government-backed guarantor behind FHA and VA loans.
"Theres a lot of credit risk" from these mortgages, Anand Bhattacharya, a finance professor at Arizona State University and mortgage expert (who spoke on a panel I moderated) told me. "Its sort of the new subprime. If you looked at the average credit profile of these [FHA and VA] borrowers, it's worse than subprime."
The mortgage risk specialists at the conference also sat through a session about how the federal government has been going after home lenders over discrimination claims with unprecedented vigor since 2010, when the Department of Justice appointed a Fair Lending Task Force.
Bolstered by the theory of "disparate impact," the DOJ and other federal agencies are prosecuting lenders over statistical analyses indicating that, even if they had no intention of discriminating, their business practices have resulted in more loans going to some groups than to others.
Lenders were cautioned that it's futile to resort to the insanity defense in this case meaning to argue that the law's insane (a prospect that the Supreme Court will take up later this year). Instead, they were advised to hire or appoint fair-lending officers and do their own statistical analyses before the feds come knocking. If the results are unfavorable, the antidote, presumably, is to balance things out by lending to members of specific ethnic groups even if that means running afoul of all those rules and regulations about qualified mortgage standards, zero defects and the like.
Neil Weinberg is the editor in chief of American Banker. The views expressed are his own.