In an attempt to encourage more lending as well as expedite the housing market recovery, Federal National Mortgage Association ( FNMA ) and Federal Home Loan Mortgage Corporation ( FMCC ) have revised rules to bring more clarity in the process of buying back loans sold to these two federal mortgage finance agencies. Risks of repurchasing loans were making lenders hesitant and dragged the housing market recovery.
Although it is true that reckless and uncontrolled lending led to the 2007-2008 crisis, an aversion to lending on account of repurchase risks shows lenders' lack of confidence in lending in accordance with the guidelines of these two government-sponsored enterprises ('GSEs').
Notably, many banks were forced to repurchase loans, issued before the collapse of mortgage markets, on account of inaccurate data or misrepresentation of borrowers' qualifications. This resulted in huge liabilities on lenders' balance sheet, thereby making them reluctant to issue loans, keeping many first-time homebuyers as well as some credit-worthy borrowers away from the mortgage market.
Adding to the woes, construction activities as well as demand for mortgage loans declined after the mortgage rates started to rise following the historic lows in 2013. In this backdrop, the Obama government is trying to push up housing market recovery. Presently, with an increased clarity in the loan repurchase process, lenders will be more confident in giving loans.
Prior to this, Fannie and Freddie had asked lenders and service providers to repurchase defaulted mortgage due to fault in loan documents or other violations of representation or warranty. A buyback was also possible in case of a breach even for a non-defaulted loan.
Under the revised rules, lenders will not be asked to buy back loans in the event of inaccurate data or borrower's qualifications, unless the flaws are significant and apply to several loans. The latest clarification, with lesser risk of repurchase, should surely encourage lending activities. Importantly, the economy will emerge as the ultimate gainer.
Both Fannie and Freddie currently carry a Zacks Rank #3 (Hold). Better-ranked Mortgage Investment industry stocks include Essent Group Ltd. ( ESNT ) and Walker & Dunlop, Inc. ( WD ). Both these stocks sport a Zacks Rank #1 (Strong Buy).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.