Fannie and Freddie could ease mortgage restrictions

Homebuyers and sellers might want to take note of remarks Melvin L. Watt delivered at a recent mortgage industry forum.

Watt is the director of the Federal Housing Finance Agency (FHFA), which is the conservator and regulator of Fannie Mae and Freddie Mac, two corporations that purchase mortgages from lenders.

The preponderance of Watt's remarks concerned issues of interest mainly to mortgage lenders and servicers. But the lengthy address also offered a few clues to policy directions that might affect homebuyers and sellers, if perhaps not directly or immediately.

Mortgage restrictions could ease

One such issue is lenders' overlays, which require borrowers to meet qualification guidelines that are more restrictive, challenging or difficult than the standards Fannie Mae and Freddie Mac require to purchase conforming loans from lenders.

An example of an overlay would be a higher credit score to qualify for a mortgage.

Why do lenders use added restrictions?

Lenders use overlays to try to protect themselves from the heightened risk that the borrower will default and Fannie Mae or Freddie Mac will force the lender to repurchase the loan.

"Lenders believe that too much uncertainty still exists in this area for them to ease their credit overlays,” explained Watt in his prepared remarks. “Ultimately, this undermines the goal of improving access to mortgage credit for creditworthy borrowers.”

How the rules might change

To address the issue, Watt said, Fannie Mae and Freddie Mac will relax some of their lender requirements. The FHFA also plans to set up an independent-dispute-resolution program to allow lenders to contest repurchases, develop other mechanisms to deal with problem loans and clarify some of Fannie Mae's and Freddie Mac's underwriting rules.

In theory, those changes could prompt them to remove or reduce their overlays, which would make it easier for some borrowers to qualify for a mortgage.

Loan limits unchanged

A second issue involves conforming loan limits, which are the maximum sizes of so-called conforming loans that Fannie Mae and Freddie Mac will purchase. Watt said the FHFA won't use its authority to lower these loan limits. That's good news for homebuyers and sellers, particularly in high-cost housing markets.

"This decision is motivated by concerns about how such a reduction could adversely impact the health of the current housing finance market," Watt said.

Watt is just getting started in his position as head of the FHFA. It will be interesting to see how his direction will differ from former FHFA Acting Director Ed DeMarco.