Fannie Mae Improved Its Underwriting Standards

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By User:AgnosticPreachersKid (Own work) [CC BY-SA 3.0], via Wikimedia Commons

Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s CEO indicated at the MBA’s annual convention that the mortgage giant has “advanced” its underwriting standards.

Fannie Mae Improved Its Underwriting Standards

However, emphasizing the need to fix the problems of the past, the organizations’s CEO cautioned that overhauling everything about the current system could result in negative long-term consequences for the housing market and the stability of the U.S. economy.

Fannie Mae’s advanced underwriting standards

Outlining the progress made, Timothy J. Mayopoulos, president and chief executive officer of Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA), pointed out that Fannie Mae has substantially improved its credit quality, advanced appropriate underwriting standards, and increased pricing to better reflect risk, besides strengthening its collection and reporting mechanism.

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He also highlighted how Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s loan quality initiatives, such as the Uniform Mortgage Data Program and EarlyCheck, have started delivering better information quite early in the loan process, thereby reducing the risk of repurchases at a later date. He also indicated that Fannie Mae is contributing to the development of the Common Securitization Platform being led by FHFA.

Role of private capital

Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA)’s CEO emphasized that to build a sustainable housing finance system, we have to reduce uncertainty and correct the obvious defects in the old system. Towards this, he feels private capital should stand in front of the government to withstand market downturns.

Interestingly, the mortgage giant’s CEO said that the size of private capital should be substantially higher than the historically-held capital levels of Government Sponsored Enterprises. However, he pointed out that five years after the financial crisis, we could see only limited evidence of private capital willing to share substantial amounts of mortgage credit risk. Mayopoulos said they are working to stimulate private capital’s participation. However, considering the large size of the U.S. mortgage market, he feels a better strategy is required rather than just hoping that private capital would fund the mortgage market.

Strengthening housing finance system

As reported earlier, the Corker-Warner Housing Finance Reform and Taxpayer Protection Act introduced on June 25, 2013 would strengthen America’s housing finance system by replacing the GSEs, Fannie Mae / Federal National Mortgage Association (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) with a privately capitalized system that preserves market liquidity and protects taxpayers from future economic downturns.

Mayopoulos, however is satisfied with the quality of the book of business. He said the book of business that Fannie Mae has acquired since 2009 is much better than what it acquired between 2005 and 2008. For instance, as of June 30, 2013, only less than one-quarter of 1% of the loans in Fannie Mae’s new single-family book have been subjected to a repurchase request, compared to more than 3% of the single-family loans that Fannie acquired between 2005 and 2008.