The challenges facing the mortgage market are many: a significant shortage of housing, rising interest rates and first-time homebuyers who need specialized underwriting are just the start. But leaders from Fannie Mae and Freddie Mac assured attendees at the MBA Secondary Marketing Conference on Tuesday that the GSEs were ready to partner with them to meet these challenges.
Desmond Smith, senior vice president and head of customer delivery at Fannie Mae, and Kevin Palmer, senior vice president of single family credit risk transfer at Freddie Mac, outlined their agencies’ efforts to make the entire mortgage process simpler and easier. And that’s a good thing, since the agencies facilitate the lion’s share — maybe even the elephant’s share — of the secondary mortgage market.
Fannie Mae’s Day 1 Certainty program, which gives rep and warrant relief to lenders who follow specific guidelines, continues to grow. Smith said that $300 billion of the deliveries the agency receives now contain at least one component of Day 1 Certainty. More than 70 vendors and sellers have partnered with Fannie on the program, which allows it to offer lenders a wide choice of services.
Likewise, Freddie Mac is looking to offer maximum flexibility to lenders. “We have been hearing customers talk around the broader theme of how can we make it faster, easier and more cost efficient to originate that loan? Making it cost efficient is more important today than ever before,” Palmer said.
The housing shortage that continues to plague the industry has no easy fixes. Smith said that half of the people employed in construction work left the industry after the housing crisis and up to 4 million homes have been diverted into rentals. In addition, the U.S. is contending with an aging housing stock that will need renovation investment before being habitable.
Fannie Mae has responded by making some major changes to its HomeStyle renovation product, making it easier to for lenders to sell those loans to Fannie Mae. It is also exploring how it can increase sales of manufactured homes and even modular homes.
“At Fannie Mae, we’re going to take a leadership position to help solve [the housing shortage]. We want to get to the root cause and solutions,” Smith said.
Fannie Mae’s biggest contribution could be the way it is trying to simplify its construction to perm program, which has been a complicated process that sees lenders holding onto the loan for six to nine months or longer.
“if we can buy that product at the time of closing, I think a whole lot of builders could come into market,” Smith said.
At the same time, Freddie Mac is addressing what it sees as one of the biggest challenges the market is facing: the lack of affordability, combined with a change in demographics that demands a different underwriting structure. Freddie Mac continues to update its Home Possible program, revising income limit requirements to focus on serving low to moderate-income borrowers. The new requirements take effect at the end of July.
Freddie Mac also recently rolled out its Home One program, which lets first-time homebuyers pay as little as 3% down. “Right now the number of first-time homebuyers is at a 10-year high,” Palmer said. “Our Home One program is just one way we’re expanding credit responsibly in this area.”
Freddie Mac is under the same Duty to Serve requirement as Fannie Mae, and Palmer said his agency is looking at a single-close process for manufactured homes that could be a game-changer for that segment of the market.
“Right now there are over 40 million households struggling with the high demand and low supply of affordable single family homes,” Palmer said. “Under these changing demographics we are studying how Freddie Mac can help.”
Those changing demographics also include a whole new type of borrower who works in the gig economy and often has multiple jobs.
“With our ‘borrower of the future’ campaign we are partnering with a lot of external firms studying this change in demographics, to understand and anticipate their needs,” Palmer said. “You’ve got a lot of borrowers today who choose to have a much more flexible lifestyle. We want to be able to underwrite them better.”
Smith echoed that sentiment. “We have to think differently. The largest transportation company doesn’t own cars. The largest retailer doesn’t own brick and mortar stores,” Smith said.
Fannie Mae is conducting a pilot to figure out how to enable loans that leverage income from Airbnb rentals. “Can we use this income? Is it stable enough to qualify to purchase a home or refi?”
Palmer noted that the challenge with Airbnb income is not simply to figure out the origination, but also what happens in a foreclosure scenario or with servicing.
During the Q&A session following the panel, Fannie Mae said it is currently conducting a single-source validation program with two lenders and expects to add three more in the next quarter. The agency is working to make sure the data — which is submitted differently by different lenders — can truly be verified.
Freddie Mac is conducting a pilot program on employment verification and income verification, testing out how best to instill confidence in the borrowers that this is done in safe and secure way.
Both GSEs take a collaborative approach to deciding which lenders to use in pilot programs. Freddie Mac said it finds these opportunities by talking with lenders and Fannie Mae said it uses its co-development panels. Smith recommended going through relationship managers to make a connection on projects lenders are interested in.
A particularly hot topic for the conference, MSR liquidity, also made its way into the Q&A session, when the GSEs were asked about their acknowledgement agreements. Palmer said Freddie Mac is seeking to be more transparent to lenders in what they are financing.
“What’s important to Freddie is the health of the nonbank originators. Can they be healthy in normal times and in more volatile times?” Palmer said
Smith said Fannie Mae believes the best way to be more transparent is to make changes to its acknowledgement agreement, which it has done.
Both GSE leaders also expressed a desire to rethink the entire condo financing process to make it less burdensome.