Remarks Adapted From Comments Delivered by Timothy J. Mayopoulos, President and Chief Executive Officer
MBA Annual Convention, Las Vegas, NV
It is always a pleasure to be with you, our customers and business partners. You are on the front lines of our housing finance system, ensuring that credit is available to allow families to buy, refinance, or rent good housing.
For 75 years, Fannie Mae has been the leading partner of mortgage bankers, supporting you with liquidity and the best products and services in the industry. Over those 75 years, we have sought to be a thought leader, an innovator, a standard setter – and most importantly – a trusted business partner to our customers.
I want you to know that, as we all are trying to find our way to a "new normal" in this difficult environment, we at Fannie Mae are re-committing ourselves to being the leading player in the secondary mortgage market – and to being your most valued business partner – both now and in the future. We are committed to providing you with the products, services, and tools you need to serve the market confidently, efficiently, and profitably.
We’ve Come a Long Way
We’ve come a long way since the worst economic crisis since the Great Depression. At Fannie Mae, we have improved our credit standards and risk management practices. As a result, our delinquencies are down dramatically, and our credit profile is greatly improved.
We have worked closely with our servicer partners to better serve borrowers and communities, helping over one million families with Fannie Mae-backed mortgages avoid foreclosure.
Our company has paid the government over $130 billion in dividends to date, some $14 billion more than we have received in support.
All of this reflects the good work Fannie Mae employees have done to improve our company, provide liquidity, and help the housing market recover. We are pleased that, working with you, we have made significant progress, and no one can dispute the housing market is in a substantially better state than it was just a few years ago.
Nonetheless, we know that serious challenges persist. First, the economy continues to present headwinds for the housing market. Household formation is down compared with historical norms. Unemployment and underemployment persist for many workers. Wage growth has been slow. And so far, most millennials have been unwilling to enter the housing market, preferring a more risk-averse approach and focusing on saving.
Second, we appreciate that the legal, regulatory, and compliance environment you are facing is extremely challenging. Regulatory and enforcement authorities continue to scrutinize your origination and servicing businesses in unprecedented ways.
Many of you have expressed that the compliance costs have become overwhelming. Just a few days ago, one of the largest and most respected players in the business told me that their cost of servicing a delinquent loan is 50 times higher than a performing loan. This is inevitably leading to unintended consequences, including lenders pulling back from making loans to those borrowers who have anything other than the most pristine credit qualifications.
We at Fannie Mae understand the challenges you are facing. Of course, we do not control all of the factors that are putting pressure on you and the housing system. But where we can exercise influence or make changes, we are seeking to do so in positive and responsible ways. We want to help you succeed today and in the future, not just for your sake, but also to fulfill our mission to help fashion a stronger housing finance system.
Customer Service and the Best Products and Services
As I said at the outset, we have re-committed to being your most valued business partner. We realize that you have choices about who to do business with in the secondary market. We aim to have you choose us – not because you have to – but because you want to. We recognize what is important to you, and we are redoubling our efforts to deliver what matters most to you.
First, we are committed to superior customer service, including dedicated customer teams focused on supporting your business objectives. Customer service is not new at Fannie Mae. Our customer teams have been connected to our partners for many years, learning their businesses inside and out and working to find constructive solutions and deliver the full value of Fannie Mae.
Over the past few years, our customer teams have had to balance customer service with delivering some tough messages. But now that the legacy repurchase issues are largely behind us, our full focus is on delivering the best customer service possible.
We recognize that one way to improve customer service is to make it easier to do business with us. Admittedly, this is not something we have always excelled at. We have embarked on a major effort to remake the front end of our business to make our interactions with you simpler, more efficient, and easier. I am confident you will see improvement.
Second, we recognize that we need to deliver competitive products and services that meet the needs of all of our customers, large and small. We are committed to a level playing field. We deliver the same pricing to smaller lenders that we deliver to the biggest players. We have become the partner of choice for smaller originators, including community banks, credit unions, independent mortgage bankers, and state and local housing finance agencies. Our commitment to this business is not going to change.
We have the leading MBS products, as well as a robust cash window available to our customers for delivery of single-family business. We also provide early funding, to help you manage your pipelines. But we are not content to rest on our existing offerings.
As we looked at the state of the market, we concluded we needed to offer you more in order to ensure access to credit for qualified borrowers. I believe we would all agree that there are segments of the population that are creditworthy, but not being served in today’s market. That needs to change. We know that loans can be safely and responsibly made to these borrowers under our current standards and we encourage all of you to do so – it is good business.
To meet this market need, I am very pleased that we will again be offering a 97 percent LTV product to all of our customers. This offering will be easy to execute through Desktop Underwriter®. It will also be competitively priced, including against FHA execution. We want this business. We are working now with FHFA to finalize the details of our offering and gain regulatory approval to proceed. I encourage you to stay tuned to learn more about our 97 percent LTV product, which we expect will help you serve more borrowers.
We recognize that a 97 percent LTV product will not solve all the issues. In every conversation with customers, I hear that lenders are desperate for more predictability and certainty in their business. You are trying to manage the downside risk. Here again, we are committed to delivering on your needs. In the important area of pricing, we have been committed for some time to predictable pricing.
We strive to allow you to manage your business with greater confidence by using a reservation pricing system that allows lenders to lock in a price on MBS execution on a forward basis. In another critical area, representations and warranties, we have taken a number of actions to provide greater certainty and to reduce your risk of repurchases.
Starting January 1, 2013, working with FHFA, we changed our representation and warranty framework to grant relief on loans that you are delivering to us. For HARP loans, we grant repurchase relief from many representations and warranties after 12 months of timely payments. For other loans, we grant repurchase relief from many representations and warranties after 36 months of timely payments or – if we review a loan as part of our quality control process – we grant repurchase relief immediately.
Over 675,000 loans that have been delivered to Fannie Mae since last year are now free and clear of repurchase liability from many representations and warranties as a result of the 12-month sunset on HARP loans. In the next few years, millions of additional loans delivered to us since January 1, 2013 are expected to receive this repurchase relief thanks to the HARP sunset, the 36-month sunset, and our quality control file reviews.
We realized that these sunset provisions were good, but not enough. As Director Watt reviewed earlier, we’ve engaged with the MBA, FHFA, and Freddie Mac to provide greater clarity on additional fronts, including what constitutes a breach of certain representations and warranties.
We also continue to work with the MBA and others on a mutually acceptable third-party dispute resolution process and an agreed upon approach to remedies. I am confident we will reach agreement on these issues. We’ve also engaged with the MBA and servicers to address compensatory fees to provide greater certainty and clarity in that area. I hope you agree that these are positive changes that will help you manage and limit your potential repurchase risk.
Finally, we have been working closely with you, our lender partners, to reduce the number of underwriting defects in your operations. We have been in your shops, and we have shared with you our findings, both good and bad – not with an eye toward playing "gotcha" – but to help you identify opportunities for improvement. Many of you have expressed your appreciation for our approach which, with your help, is producing positive results. We can see that defect rates have declined.
As you know, under our new representation and warranty framework, we are reviewing more loans closer to the time of delivery to Fannie Mae.
We’ve reviewed samples of the loans delivered to us in the first three quarters of 2013. Out of the 2.7 million single-family loans delivered to us from January through September 2013, we have issued repurchase requests on just 0.3 percent of them. That’s only 8,200 loans out of 2.7 million!
Even more, we’re giving lenders the opportunity to correct issues that prompted a repurchase request. For the first quarter of 2013, lenders corrected approximately 60 percent of our repurchase requests by providing data or documentation – meaning they didn’t actually have to repurchase the loans. So of those 8,200 repurchase requests I mentioned, most were resolved without a buyback. All of these numbers show that you have been successful in delivering loans that meet our standards, and that we are being fair in reviewing loans and giving you the chance to correct defects.
I was encouraged by a survey of executives at the recent MBA Secondary Conference. When asked how concerned they were about repurchase requests, the average rating was 3.2 out of 10 – down from 8 or higher in recent years. This shows progress, and the changes we continue to work on with the MBA should help make fear of repurchases a nonissue. My promise to you is that we will continue to treat you fairly in the loan review process to limit your repurchase risk today and in the future.
Let me note that we will also continue to build and deliver to you foundational tools that will reduce risk to you and the housing finance system. You are already familiar with some of them. For example, Desktop Underwriter is the leading automated underwriting platform in the industry, and provides limited waivers of representations and warranties. Another Fannie Mae tool is Early Check™, which enables you to do quality control checks earlier in your business process. These tools help you meet Fannie Mae’s requirements, and lend confidently to qualified borrowers. In August 2014, nearly 60 percent of loan deliveries came through the Early Check process, and I urge any lender who isn’t using that tool to do so.
We are working hard to develop additional tools to reduce risk to you and the system. To that end, today we announced Collateral Underwriter™ – a major innovation that gives you access to the same tool we use internally at Fannie Mae to analyze appraisals. Collateral Underwriter will help you evaluate the appraisal you order on a loan and understand how Fannie Mae views that appraisal. It compares the appraisal against our database of appraisals, and against other pieces of information we have about the home and neighboring properties.
You can use Collateral Underwriter before a loan closes, allowing you to address appraisal quality long before delivering a loan to Fannie Mae.
We see Collateral Underwriter as a major step toward offering representation and warranty relief on appraisals in the future, and we will work with FHFA on the details to do that.
Previews of Collateral Underwriter are available in our meeting rooms here at the Mandalay Bay, so we hope you’ll stop by to see it. Like Early Check, Collateral Underwriter will be available to you at no additional cost. It is not a vendor solution and we will not charge you to use it.
All of these steps – changes to the representation and warranty framework, greater clarity on what does and does not give rise to a possible repurchase, our loan quality review processes, and new tools such as Collateral Underwriter, should enable you to lend to our standards so that there won’t be surprises down the road – for you or for us.
For your part, with less repurchase risk, I ask you to commit to lending across our full credit box. Again, there is good, profitable business available by expanding your lending to qualified borrowers at a wider range of FICO, LTV, and DTI levels. Increasing access to credit for qualified borrowers is good for borrowers, lenders, and the economy as a whole. We will be there to support you as you expand your work with additional borrowers.
We’re In This Together
At the end of the day, the only way we at Fannie Mae can fulfill our mission of helping to build a stronger, better housing finance system is to make you successful in delivering credit to the market. You are out there every day, working with borrowers to meet their needs, whether that’s to buy or refinance a home. In addition, our multifamily lender partners are helping to ensure that families who choose to rent have access to good, affordable housing. We are striving to equip you with the products, services, and tools to underwrite quality loans and to serve more borrowers.
Our goal is to continue to be the leading player in the secondary mortgage market by being your most valued business partner. At Fannie Mae, we are focused on serving you, and we look forward to winning with you in the future.
Thank you very much.