The Federal Housing Finance Agency's (FHFA) announcement last week to allow Fannie Mae and Freddie Mac to purchase mortgages with slightly higher loan-to-values (LTV) signals a continued shift in direction, according to Fitch Ratings. The global rating agency said it believes the proposed changes will help the GSEs maintain their dominant position--potentially leaving less room for private capital in the mortgage market.
Fitch said the changes proposed by FHFA will be helpful to residential real estate market activity only if banks become more willing to ease lending standards. “While the initial market reaction to the proposed changes has been positive, it is not clear if banks will loosen their credit overlays on agency loans and increase lending volume,” it reported.
Currently, the GSEs' credit standards remain lower than those of originators, despite revised framework put in place in early 2013. Banks have been much more cautious about underwriting because of the scale of loan putbacks imposed by the GSEs post-crisis.
However, Fitch said the proposed increase in LTV levels to 97% from 95% may result in some benefit to the active private mortgage insurers, which provide coverage on most GSE loans with LTVs above 80%. The decline in the down payment requirement could increase the number of loans eligible for private mortgage insurance coverage and would extend the average length of policies' coverage.
The benefit to the mortgage insurers, however, also depends on banks' willingness to lend at higher LTVs. It may also increase the riskiness of their insured books with more high-LTV loans. “The Private Mortgage Insurance Eligibility Requirements, a new set of capital rules set to be finalized by the end of 2014, remain an uncertainty for the industry and potentially another long-term challenge for MIs,” Fitch said.