Regulatory Effort Threatens Innovations in Mortgage Market - 2/2/2004 - Mortgage Loan Refinance Debt Equity

Regulatory Effort Threatens Innovations in Mortgage Market

As regulatory legislation for the housing GSEs moves forward, there are those who accuse them of “being too responsive and innovating too quickly,” said Franklin Raines, chairman and CEO of Fannie Mae, and they “want to have the government approve every new product and activity” that is proposed to help improve the mortgage market.

That, he said, would throw a “monkey wrench” into the process of innovation that is being driven by technological advances in automated underwriting and would result in higher financing costs and less demand.

“We are staking the future of Fannie Mae on the ability to innovate on behalf of customers,” said Raines. In the past decade his institution has geared up for mass customization of mortgage lending, he noted, by investing hundreds of millions of dollars to redo systems that were created in the era when all loans were 30-year, fixed-rate.

Five years ago, Raines said, Fannie Mae didn’t buy any loans from impaired credit buyers; today it is buying $40 billion worth of those mortgages a year. Similarly, it last year bought $15 billion in loans with downpayments of 5% or less.

He listed several other innovations that have arrived on the scene or are in the works: interest-only loans; loans that allow borrowers to skip payments without being in default; acquisition, development and construction financing for builders and developers; loans for teachers requiring payments only during the nine months of the year when they are working; faster amortizing mortgages for people who are retiring; and more.

Paul Peterson, Freddie Mac’s chief operating officer, said that innovations in automatic underwriting and access to global financial markets have enabled the mortgage industry to originate far more loans than it was capable of before.

He said that lenders were able to originate three times the volume of loans during the 2001-2003 refinancing boom than they handled during a comparable boom in the early 1990s, when the pipeline swelled and lenders kept interest rates artificially high because they were unable to handle the huge influx.

“In the early '90s, almost every home was originated manually, to varying credit standards, took too much time and was expensive,” said Peterson. “Today, automated underwriting has become the standard process. Rather than waiting weeks after credit data is received to get a secondary market decision, lenders now receive all that information together…in about a minute. Because of this advance, the cost to originate a loan has dropped by several hundred dollars, and lenders have approved countless borrowers that would have been unfairly denied under the old way.”

“Housing is threatened,” said Eugene Ludwig, managing partner of Promontory Financial Group in Washington, D.C., by “a drift away from support for innovative housing finance and away from homeownership as a key element of social policy.”

Ludwig said he was a believer in the value of third-party supervision, but in the current efforts for regulatory restructuring he finds it troubling that “the debate has had an aura of cutting back Fannie and Freddie and nothing about increasing innovation and homeownership.”