Fannie Mae and Freddie Mac are not going to be drawn into buying dangerous mortgages that could come back to haunt home buyers, a group of lenders from Washington, Oregon and Idaho were told earlier this month.
While some measure of imagination is necessary to meet changing market conditions, representatives from the two government-sponsored enterprises said at the Pacific Northwest Mortgage Lenders Conference in Sun Valley, Ore., the GSEs intend to move slowly in developing products that go beyond the norm.
Fannie Mae and Freddie Mac where chartered to bring liquidity to the mortgage market by purchasing loans from primary lenders and selling them to investors worldwide on the so-called secondary market.
"We're here to work with lenders to develop markets, not exploit them," Connie Ferran, Freddie Mac's vice president of regional lending for the western states, told the conference. "That's why we won't buy loans that we know will end up in foreclosure or were originated with predatory lending practices."
Todd Hempstead, senior vice president of single-family mortgage business at Fannie Mae and manager of the company's Western Business Center, sounded a similar theme, saying, "We don't want to put people in homes and see them lose their homes."
"It's devastating for them and their families, for their communities, for the economy, and it's certainly not healthy for our industry or our companies," he added.
But panelists on a conference session entitled, "Opportunities in Non-Prime Lending," told the meeting that subprime lending is not nearly as risky as it is believed to be.
Non-prime lenders "are more disciplined than most people think," said Michael Upp, national sales director for both the Northwest and Midwest regions of Option One Mortgage.
Upp pointed out that more than three out of five non-prime loans are originated by the nation's largest and most well-respected lenders, adding that that alone brings self-control to the market.
He also noted that the profile of his company's borrowers is not terribly different from that of conforming loan borrowers, and that nearly half of Option One's non-prime loans are to borrowers with credit scores of 620 or higher.
And "it's the same with other Top 10 subprime lenders, too," he added "We're not doing as many loans under a 540 credit score as many people think."
Bruce Dickerson, chief operating officer of Ownit Mortgage Solutions, stressed that subprime is not a business but a product line developed to meet changing market demographics.
And Joel Cambern, Northwest Regional Manager for LIME Financial, which is based in Lake Oswego, Ore., said that the term "alternative mortgages" is usually applied to such products as interest-only loans, option ARMs, stated income loans, limited documentation mortgages and a host subprime offerings. It does not necessarily mean the same as "creative mortgages."
"The three Cs: collateral, credit and character still apply," he said. "It's just that every loan has a story, and a good non-prime underwriter looks for that story. There's still a lot of integrity in this industry."
"We're not lending to the guy on the street-corner holding up a sign. It's your neighbor who is working 10 hours a day to raise a family."
But Fannie Mae's Hempstead said his company is taking a "cautious" approach to what he called "exotic" loans.
"When we finance ARMs with IO features, Alt-A loans and other custom and hybrid loans, we work with lenders to make sure borrowers can handle the risk," he said.
The popularity of adjustable mortgages per se is not a concern at Fannie Mae, which has participated in the ARM market for years, according to Hempstead, who added that such loans make sound financial sense for some borrowers.
But the company does worry about borrowers who stretch themselves to the limit, who have a thin financial cushion, blemished credit and spotty documentation, or who are speculating that house prices will go even higher.
"When you put two or more of these factors together, when you layer the risks, it could pose a danger both to the borrower and to the entire housing finance system and everyone in it," he explained.
Consequently, Fannie Mae is taking a "very disciplined approach" to exotic loans, "even if it means losing market share to private label investors," he said.
"We are not chasing the market simply because they are available."
Ditto for Freddie Mac. "Our goal is not simply to buy as many loans as possible," Ferran said, "it's to encourage the market to make the right loans the right way."
That doesn't mean the GSEs are not responding to the market. They are, but slowly and surely, the conference was told. "This is easily the greatest era of new product development in my 14 years at Freddie Mac," Ferran said.
For example, the company's new Home Possible suite of loans offers flexible credit standards with lower credit scores and lower downpayment requirements and a wider range of property and loan types.
Fannie Mae also is trying to invent a better wheel. Pre-sale requirements and limits on investor-owned units have been loosened for condo loans, loan terms can go as long as 40 years, and down payments as low as $500 from the borrower's own funds all are part of the company's menu.