Government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac should be required to use a single, standardized automated underwriting system (AUS) to give consumers and government regulators complete transparency into their underwriting processes, the Mortgage Bankers Association (MBA) says in its latest position paper, ‘Keys to Expanding Credit Access: A Common Credit Box And Clearer Representations and Warranties.’
As the report points out, the two GSEs use separate, albeit similar AUS – which was fine when they were competitors in the private sector and needed to hide the details of their lending standards from each other. However, it was these same ‘underwriting variances’ negotiated between the companies and their larger customers that ‘masked the real risks the GSEs were taking from regulators and Congress’ prior to the housing meltdown in 2008, the MBA's report states.
As competition between the two companies became increasingly fierce, each started to relax its standards in order to attract more large customers. This in turn resulted in a ‘race to the bottom and led to the GSEs' downfall,’ the MBA says.
Today, Fannie Mae and Freddie Mac still have the same underwriting systems in place, which means despite the government takeover, they ‘are still not fully transparent about their AUS credit standards.’
Congress and the Federal Housing Finance Agency, therefore, should consider equipping the GSEs with a standardized AUS, as well as implement consistent and transparent credit underwriting rules, the lobbying group asserts in its position paper – the fourth in a five-part series on how best to reform the secondary market.
‘By utilizing the same underwriting engine, credit variances between the two enterprises would become much more transparent, which would facilitate credit access,’ the report states. ‘In fact, this type of approach, resulting in a single AUS infrastructure which could include credit scorecards from a number of different guarantors, may provide a good model for a future credit system – a system that could clearly indicate the choices available for lenders and consumers and break the black box. Under this construct, the QM definition would still demarcate the outer boundaries of the credit box.’
Aligning underwriting standards would also help resolve the problem of different standards leading to differences in prepay speeds, the MBA says.
‘Any reforms of the secondary market should limit the ability of the GSEs to compete on credit boundaries,’ the report states. ‘The GSEs are not betting with their own capital – they are betting with money from taxpayers. It does not make sense to have multiple credit models from government-backed entities competing in the market.
‘While private capital can and should be encouraged to compete in the mortgage market with appropriate regulatory oversight, there is no reason to have two different, government-backed, black-box underwriting systems,’ the report adds.
To view the full report, click here.