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Restoring Excellence in Mortgage Lending

EVP Don BiseniusAt Freddie Mac, the priorities of the single-family business fall into three categories: past, present and future. For loans that we purchased in the past and still own, we are sustaining homeownership for borrowers in economic distress. Since 2009, we have provided foreclosure alternatives to 360,000 families. Next, in the present environment, we are providing liquidity to the mortgage market at a time when it is most needed. Since 2009, we have purchased more than $600 billion of mortgages, financing almost one in four new home loans.

Importantly, we also are addressing the future. The housing bust and mortgage meltdown have weakened confidence in the U.S. housing finance system. Families are more skeptical about whether mortgages have unexpected costs or features. Lenders are less sure that the loans they originate will not come back to them as repurchases. And institutional investors wonder whether the loans in mortgage-backed securities will perform as expected.

How do we earn back the confidence of these and other stakeholders? We believe the answer is to restore greater excellence in mortgage lending. To this end, Freddie Mac and our lenders are forging a strong foundation of responsible lending practices that produce better quality loans. The benefits that we are seeking: more sustainable homeownership for families, fewer unexpected costs for our lenders, and better loan performance and lower taxpayer funds for Freddie Mac.

To us, responsible lending requires a combination of strong loan attributes – factors that describe the borrower, property and mortgage – and solid underwriting processes. We establish credit polices around acceptable loan attributes and then define processes that ensure the right data is collected and verified, and complies with our guidelines.

Freddie Mac has taken action on the first part – ensuring strong loan attributes – by addressing risk layering at a loan level and eliminating many non-traditional loans. On new loan purchases, credit scores have gone up, loan-to-value percentages have gone down, and debt-to-income ratios have become more manageable for borrowers.

These credit parameters have been important for improving loan quality. But they have not fully defined loan quality. That's why we also have been working with our lenders to improve the effectiveness of various processes – origination, underwriting, closing, delivery and quality control – involved in loans sold to us. Why such an emphasis on process? Because, despite the appearance of good loan parameters, some loans that contain flawed or unsupported data concerning the borrower or property might default at a higher rate.

Thus, during the past year we have worked with our lenders to forge best practices in loan underwriting and processing. And much to our lenders' credit, non-compliant loans sold to Freddie Mac have declined.  To sustain this positive trend, we have recently enhanced our reviews at more points in the loan process. For example, we have enhanced processes that better detect errors that might still be correctable by the lender, provided trend analysis and detailed reports that lenders can use to improve their own processes, and developed tools that can prevent certain errors from occurring in the first place.

Now, all this process change involves costs for the lender in both time and money. And borrowers have been impacted in both the cost of a loan and whether they qualify for a particular loan at a given time. But all this change is essential to placing the housing finance system on a better foundation of responsible lending practices. If we continue to make progress, then we will be able to attract more capital into the U.S. mortgage market, reduce unexpected costs for those involved in the market, and, best of all, give families the confidence they need when financing homeownership.

*Don Bisenius left his position as executive vice president of Freddie Mac's Single Family Credit Guarantee Division in March 2011.


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