TheMReport — News and strategies for the evolving mortgage marketplace.
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14 | TH E M R EP O RT TAKE 5 M // What do you think will be the largest factors affecting the mortgage industry in the com- ing year? CORLEY // The economy is No. 1. Our expectations are consistent with the industry consensus that next year will be better for purchase mortgages than refinances. We expect the economy to grow at an annualized rate of 2.5 percent, and mortgage rates to average 4 percent on 30-year fixed rate mortgages. Although low by historical stan - dards, the increase in mortgage rates from recent periods will trigger a decline in refinance activity from 47 percent of all originations this year to an estimated 39 percent next year, and total originations will drop from about $1.53 trillion to roughly $1.4 trillion in 2016. But another big factor is how the economy will affect homebuy - ing among millennials and other groups on the sidelines. We're generally optimistic that affordable mortgage rates will be enough to offset rising home appreciation and bring more buyers to the closing table. We see home sales growing from 5.74 million to 5.96 million next year. M // What do you see industry practitioners doing to adapt to these changes? CORLEY // The industry is look- ing for a flexible, low-downpay- ment conforming conventional mortgage product they can use to reach millennials and other aspir- ing homeowners with limited savings. But lenders are reluctant to offer them without greater certainty from the investor. M // In the past year, Freddie Mac has strengthened its Private Mortgage Insurer Eligibility Requirements (PMIERs) for new mortgage insurers applying to do business with Freddie Mac. Come the end of December, these requirements will also impact previously approved insurers. What is the gist of the policy changes, and what is the intended outcome? CORLEY // Private mortgage insur- ance is critical to making home- ownership affordable to eligible borrowers who cannot afford a 20 percent downpayment. During the recent financial crisis, some mort - gage insurers were unable to fully pay claims, resulting in losses to Freddie Mac and increased losses to taxpayers. The goal of PMIERs is to strengthen and align counterparty risk management policies to make certain that private mortgage insurer counterparties are able to fulfill their role of providing reliable credit enhancement for loans acquired by Freddie Mac, even in adverse market conditions. Some of the key changes include applying a risk-based standard to each approved MI's portfolio to ensure they have liquid capital available for paying claims under a variety of significant market stress scenarios. Insurers that fall short may have to raise new capital, enter into reinsurance contracts, or replace illiquid with liquid assets to meet the requirements. The PMIERs also include a peer scorecard intended to promote sound business practices and to establish strong internal risk management frameworks at each approved MI which will monitor quality of underwriting practices. M // In January, the GSEs new repurchase policies will go into effect. What is intended with the new guidelines, and what effect do you feel these guidelines will have on lender willingness to lend? CORLEY // The remedy framework taking effect in January was de- veloped with the Federal Housing Finance Agency and is largely based on the framework we were already using with our customers. In short, we put into words the practice that we've been following. The desired effect is that our added transparency will increase lender confidence to reach out to more eligible borrowers and make fuller use of Freddie Mac's credit box. That's because the framework clarifies the types of remedies that correspond with the differ- ent categories of origination defect. This in turn makes our options for loan-level decisions during a quality control review more transparent to our customers. Giving lenders greater certainty when they do business with us is fundamental to our business plan. Sizing Up the Risk With Freddie Mac's Donna Corley Through her nearly 20 years of experience in the secondary mortgage market, Donna Corley has learned to handle and mitigate difficult situations. Corley currently serves as SVP and Single-Family Chief Risk Officer for Freddie Mac's Single-Family Business. We sat down with her to discuss key Freddie Mac initiatives leading into 2016. "Giving lenders greater certainty when they do business with us is fundamental to our business plan."