Freddie Mac's recently announced reductions in mortgage insurance coverage requirements enables lenders to qualify more borrowers, said its chairman and chief executive, Leland Brendsel.

Speaking at the Regional Conference of Mortgage Bankers Associations in Atlantic City, Brendsel explained the changes were possible because of the use of automated underwriting, combined with new forms of risk sharing.

Neither of the two announced coverage options are intended to replace traditional default protection, but do offer lenders the ability to provide alternatives to borrowers.

Providing lenders with these alternatives is consistent with the mission of Freddie Mac to provide a reduced cost of homeownership to consumers, he said.

Brendsel said the mortgage industry has been flexible in adopting changes that are beneficial to consumers.

Automated underwriting in general allows Freddie Mac to understand risk better and thus distinguish between borrower risks that were once thought to be alike.

More than half of mortgage lenders use automated underwriting. The use of Loan Prospector quadrupled in 1998, with more than 2 million loans. Almost 40% of Freddie Mac's business came through automated underwriting, Brendsel said.

Eventually automated underwriting will be used to make 90% of Freddie Mac's loan purchase decisions. Brendsel sees the use of automated underwriting as allowing Freddie Mac to expand the type of products the company will purchase.

With the further development of automated underwriting tools, the sharp differences in varying market segments (in terms of credit quality) will disappear. Instead of credit grades, mortgage lending will take place in a continuum, he said.

Brendsel also spoke about the events of last fall, when the conforming loan market emerged unscathed from the turmoil that affected other segments of the business.

Not only did Freddie Mac provide stability, it also helped lower costs for homebuyers. He noted that he has experienced many cycles in the home lending industry and the ability to maintain a steady supply of capital is improved through each cycle.

This is because of developments in the secondary market.

As for the future, Brendsel said he sees an era where affordable mortgage credit is available to all borrowers.

This will be done by lenders creating customized solutions for borrowers, rather than today's "one size fits all" loan.

Published: March 31, 1999

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