Mortgage Standards To Relax Under New Federal Plan
If you've tried to get a mortgage during the past few years you know the application process has become extremely difficult. Even borrowers with 20 percent down and good credit are not getting loans according to no less a source than Federal Reserve Chairman Ben Bernanke.
But starting in January loan applications are likely to become less picky and perverse, including applications to finance foreclosures, short sales and REOs. The more reasonable underwriting requirements will be a by-product of new regulations proposed by the Federal Housing Finance Agency, the government institution that oversees Fannie Mae and Freddie Mac.
Putbacks
Most loans today are originated by one lender, sold into the secondary market and then packaged together to make mortgage-backed securities. In this process the original lenders and the packagers make certain warranties and representations to the investors who buy the loans, essentially promising that the quality of the mortgages being sold meets critical standards.
Most loans today are originated by one lender, sold into the secondary market and then packaged together to make mortgage-backed securities. In this process the original lenders and the packagers make certain warranties and representations to the investors who buy the loans, essentially promising that the quality of the mortgages being sold meets critical standards.
Bloomberg News says that lenders have paid $84 billion in buy-back claims just to Fannie Mae and Freddie Mac since 2007 and more may be coming — a study by the FHFA inspector general says that better loan reviews could yield an additional $3.4 billion.
Everyone agrees that lenders should be forced to buy-back lousy or fraudulent loans. But should any mistake in the origination process require a buy-back? One lender, speaking privately, says even minor clerical errors are creating buy-back demands and that he knew of hundreds of such cases.
No Harm, No Foul
The new FHFA proposal does not “liberalize” underwriting standards, instead it tries to distinguish major errors from minor ones by looking at whether the borrower is actually making payments. The basic deal with small mistakes under the FHFA plan is no harm, no foul.
The new FHFA proposal does not “liberalize” underwriting standards, instead it tries to distinguish major errors from minor ones by looking at whether the borrower is actually making payments. The basic deal with small mistakes under the FHFA plan is no harm, no foul.
Specifically, the FHFA plan works like this:
First, “lenders will be relieved of certain repurchase obligations for loans that meet specific payment requirements, for example, rep and warranty relief will be provided for loans with 36-months of consecutive, on-time payments.”
Second, “Home Affordable Refinance Program (HARP) loans will be eligible for rep and warranty relief after an acceptable payment history of only 12 months following the acquisition date.”
Third, FHFA says "exclusions for rep and warranty relief, such as violations of state, federal and local laws and regulations will be detailed."
Fewer Mortgage Hassles
For borrowers — including those purchasing short sales, foreclosures and REOs — the new plan will make the loan application process easier and less exacting. There will be less pressure to restrict mortgages to borrowers who absolutely and perfectly fit program guidelines. Instead, lenders will be more willing to use the exceptions and variables found within loan standards and extend credit to borrowers who might be unable to get financing today. Modifications — if the federal Making Home Affordable program continues past the end of this year — will be easier to get with warranty relief.
For borrowers — including those purchasing short sales, foreclosures and REOs — the new plan will make the loan application process easier and less exacting. There will be less pressure to restrict mortgages to borrowers who absolutely and perfectly fit program guidelines. Instead, lenders will be more willing to use the exceptions and variables found within loan standards and extend credit to borrowers who might be unable to get financing today. Modifications — if the federal Making Home Affordable program continues past the end of this year — will be easier to get with warranty relief.
Lenders will surely like the new standards but two problems remain: First, the new regulations do not apply to old loans. Mortgage originators remain liable for past sins — and those underwriting conflicts could cost additional billions of dollars. Second, Congress can always dump the FHFA proposals.
Real Estate Blog Author Bio: Rob Alley earned a bachelors degree at Virginia Tech, in Blacksburg, VA in Biology. Rob Alley consults with homeowners regarding Real Estate transactions and speciliazes in listing and selling Charlottesville Real Estate. Realtor/Owner of Virginia Real Estate Solutions at RE/MAX Assured Properties
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