One of the biggest reasons for the tightening and continued Tightening Of Mortgage Underwriting Guidelines By Lenders, is the result of the large number of mortgages that Lenders are being forced to buy back form the three major GSE's Fannie Mae, Freddie Mac, and FHA. The number of mortgages that Lenders have had to buy back have been unprecedented in recent years.
Just this year alone in the 2nd Quarter Fannie tried to send $14.58 Billion in mortgages back to Lenders, and was successful in getting Lenders to take back $2.34 Billion. Freddie Mac tried to send $2.91 Billion in mortgages back to Lenders, and was successful in getting Lenders to take back $1.18 Billion. Many of these Mortgages were several years old, and had preform well up until recently. However, the GSE's don't truly review or audit the mortages that they purchase until the mortgage stops performing and foreclosure takes place. This puts a major burden on Lenders because a mortgage could have been paid on time every month for 5, 10, 15, 20 years or more, but as soon as the Borrower runs into difficulty paying the mortgage, that is when the GSE's start to find reasons to stick the Lender back with the mortgage.
These days the reason that Lenders are being asked most to take back a mortgage, is for ridiculously small deposits and withdrawals that were not explained at the time the mortgage was underwritten. The reason that the deposits and withdrawals were not explained then was because Lenders were not asked to explain deposits and withdrawals unless they were around $1,000 or more. Now the GSE's want even a $100 deposit or withdrawl explained when they send the mortgage back. This is a requirement now, but not a requirement when the mortgage was Underwritten. So Lenders are having to meet a guideline that did not exit when the mortgage was Underwritten and being cited for a guideline that did not exist at the time of Underwriting. The GSE's will claim that it did, and will hang their hat on very grayish wording.
The reality is, how in the world does a Lender or even a Borrower remember what a $295 deposit or withdrawal was for 5 years ago. The answer is obvious, they don't, and as a result is a Lender may end up with a $200,000 mortgage back on their books because of a $295 deposit or withdrawal that could not be explained 5 years later. A Lender no matter how large will quickly find themselves with cash-flow issues if enough mortgages are taken back into their portfolio. This is a major problem for Lenders, and has resulted in Tightening Of Mortgage Underwriting Guidelines By Lenders, not only asking for an explanation of just about every deposit and withdrawal from Borrowers at time of Underwriting, but tightening other areas of the Underwriting process as well.
Lenders have been fighting the GSE's on this unreasonable requirement, and it seems that the Edward DeMarco, the acting director of the Federal Housing Finance Agency, which regulates the GSE's, is beginning to finally listen. DeMarco in a recent letter to Congress writes:
"When lenders sell a mortgage to Fannie Mae or Freddie Mac, by contract they represent and warrant that the loan meets applicable standards and they agree to buy the loan back should that not be the case. The wave of poorly underwritten loans in the 2005 to 2008 period has led to unprecedented repurchase requests by the Enterprises. But it also reveals a flaw in how this business arrangement has traditionally worked. By waiting until bad mortgages emerge through mortgage delinquencies, the application of reps and warrants delays recognition of emerging weaknesses in loan origination.We want to change the focus going forward to ensure loan quality at the time of origination.
Under FHFA’s oversight, Fannie Mae and Freddie Mac are developing new, consistent requirements for reps and warrants that will shift the focus of loan quality review to the time of sale to an Enterprise and to give lenders greater certainty that a loan that performs successfully for a period of time will not later be subject to repurchase except for very limited reasons. While this will result in greater scrutiny of performing loans near the time of origination, the intent is to reduce the risk for the Enterprises and lenders alike. We anticipate issuing these new standards by September."
This makes sense to me and hopefully it will become the policy and procedure by witch mortgages are audited by. It should be and needs to be at the time the mortgages are sold, and the mortgage is performing, not several years later when the mortgage stops performing. If this change does go into place, in my opinion we will the start to see a relaxing of some of the items and explanations that Underwriters have been requiring of Borrowers. Only time will tell but this is finally a step in the right direction in my opinion, and an end to the Tightening Of Mortgage Underwriting Guidelines By Lenders.
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