Tightening Of Mortgage Underwriting Guidelines By Lenders

By
Mortgage and Lending with George Souto NMLS #65149 FHA, CHFA, VA Mortgages NMLS #65149

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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Who To Call For Your Mortgage Needs In Connecticut:

George Souto NMLS# 65149 is a Loan Officer who can assist you with all your FHA, CHFA, and Conventional mortgage needs in Connecticut. George resides in Middlesex County which includes Middletown, Middlefield, Durham, Cromwell, Portland, Higganum, Haddam, East Haddam, Chester, Deep River, and Essex. George can be contacted at (860) 573-1308  gsouto@mccuemortgage.com, or visit my McCue Mortgage Homepage.

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George Souto NMLS# 65149 is a Loan Originator who can assist you with all your #FHA, #CHFA, and #Conventional #mortgage needs in Connecticut. George resides in Middlesex County which includes #Middletown, #Old Saybrook, #Middlefield, #Durham, #Cromwell, #Portland, #Higganum, #Haddam, #East Haddam, #Moodus, #Chester, #Deep River, and #Essex. George can be contacted at (860) 573-1308 or souto@snet.net

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Brenda Mullen
RE/MAX Access - Schertz, TX
Your San Antonio TX Real Estate Agent!!

I guess I am little confused (and that's why I am not a lender).  Do you mean a deposit or a withdrawl of the borrowers funds?  I don't see how anyone could explain that after 5 years either and it sounds a bit ridiculous that they would require that.  

Aug 26, 2012 09:55 AM #1
Rainer
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Steven Cook
No Longer Processing Mortgages. - Tacoma, WA

George -- an outstanding explanation of what is happening.  And yes, Brenda, he is talking about the client having to explain a deposit or withdrawal in their checking or savings account many years after the event.  We try to make sure we get all those explained up front now, but sometimes it is hard meeting the UW requirements even when the item was only 2 months ago.

Aug 26, 2012 10:22 AM #2
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
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Brenda, we just had on loan that FHA tried to send back to us that performed well for 18 years and now the people are having a problem making the payment for the last year.  So 19 years  later they are questioning a small deposit and trying to use it to send the loan back to us. 

Steven, thank you for verifying that for Brenda and thank you for the e-mail :)

Aug 26, 2012 10:31 AM #3
Rainmaker
1,278,199
Nick T Pappas
Assoc. Broker/Broker ABR, CRS, SFR, e-Pro, @Homes Realty Group, @HomesBirmingham & Providence Property Mgmnt, LLC Hun... - Huntsville, AL
Madison & Huntsville Alabama Real Estate Resource
George, I can understand to some extent auditing mortgages during the '05-'08 years, but going back beyond that just seems inherently wrong. I seems like any excuse will be used to give a mortgage back.
Aug 26, 2012 12:15 PM #4
Rainmaker
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Joan Whitebook
BHG The Masiello Group - Nashua, NH
Consumer Focused Real Estate Services

George ~  I hope that things start to become more sane. We all are hoping for some postive news in the lending industry.  I hope this is the begging of just that.

Aug 26, 2012 01:21 PM #5
Rainmaker
869,561
Ann Hayden
Berkshire Hathaway HomeServices Select Properties-St. Louis Missouri - Chesterfield, MO
SelectAnn.com

George,

Sounds like a good way to slow the economy.....or at least the housing market.

Ann Hayden in Wildwood, MO

Aug 26, 2012 01:35 PM #6
Rainmaker
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Ginny Gorman
RI Real Estate Services ~ 401-529-7849~ RI Waterfront Real Estate - North Kingstown, RI
Homes for Sale in North Kingstown RI and beyond

George, this looks like a lot of work to figure out on changes to the GSEs...again it comes down to documenting, documenting to the finite degree...tough on you lenders

Aug 27, 2012 02:47 AM #7
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Brenda Mullen
RE/MAX Access - Schertz, TX
Your San Antonio TX Real Estate Agent!!

Thank you both for clarifying that for me.  I figured it couldn't be that silly but apparently it is.  Wow...I get verfying funds while you are trying to get the loan, but afterwards, people have a right to spend their money the way they want to.  Why have deposits be the explantion YEARS later as a justification?  Sick if you ask me.  

Aug 27, 2012 05:19 AM #8
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George Souto
George Souto NMLS #65149 FHA, CHFA, VA Mortgages - Middletown, CT
Your Connecticut Mortgage Expert

Brenda, the deposits and withdrawals that they are asking explanations for are not deposits and withdrawals that the Borrower is making now, that would be unreasonable, but easy to explain.  The explanations that they are asking for are for the deposits and withdrawal that were made at the time of the loan, back several years ago.  So it is almost impossible to get an explanation, I can barely remember what I was doing when I started to make this comment, much less a deposit or withdrawal I made 5 years ago :)

Aug 27, 2012 06:47 AM #9
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