Removing barriers to getting a mortgage
HUD has been talking to their counterparts in the government
about the reduction in FHA loans.
Jamie Dimon from JP Morgan stated in a conference call that perhaps its’ time to
re-think doing FHA loans.
Mortgage Bankers are looking at alternatives to Fannie Mae
and Freddie Mac loans.
Why is all this going on?
Lenders are tired of being sued for lending. That one-sentence probably best sums it
up. The days of subprime mortgages and
bad lenders were cleansed when the market crashed and rinsed and washed a
second time with some valuable Frank-Dodd reforms.
However, the US government continues to sue lenders and
announce large settlements, regulators continue to overzealously enforce
provisions that even they do not fully understand and banks and bankers seek to
settle because the cost of litigating is high, but to litigate your regulator
is toxic.
What choices do lenders have? Lend without using Fannie, Freddie or
FHA. Tighten lending standards above and
beyond what CFPB requires and deny credit to anyone who would have gotten a
loan as recently as 2011. And, lenders
now over underwrite and over request documentation while over disclosing and
demanding proof from the borrower that they received the disclosures to ensure
they are in compliance.
So, HUD and Fannie have taken a step back. HUD is in the process of re-writing their FHA
lending requirements and Fannie and Freddie are looking at providing a more
concise lending matrix that is very clear about how lenders can protect
themselves from claims over bad loans.
The claims over bad loans are a big issue to lenders. Fannie, Freddie and HUD all look to kick a
loan back to the lender for the smallest of things when that loan is,
typically, found to be 30 or 60 days late.
The late payment status of a particular loan triggers a complete review
of the loan. Any “t” not crossed or “I”
not dotted triggers buy back demands.
This then triggers lenders to demand buy backs from other lenders and
the game of “Hot Potato” with Mr. and Mrs. Smith’s mortgage begins. As the game heightens and the loan gets sent
from lender to lender back down the chain, the borrowers find themselves
getting notices that their loan payment is not due to lender X, it’s due to
lender Y now and maybe in 3-months it may be due to lender Z. This hurts everyone and typically is caused
by Mr. Smith forgetting to make the mortgage payment and everyone from Fannie
to the small mortgage banker that originally originated the loan getting
involved in who has what exposure.
Now, Fannie, Freddie and HUD realize that the mortgage
market has gone too far in tightening credit.
They don’t cite the reasons, but the reasons are clearly outlined above
– they and the government went too far and became too punitive following the
market crash of 2008 and 2009.
To ease the situation Fannie, Freddie and HUD know they have
two issues to attack. One is the
reduction in credit to individuals that is pushing potential homeowners into
the rental market and slowing the home buying market. The second is being clear to lenders that if
they lend in good faith and follow the rules, they will not be held accountable
if a loan becomes non-performing.
Recently, Fannie and Freddie announced that they were
working to clarify what constitutes a buy back.
In 2013 they stated that no buy back would be demanded if the borrower
did not miss any payments for three years.
In May they announced that the borrowers could miss two nonconsecutive
payments within three-years without triggering a buy back demand.
The agencies are now working on other issues including small
mistakes (minor clerical errors or missing paperwork that does not alter the
soundness of the underwriting decision made while processing and approving the
loan). That’s a big concern for lenders
because many banks and agencies will look for a missing pay stub or a missing
disclosure to trigger a buy back on a loan that they just want to find a reason
to demand it be purchased because they simply do not want that loan.
Also, fraud is coming into view in the horizon. They are finally looking at what constitutes
fraud and the definition of that. This
is an important point because lenders have met and exceeded due diligence in
making a mortgage to a borrower only later to find out that the borrower was
slick in providing false and misleading information to the lender to induce the
lender to provide a mortgage. This has
led many lenders to close, others to be wrongfully accused of fraud and yet
still others to lose a lot of money on fraudulent loans. And, this problem, comes from consumers and
individuals outside the mortgage industry.
The general public has been sold the story by the US Government that the
bad guys are the mortgage professionals and they do not know the story of the
bad person who may be living next door to them that pulled off a sophisticated
mortgage fraud scheme to acquire their home (which, is the equivalent of
stealing hundreds of thousands of dollars from a bank but since it was not done
with a stick up they are not, in many cases, being prosecuted. Instead, the lenders is being scrutinized by
investigators from three, four and five federal agencies looking for anything
to indict a company or staff of a felony; when in fact they were a victim. Most people don’t view lenders as victims
following the outrage of the crisis and the shrill voice of uniformed
politicians throwing red meat to the angry voter)
So, how does the government provide lenders with the
protections that they need so that they can make solid, good loan decisions
based on information provided to them and received by them using third party
tools to verify said information without fear of being second-guessed later
on?
How does the government reduce angst by lenders so that they
loosen up credit?
And, how does the government address the fraud question and
determine who is culpable (and this is a sticky one because, in the defense of
the government, anyone could have committed the crime since there’s gain to be
had for everyone in the process from the lender to the loan officer to the
borrower to the attorney to the realtor and so on).
Well, that process has begun.
Fannie & Freddie are coming out with new “road rules”
that address buy backs and addresses expanding credit to borrowers with lower
down payments. And, they’ve begun to
attack the buy back issue along with the fraud issue.
HUD also has begun that process
So, it may be a new day in the mortgage industry where saner
heads prevail and the adults take control of the room from the crazy kids who
ran rampant.
Perhaps returning to vanilla products that were available
before Clinton pushed for expanded home ownership is a sound decision. Perhaps throwing in a few more products like
one or two expanded ratio products geared specifically to LMI borrowers as
defined by HUD medium incomes, issued by Fannie/Freddie is wise. Sticking to
basic DTI’s and sticking to basic credit requirements is key.
In 1995 the mortgage market began to see the lugs that held
the wheels to their cars loosen when first the government announced that
certain minorities lacked access to traditional credit and an underwriter could
use alterative credit sources – and such began the process of tiered credit
(Tier I, Tier II and Tier III credit) that could be used instead of traditional
credit reports.
That lead to tossing the basics out of underwriting and off
loaded tax returns, eliminated proving income, went off only credit if the
borrower put “enough down” and lent to borrowers at higher and higher DTI’s to
get the coveted CRA’s from the government.
That was insanity.
And, that led to the subprime market.
And, that is a story the government does not want told - its’ to arcane a story to tell and the
public would prefer to dumb down what happened and blame the lenders. This works for the likes of Barney Frank who
pushed for the very rules he railed against in hearings in 2008 and 2009.
Maybe now we realize that too far left and too far right is
simply too far. Perhaps we now get that
lending soundly means lending rules should be clear, concise and across the
board. The basic underwriting tools used
from the 1990s were sound,: they should be used universally.
Borrowers who don’t meet the criteria of vanilla conforming
or vanilla govy loans or even vanilla expanded credit loans (lower LTV) should
be viewed as tomorrow’s borrower. Not
today’s reject or the need for some politician to interject about unfair and
discriminatory lending demanding new lending laws.
Lenders and agencies need clear rules of the road that
dictate when a loan does not conform to agencies guidelines or regulations that
then does trigger a buy back.
And, regulators and the government need to let people know
that they will prosecute Joe Blow for lying on his mortgage application and
getting a mortgage in addition to prosecuting rings of thieves who do so and
rings of those in the industry who do so.
Breaking lending laws is not just the provence of those inside the
lending industry.
