The Mortgage Industry Secret that Prevents You from Getting a Loan
Due to the large amount of mortgage buy-backs within the mortgage industry caused by excessive defaults consumers are getting limited or locked out from getting a mortgage.
If your credit is good and you’ve tried to get a home loan, you may have found yourself in the perplexing position of being told you aren’t qualified—even if you feel that you are by old standards. What’s going on here? The answer is a secret problem in the mortgage-lending business called Repurchase Demands (loan buy-backs)—and they are slowly strangling the industry. Thus, fewer loan products are available for the qualified borrower.
The problem started with the popping of the housing bubble in 2007. As the financial system collapsed, so did mortgage loans that had been securitized. This caused a systematic failure at Freddie Mac, Fannie and Ginnie Mae (the sources for FHA and VA loans). Congress demanded that these institutions become solvent after two major bailouts.
Today, Fannie Mae, Freddie Mac, and the Mortgage Insurance Companies are pushing back on loans up to 5 years old to the aggregators (Wells Fargo, Citigroup, Chase, Bank of America, etc.), who in turn are forcing buy-backs on the originators (Main Street mortgage companies or Brokers). In the first quarter of 2010, these agencies forced lenders to repurchase $3.1 billion in mortgages, up 64% from one year earlier. Additionally, Ginnie Mae pushed back $15.5 billion in loans in the first quarter 2010 versus $4.9 billion in the year ago quarter. To further complicate things, the FDIC is pushing back on loans they inherited from seized banks, most notably Indy Mac.
The effect of loan buybacks is far-reaching and one of the major obstacles to a housing recovery. Repurchase demands have led to fewer lenders as some lenders or Brokers simply could not afford the repurchase and ceased operations. An increase in loan loss reserves, increased overhead to handle the buyback demands, fewer choices for the consumer, and a lack of loan product availability for everyone, especially the self-employed has been the result. The overall effect on lenders is to tighten guidelines, a move to more time-consuming underwriting of each file, and a reluctance to take reasonable risks in hopes to mitigate future buybacks or even the perceived remote risk of a future buyback.
The result: You can’t get a loan, even if you’re qualified.
Most of the trouble with ‘bad loans’ in the past centered around stated income loans above 80% loan-to-value, loose underwriting guidelines and pricing models that enticed lenders to place borrowers in loans not in the borrowers’ best interest. However, there are a large percentage of buy-back demands on loans the originating lender underwrote to the program rules and guidelines in place at the time. Facts arising after the loan origination—such as job loss, new debt, misreading of the credit reports or closing documents—are being asserted as reasons for pushback. Lenders like FNMA, FHLMC and Ginnie Mae are trying to reduce their exposure and are trying to unload as many questionable loans back to originators even if they followed the guidelines at the time.
Originators are stuck between the proverbial “Rock and a Hard Place” for if they do not buy back the old loan then they will be cut off from selling new loans. Thus they are out of business.
