I read a really good article this week in the Wall Street Journal about why the Mortgage Market is so tight even though rates are reaching new historical lows almost weekly. I’ll summarize but I encourage you to read the entire article, because without changes to the Dodd-Frank act, things could get worse.
Basically the two agencies Fannie Mae and Freddie Mac who are responsible for 90% of conventional loans, and who most loans are sold to, have a forced buy-back (or put-back as they call it) policy where they can force a lender to re-purchase a loan that was sold to them. Lenders are so afraid of these policies that they have grown weary of making new loans, and the loans they are making they have ratcheted up credit and documentation standards for new mortgages.
Banks are asking borrowers to explain every deposit into their bank accounts over a few hundred dollars in order to verify that their assets are their own, lest an audit later find that the buyer borrowed cash from a family member. Cash no longer counts. We are being asked to explain in detail any inquiries made on our credit reports even is they are from the lender.
According to the article, following the meltdown, the agencies began hiring armies of auditors, called “bounty hunters” by bank executives, to conduct detailed reviews of loan files to spot errors that could justify a put-back. So far, Fannie and Freddie have asked banks to repurchase $66 billion in mortgages made between 2006 and 2008. I get that the banks and mortgage companies that made mistakes should have to repurchase loans, the problem is they are making banks repurchase loans based on new criteria. And lenders are wary of what new criteria could pop up in the future. New mortgage regulations set to take effect next year in a provision of the Dodd-Frank financial-overhaul law, for example, may carry hefty penalties for failing to thoroughly document a borrowers’ ability to repay a mortgage.
We here from the politicians that they want to relax the criteria for families to get a mortgage but as long as the put-back provisions exist, lenders won’t make the loans the politicians want them to make. The “Home Affordable Refinance Program” or HARP 2.0 is just such an example. The government can float a program but thy can’t force lenders to offer it. It’s my opinion and I’m sticking to it!