Sunday, September 05, 2010

Mortgages

I'm sure by now, regardless of what lender(s) you've been dealing with lately, you've noticed a profound change in the way loans are being underwritten. If you haven't, you WILL. These massive changes are creating delayed closings, and have caught us all off-guard, INCLUDING the loan officers. Here's why.




As you may already know, Fannie Mae & Freddie Mac, which are Government Sponsored Enterprises (GSEs), have been under close government scrutiny ever since the housing market began to take a dive. The govt. has been trying to determine if they need to take over control of the two GSEs because of their apparent lack of self-control, or whatever your personal opinion may be. As a result, the two giants have been searching for ways (in my opinion) to offset some of the losses they've incurred over the last year or so.



Very recently, lenders began feverishly stressing the importance of loan quality and making sure every "T" was crossed & every "I" was dotted. The reasons behind this were that Fannie & Freddie had now begun not only scrutinizing the loans they were buying currently, but were going BACK & auditing loans they'd previously bought. You see, when a lender gives a mortgage, they almost always sell the "paper". The customer may always make their payment to that lender for the life of the loan, but that doesn't mean the paper itself wasn't sold to one of the GSEs to be included in mortgage-backed securities. In other words, although the mortgage has been sold, the lender will always SERVICE the loan. This means that there will never be a change to the customer's way of paying their mortgage payment each month. This is the primary means of income for most lenders, contrary to the belief that most lenders make their money from the interest rates they charge. Fannie & Freddie, as part of their contract with lenders, have the authority to require lenders to buy back any mortgage sold to them that has been proven to be inaccurate, incorrect, fraudulent, etc. For this reason, Fannie & Freddie have been going through everything they have & making lenders, past & present, buy back mortgages where, for all intents & purposes, everything wasn't underwritten perfectly. No missing dates, no name discrepancies between the loan application and the deed of trust, no addresses shown on the credit report that weren't on the loan application, etc. These are only two or three of the HUNDREDS of items these two GSEs are searching for in an effort to require lenders to buy their loans back.



The true "wealth" of a bank is dictated by how swiftly their cash is moving within the organization. They don't have the capital to place every loan they do in portfolio & tie that particular money up for 30 years. A bank can typically loan (unless its changed) 8 x the amount of assets they are currently holding. This is determined by the federal government. So, as you can see they need to keep their money "free" in order to continue lending.



For all these reasons, underwriters have been asking for items from customers that are sometimes viewed as ridiculous & unbelievable. Freddie & Fannie have forced lenders to throw common sense to the wayside because if it isn't documented, it doesn't work. Underwriters are reprimanded or their underwriting authority is REVOKED if they receive too many of these problems with loans they have underwritten. Underwriting is how they put groceries in THEIR pantry, just like we do what we do. No underwriter wants the bank they work for to have to buy back a loan because they forgot something, overlooked something, or just decided to use "common sense" to underwrite the loan.



This is a new time, ladies & gentlemen, and I wanted (if nobody else had yet) to shed some light on why things had changed so drastically, so quickly. The loan officers don't even KNOW how to respond to this, but we're doing the best we can.



Here is an article that was published on August 19th, 2010 on the website www.housingwire.com . It will also help us understand what's going on.





Fitch: Big Four Banks Face $180bn in Buybacks from Fannie and Freddie

Thursday, August 19th, 2010

Government sponsored enterprises (GSEs) Freddie Mac and Fannie Mae may exercise the right to force the big four banks, JP Morgan (JPM: 37.08 +0.03%), Citigroup (C: 3.7282 -1.63%), Bank of America (BAC: 12.834 -1.43%), and Wells Fargo (WF: 34.95 -2.94%), to repurchase up to $180bn delinquent mortgages, according to a report released by Fitch Ratings Wednesday.

As of June 30, the GSEs hold $354.5bn troubled mortgages, with 50% serviced by the big four banks. Fitch estimates the big four banks already received repurchase requests up to $19.1bn in the Q110 and Q210 — $10.7bn of which related to the GSEs.

Fannie and Freddie are "actively exercising their right to put back to the original lenders a considerable amount of the troubled mortgages in their portfolios," write analysts Tom Abruzzo and Christopher Wolfe. The agencies have a right to require lenders to buyback delinquent mortgages, if it is determined the mortgage loan did not meet GSE investor underwriting or eligibility standards.

Fitch said it is undertaking a review of Fannie and Freddie to assess whether the increased reserves are just a part of the flood of troubled mortgages or whether they are expanding their interpretations of what constitutes an eligible mortgage under existing representation and warranty provisions.

"Fitch is concerned that a more aggressive request for loan repurchases could potentially expose banks with large mortgage origination operations to future losses that have not been previously incorporated into Fitch's existing exposures, and effectively into current ratings," the report said.

Under a mild loss scenario, where the banks buyback 25% of delinquent loans and recover 60% of the money, Fitch expects cumulative losses around $17bn.

Under a moderate loss scenario, in which the banks buyback 35% of delinquent loans and recover 55% of the money, Fitch expects losses around $27bn.

Under a more adverse scenario, if banks repurchase 50% of troubled mortgages and recover only half of the original investment, Fitch expects losses of about $42bn.

These figures do not include the banks' ability to cure deficiencies in loans which could lessen loss. Fitch believes the moderate scenario is the most likely and said it will continue to monitor the on-going developments between banks and the GSEs related to mortgage loan repurchases.
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