Typically when I hear media say that it’s difficult or impossible to get a mortgage, my hair stands up on the back of my neck. Often times, they’re misstating mortgage programs and saying something like “you need 30% down payment and 760 credit scores to buy a home” which simply is not true. However something that I cannot argue is that it is more challenging to go through the mortgage process today.
The process is tedious as borrowers are asked to provide more supporting documentation to prove they’re qualified for the mortgage. I’m not saying this is a bad thing. If you’re a long time reader of my blog, you know I was never a fan of stated income mortgages. However it’s to a point where home buyers and home owners wanting to refinance are having to do things like document and prove where a large deposit from a month ago came from…even if they have plenty of funds for the transaction. Underwriters are calling for additional documentation.
This is partly happening because of tougher guidelines to make up for the sins of the subprime era of mortgages. Loosey goosey underwriting guidelines allowed just about anyone to obtain a mortgage with no regard to if the borrower would actually be able to make the mortgage payments.
What’s also impacting guidelines are buy backs. Fannie Mae and Freddie Mac are pushing back loans that are not performing back to the banks. If that loan was not originated by a bank (for example, a correspondent lender, like us), the bank will try to force the originating lender to buy back that loan. This is one reason why many banks prefer working with correspondent lenders over mortgage brokers – correspondent lenders have skin in the game. From Reuters:
Historically, Fannie Mae and Freddie Mac have taken banks at their word when they said loans were eligible. If later there were problems (because the borrower’s income was not properly verified, for example), then Fannie Mae and Freddie Mac could ask banks to buy back the mortgages at face value and absorb any losses.
Those repurchase requests are increasing as Fannie and Freddie apply more scrutiny. Both companies have hired more staff to comb through loans and determine which can be sold back to banks.
In the second quarter, outstanding repurchase requests at Fannie Mae grew by 20 percent to $14.6 billion from the first quarter, according to a filing last week.
In order for a bank or lender to have a fighting chance in not buying back the loan, they need to be able to show they had a complete and strong loan package with all of the borrowers supporting documentation to illustrate they qualified for the mortgage program.
You’re probably thinking that this sounds pretty fair. If a loan is not performing, then the originating lender should have to buy it back and deal with the losses. Banks are arguing that some loans that are not performing may be caused by the economy (loss of employment) and not due to the quality of the loan. A lender has to consider what are the odds the borrowers will be able to make the mortgage payments in the future.
As Fannie and Freddie increase scrutiny on mortgages and force more buy backs, banks will lend to fewer borrowers and toughen up guidelines. It’s already happening – just ask any HARP 2.0 borrower who’s trying to go back to their bank to refinance. Odds are, unless the refi has no pmi or lpmi, the bank may refuse it. Some banks have turned their backs on FHA streamlined refi’s as well. Many banks are “cherry picking” mortgages…and with all the current volume, they can easily afford to.
NOTE: If your bank has turned down your HARP 2.0 or FHA streamlined refinance on a home located anywhere in Washington, I’d love to see if I can help you. We work with several lenders who offer HARP 2.0 mortgages – even if you have LPMI. We are also still doing FHA streamlined refinances on Washington homes as well. One of the benefits of working at a correspondent lender is that we have several lenders to work with – we are not limited to one set of programs and guidelines. Click here for a mortgage rate quote. Okay… commercial over.
Watch for guidelines to continue to become tougher and expect to be asked for more and more documentation from your lender if you are considering a mortgage… we still have the Consumer Financial Protection Bureau fine tuning “the ability to repay”. More mortgage fun coming your way soon!
With a little patience and cooperation with providing requested documentation to your mortgage professional, you will survive the mortgage process with success.