Originating a home loan imposes a degree of risk on the lender, the stakes of which are made all the worse by Fannie Mae’s and Freddie Mac’s (collectively Frannie’s) strict punishment for underwriting flaws. If a lender makes a mistake on the loan documents it submits to Frannie, the lender is forced to repurchase the loan from Frannie, a process they call a put-back. These mistakes include misrepresenting (intentionally or unintentionally) the home’s appraised value or the homeowner’s creditworthiness.
This repurchase rule is essentially a put option included in standard agreements between lenders and Frannie. When exercised by Frannie it is to the lender’s detriment – a backwards strategy. Frannie is supposed to be taking on the lender’s risk when they purchase the loan, not the other way around.
However, a “secondary wave” of repurchases is now underway, demanded by Frannie on loans they now reject but purchased from big mortgage lenders who in turn obtained the flawed loans from other banks.
A former chief credit officer of Freddie Mac has suggested Frannie charge lenders who have made a certain amount of underwriting flaws an additional fee to guarantee their mortgages, rather than require them to buy back flawed loans.
first tuesday take
Frannie has yet another management problem (they are owned by the U.S. Treasury (Treasury)), recalling Freddie Mac’s bet earlier this year against homeowners refinancing into lower rates.
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One of the main difficulties when a homeowner attempts to refinance an underwater home is the result of Frannie’s buy-back rule.
Lenders avoid refinancing home loans with high loan-to-value (LTV) ratios they do not service due to the high risk associated with submitting new documentation to Frannie. Lenders do not want to be stuck with an underwater mortgage if a homeowner misrepresented information on their refinancing application or the lender made a mistake.
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By dissuading lenders from helping underwater homeowners refinance, Frannie is harming itself (and the Treasury and taxpayers by extension), as homeowners unable to refinance into low rates and reduced payments default. While charging a fee in place of demanding buy-backs is one way to encourage lenders to participate in the refinancing of underwater homeowners with high cost loans, lenders of course will pass that fee along to the borrower. Still, bad loans will be refinanced as a result.
Thus, homeowners suffer and pay either way, and lenders remain sloppy. Instead, we should address the underlying problem – lenders with insufficient and untrained staff to process home loans and refinances. Inadequate staff results in avoidable mistakes, as occurred in the recent robo-signing catastrophe evidenced in the national mortgage settlement. Why should homeowners (and taxpayers) have to continue to pay for this lender defect too?
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Re: Mortgage Putbacks Must Change, Former Freddie Credit Chief Says from Bloomberg Businessweek
Yea, at a quick glance, this is good; appears takes the upward pressure off of value and the appraisers; get’s to an less engineered equilibrium for lending purpose. Forces the loan officer and Bank to get to the most probable and stabilized value, especially when Bernanke is unwilling to adjust interest rate for risk. Downside: Bernanke is unwilling to adjust interest rate for risk hyper inflating the market so that government can collect more in real estate tax, supporting public sector lifestyle, among other things. Business as usual in this regard. Most government budgets are driven by the real estate tax. Interest rates need to be around 7-9%.
Federal Reserve Chairman Ben Bernanke reported assets of as much as US$2.28-million last year while refinancing into a cheaper 30-year mortgage. Bernanke, 58, and his family owned financial assets valued between US$1.07-million and $2.28-million, according to annual financial disclosures released today. That compares with a range valued between US$1.06-million and US$2.31-million in last year’s disclosure, and US$1.15-million to US$2.48-million for 2009. The forms from the U.S. Office of Government Ethics require officials to report only a range in the value of holdings.
I believe Frannie is doing the right thing. First of all, the banks that originated the loans of properties going into foreclosure never should have originated them in the first place. Loan officers were using the No Doc requirements to sell homes to people that couldn’t afford them. Everyone overinflated their incomes and most of the people getting these loans knew it. So these so called “Homeowners” are harsh as this might sound, would have never been “Homeowners” through conventional loans or FHA loans. Yes, it is unfortunate that these families and individuals will loose their newly found properties but again, they are just paying the price for liying about their income and knowing and willingly signing zero interest loans going from fixed 0 interest for the first 3-5 years to an ajustable. All these homeowners figured, somehow they’ll come up witht those payments. Second, Frannie, should punish those banks who abused this lending scheme and what they should do is put in thresholds that if a bank stays within then they should not be penalized. As the article states, mistakes will happen, so not all banks/loans should be penalized. Sorry but when you play the corruption game, you have to take responsibility and not act like the victim. I don’t buy that all these people who took out these loans did not know what was going on.