You’ve heard that it’s almost impossible to get a mortgage these days because mortgage underwriting is so crazy. Ben Bernanke was turned down, for goodness sake! What if I told you that might all change in the next few weeks, and it is about to get significantly easier to get a mortgage?
Fair warning: this post is NSFFWDWTLAT (Not safe for folks who don’t want to learn and think)
There is a lot of buzz in the mortgage-industry media this week about an arcane topic that you probably don’t even know about (although I’ve blogged about it before) – put-back agreements. You don’t know about this because, frankly, most folks who work in the mortgage industry don’t know what they are. But they are the single biggest contributing factor to the insane underwriting practices we have seen in the last few years. And the problem just might have been quietly fixed.
Let me explain. We’ll start with a little background.
Mortgage lenders and banks are not actually in the business of lending you money. They are in the business of originating a loan, and then selling it (within a large pool of similar loans) for a profit to Fannie Mae, Freddie Mac, Ginnie Mae, or to a privately-held investment bank or REIT. When mortgage lenders sell a pool of mortgages, the buyer (investor) naturally insists that they guarantee the quality of the loans in the pool. If a loan turns out to not meet the agreed-upon guidelines, the investor “puts back” the loan to the mortgage lender; the lender must buy the loan back from the investor. These are known as put-back agreements.
Before the financial crisis, this agreement was usually only exercised if a loan stopped performing and an audit revealed that the loan had been made improperly, especially if fraud or gross negligence was involved. This makes sense.
After the financial crisis the practice changed. Due mostly to political pressure to hold lenders’ feet to the fire, the agencies began putting back loans that were performing perfectly fine and where no fraud or even negligence was present. The loans were often put back only for perceived gaps in adherence to underwriting guidelines, even minor ones. Worse, (at least according to lenders) the put-back agreements were not exercised consistently. Lenders, therefore, were uncertain what would trigger a put-back demand, and therefore had to be overly rigorous in underwriting a loan to be sure they would not have to buy it back.
If you want to know why lenders were so concerned about buying back a loan, read my post from earlier this year titled “What’s Your Mortgage worth?” Lenders lose thousands of dollars on every loan they must buy back.
But now this may all change.
Mel Watt, the director of the Federal Housing Finance Agency, which oversees all mortgage lending in the U.S., announced this week that an agreement has been reached between an industry group, the GSEs (Fannie / Freddie / Ginnie) and the FHFA, “in principle on how to clarify and define the life-of-loan (triggers)”. He said they were more clearly defining the triggers “so that lenders would know what they are and when they apply to loans that have otherwise obtained repurchase relief.” He added the GSEs would be providing details about the updated definitions in coming weeks. *
Speaking of details, that is where we will find the devil. Lenders are unlikely to make any changes to underwriting policy until the guidance is out, and even then only if the guidance is clear, specific and most importantly followed by the FHFA.
However, even though it is too early to break out the champagne bottles, this unnoticed, arcane agreement hidden within mortgage-industry news blurbs that no one outside of the industry will read (and few in the industry, I admit) just might be the biggest thing to happen to mortgage underwriting in seven years. With less uncertainly and less risk of having to buy back loans, lenders should loosen up their underwriting guidelines again and go back to common sense underwriting.
We should know more by the first of the year.
* Thanks to Rob Chrisman (http://robchrisman.com) for his in-person reporting on this.