RTC Mortgage Blog

Are Lenders Over-Conditioning for Documentation?

Do you feel like mortgage lenders have become overly picky when issuing Loan Approval's? I've certainly noticed a trend of increased documentation and delays in getting loans closed. I've been looking into it and here's what I'm finding out.

It has to do with Fannie Mae, Freddie Mac, and all the loan buybacks they are jamming down the throat of the industry. You see, when lenders sell their loans to Fannie Me and Freddie Mac, they are obligated to buy them back if they do not meet the underwriting criteria outlined in their guidelines. In days past the agencies were pretty loose about enforcing their underwriting criteria and as long as loans were performing they left the lenders alone. Now that the agencies - which are owned by the Government - are losing money they want lenders to buy back the loans that are less than perfect. Lenders are scared of having to buy back loans, which essentially could put them out of business. So they ask for more and more documentation in order to protect themselves.

Fannie and Freddie forced the nation's mega banks and others to repurchase roughly $30 billion in product during the second half of 2009. And that's just half of last year. The way I see it, we have all of 2010 and next year. It's going to be a loan buyback storm from here on out so I don't see the lenders loosening up any time soon.

There are other factors at play too which are too lengthy to go into here but include all those AAA-related bonds they bought from Wall Street investment banks. And it has to do with the mortgage insurance industry which insures most high Loan-to-Value products sold to the two GSEs.

So What do We do Now?

You need to deal with a mortgage broker that has access to multiple sources and that knows the guidelines and can anticipate the documentation that a lender is going to request. If we are good at getting this documentation early in the process, we can avoid the last minute scramble to satisfy the lenders needs and be able to close on time.

This is no market for rookies. There's too much at stake for buyers, Sellers Realtors, Mortgage Brokers and Lenders. I've been in this business for 34 years now and pride myself on know the guidelines and the lenders that are best to work with.

Mortgage Rate Update:

It's been a wild ride this week and not for the good. After rates declining for the past couple of weeks for no apparent reason, it seems that reality is beginning to set in for mortgage bond traders and buyers. The Government's commitment to buy most of the Mortgage-Backed Securities (MBS's) issued by Fannie and Freddie ends next week. In the meantime there is a glut of U.S Treasury's hitting the market in order to finance the country's debt and so supply has outstripped demand. Add the future MBS's into the arena that compete with Treasury's, then take the Government out of the picture as the buyer of about 80% of these MBS's and rates can only go up. Investors are demanding a higher rate of return than 4.5% or 5% if they are going to buy MBS's. It's as simple as that.