I feel so sorry for today's mortgage consumer. Here's what I just had to explain to one of my customers.My processor and I have not been doing nothing for the past 1.5 days. Many back-and-forth communications have taken place to get your loan out of QC [quality control]. At this time, it’s still not out of QC, so I can’t order the loan docs. Before the appraised value came in, your file was submitted under United Wholesale Mortgage’s “Elite” program. The Elite program requires three features:760+ FICO score 70% LTV or less $250,000+ loan amountAs you know, Fannie Mae requires that disputed credit bureau accounts be deleted from the consumer’s credit report. However, due to the three credit pulls we had to make while we were working on this issue, for reasons you're well aware of, you lost FICO points. Your governing score is no longer 760; it’s 748. While a loan is now possible, whereas it wasn’t before, there’s no advantage to lowering the loan amount to 70% LTV ($336,000). I also determined that UWM charges an impound waiver fee no matter how low the LTV is. This is a bit unusual in the lending industry, but that’s their rule and we must accept it.As a result of the clarifications we sought regarding credit and appraisal issues, we chewed up a lot of lock time. As of today, it’s not possible to close this loan before your lock expires on July 18. Therefore, we must extend the rate lock to accommodate the Federally mandated 3-day right of rescission. The fee for extending the rate lock is...2 days = .1257 days = .2515 days = .375I’m working with the wholesale rep to determine how many days extension would be reasonable considering work flow demands on UWM’s pipeline. I’ll get back to you about this as soon as I hear from someone at UWM.A consumer has the right to dispute incorrect information on his/her credit profile, but the Agencies don't care about that. They want the notation removed, end of story, or the loan is not sellable.At least this borrower locked before the recent run-up in rates.
Consumers have the right to dispute items, but not to spike their credit scores by disputing accurate items. The new regulations are a response to consumers gaming the system. How do you propose to avoid issuing loans to unqualified buyers?
Why, you're right...of course. Everyone is gaming the system.
Why, you're right...of course. Everyone is gaming the system. Not everyone, but those who aren't are being punished because there is a percentage who are gaming the system.New regulations are frequently an over reaction to a problem, but these regulations are a reaction to a problem does exist. Considering the competing interests: Innocent buyers who have incorrect entries on their credit reports and "Not Innocent" buyers who dispute all valid negative entries to raise their score, what is the solution?
How do you propose to avoid issuing loans to unqualified buyers? Simple. Greatly reduce the involvement of Fannie and Freddie in the mortgage loan system.Right now, those two are the ultimate lender for something in excess of 80% of the loans made these days. That means that most "lenders" aren't really lending their own money, they're lending Fannie and Freddie's money.And THAT means that the lenders don't really care how the loan performs. They just care that the loan meets the requirements for Fannie and Freddie to take the loan off their hands. Lenders don't really have any skin in the game. Yes, if they screw up, Fannie and Freddie can make them take the loan back, but that's why the loan process is so painful with all of the obscure bits of information. Fannie and Freddie require those things, and lenders get them - not to make sure the borrower can repay the loan but to make sure they have the paperwork in order so that the loan can't get put back to them.Get these two quasi-government entities back in their corner, taking on something closer to 5% or 10% of loans, and get lenders back to lending their own money. Then you'll get some logic back into the market, along with a bit more variety of loans available to fit situations that aren't the cookie cutter loans that Fannie and Freddie buy.--Peter
Get these two quasi-government entities back in their corner, taking on something closer to 5% or 10% of loans, and get lenders back to lending their own money. Then you'll get some logic back into the market, Good point, government involvement doesn't often result in logical solutions.
That means that most "lenders" aren't really lending their own money, they're lending Fannie and Freddie's money.Really?Where Your Mortgage Check Ends Up : Thanks to the secondary mortgage market, your mortgage can go halfway around the world and fund still more home loans.Fannie Mae (the Federal National Mortgage Assn.) and Freddie Mac (the Federal Home Loan Mortgage Corp.) help millions of home buyers across America obtain loans by tapping into Wall Street and the rest of the world's capital markets to raise money for mortgages.Fannie, headquartered in Washington, and Freddie, based in McLean, Va., were created by Congress (Freddie in 1970 and Fannie in 1983), with the nearly identical missions of generating a steady supply of money for home loans at reasonable rates.The two [now government-owned] companies, which earned $2.6 billion between them last year, are a powerful force in the home mortgage market. Yet despite their key role in putting buyers in houses, the two companies are little-known by the typical borrower.Here's who Fannie Mae and Freddie Mac are and how they help home buyers:The two companies make up a large part of the "secondary" mortgage market, so named because they do not enter the picture until the primary transaction between the home buyer and the "origination lender" is completed.After the loan is made, Fannie or Freddie may buy the mortgage from the lender. Together, the two companies buy one of every five U.S. mortgages from the origination lenders, which provides the lenders with fresh cash to make more loans. (The remainder of the mortgages are made by S&Ls, banks and private investors who keep the loans in their portfolios.)Fannie and Freddie then bundle thousands of the mortgages into tradable securities that are large enough--a $500 million agglomeration of individual loans is common--to attract investors such as U.S. life insurance companies, Japanese pension funds, Swiss money markets or the central bank of Zimbabwe.The rise of the secondary market, which began in the early 1980s, has benefited consumers in a number of ways. Cheaper mortgage money is chief among them. Most estimates credit the companies with lowering interest charges to borrowers by up to a half of a percentage point.More at http://articles.latimes.com/1995-05-21/realestate/re-4217_1_...
Where Your Mortgage Check Ends Up :You do realize that you're quoting a newspaper article from 1995?Now I'm not a mortgage professional like you, so I might be wrong, but I'm pretty sure there have been some changes in the mortgage lending industry in the last 18 years.--Peter
That means that most "lenders" aren't really lending their own money, they're lending Fannie and Freddie's money.Really?...After the loan is made, Fannie or Freddie may buy the mortgage from the lender. Together, the two companies buy one of every five U.S. mortgages from the origination lenders,Ummmm...your article is showing it's age. Between late 2008 and 2012, the government (Fannie, Freddie, FHA, VA & USDA) backed more than 95% of mortgage loans, according to this article: http://www.americanprogress.org/issues/housing/report/2012/0...Exactly four years ago, during the early days of the financial crisis, the federal government took control of mortgage financiers Fannie Mae and Freddie Mac through a legal process called conservatorship. Since then, the two companies have required roughly $150 billion in taxpayer support to stay solvent, while the government has kept the housing market afloat by backing more than 95 percent of all home loans made in the United States.That means, at most, 5% of loans are backed by private lenders.AJ
Get these two quasi-government entities back in their corner, taking on something closer to 5% or 10% of loans, and get lenders back to lending their own money. Then you'll get some logic back into the market, along with a bit more variety of loans available to fit situations that aren't the cookie cutter loans that Fannie and Freddie buy.Accomplishing this is less about restraining Fannie/Freddie, than it is deregulating and removing the constraints from the industry overall, and ceasing the subsidization of interest rates.The reason private portfolio lending is so sparse is not because Fannie/Freddie are faster to the punch... but rather because at the restricted rates allowed to be charged are far too low (50-70% by many estimates) to cover the risks of terms.IOW... Fannie/Freddie dominate because they're lending at rates & terms that no company of any financial common sense would volunteer to offer.Dave DonhoffLeverage Planner
You do realize that you're quoting a newspaper article from 1995?So? Except for crippling regulation ala Dodd-Frank, do you think the entire industry has changed how it does business?
Between late 2008 and 2012, the government (Fannie, Freddie, FHA, VA & USDA) backed more than 95% of mortgage loansDo you understand what "backed" means in this context?
Here's a good explanation of what "backed" means.Fannie Mae buys loans from approved mortgage sellers, either for cash or in exchange for a mortgage-backed security that comprises those loans and that, for a fee, carries Fannie Mae's guarantee of timely payment of interest and principal. The mortgage seller may hold that security or sell it. Fannie Mae may also securitize mortgages from its own loan portfolio and sell the resultant mortgage-backed security to investors in the secondary mortgage market, again with a guarantee that the stated principal and interest payments will be timely passed through to the investor. By purchasing the mortgages, Fannie Mae and Freddie Mac provide banks and other financial institutions with fresh money to make new loans. This gives the United States housing and credit markets flexibility and liquidity.In order for Fannie Mae to provide its guarantee ["backed"] to mortgage-backed securities it issues, it sets the guidelines for the loans that it will accept for purchase, called "conforming" loans. Mortgages that don't meet the guidelines are called "nonconforming". Fannie Mae produced an automated underwriting system (AUS) tool called Desktop Underwriter (DU) which lenders can use to automatically determine if a loan is conforming; Fannie Mae followed this program up in 2004 with Custom DU, which allows lenders to set custom underwriting rules to handle nonconforming loans as well. The secondary market for nonconforming loans includes jumbo loans, which are mortgages larger than the maximum mortgage that Fannie Mae and Freddie Mac will purchase. In early 2008, the decision was made to allow TBA (to-be-announced)-eligible mortgage-backed securities to include up to 10% "jumbo" mortgages.***In other words, the Agencies (Fannie Mae/Freddie Mac) don't have huge stockpiles of money that it lends to consumers through the go-between of the nation's lenders.
In other words, the Agencies (Fannie Mae/Freddie Mac) don't have huge stockpiles of money that it lends to consumers through the go-between of the nation's lenders. That's correct.They only have the formerly implicit and now explicit backing of the US Federal government. You know - the guys who can just print money if they want.More seriously - here's my point.All of the mortgage money comes from investors. Today, my claim is that something in excess of 80% of investors money goes through Fannie/Freddie. (aj kindly came up with a source claiming 95%, but including a couple of additional agencies. The difference is immaterial for my argument.) From there, the money goes to "lenders" and finally to borrowers to buy real estate.The other path is from investors directly to "lenders" to the borrower.Here's the rub. When Fannie/Freddie get involved, the investors look to those agencies if things go wrong. They don't look any further down the money trail. With the vast majority of loans going through this path, there's no incentive for lenders to care about the quality of the loan. They only care about meeting the paperwork requirements to get Fannie or Freddie to back the loan. If they can show they did that job correctly, they bear no burden for bad loans.In the alternative path - keeping Fannie/Freddie out of the picture - lenders bear a much higher burden. Now, if loans go bad, the investors look to the lender. So the lender now has an incentive to care about the quality of the loan and not just the quality of the paperwork.I'd like to get incentives back to making sense. I'd like to see lenders with an incentive to make good loans, not just good paperwork. Fannie and Freddie did a good job lending money when they were only involved in a smaller fraction of the loans - perhaps up to the 1995 level of 20% quoted in your rather old article. With them basically the only game in town today, mortgage lending is highly irrational - focused almost entirely on getting the right pieces of paper in the file instead of focused on making loans that will be repaid.--Peter
I'd like to see lenders with an incentive to make good loans, not just good paperwork. What's the difference? What criteria, in addition to/other than documenting one's ability to repay (good paperwork), do you suggest lenders use to predict a "good loan?"
What's the difference?The difference between good loans and good paperwork involves actually engaging a brain.Good paperwork is mindless work. It's following a checklist. It's documenting a file without regard to what is actually on the documents.Good loans is thinking about what the paperwork says. It's assessing the risks of the loan. It's using experience rather than just following a formula.--Peter
It's documenting a file without regard to what is actually on the documents.Nonsense. Clearly, you know nothing about the mortgage industry.
Nonsense. Clearly, you know nothing about the mortgage industry. Please.How often have you had an underwriter ask for some extra piece of documentation just because the data in the file was a couple of immaterial dollars over or under some threshold number.Perhaps it was my favorite situation from last fall.Husband has a W-2 job making about $200k a year. Wife does a bit of tutoring on the side - mainly to keep busy - grossing about $10k a year and netting about $8k. They're refinancing a $150k mortgage that's about 50% LTV. Sounds like a slam dunk to me.But there's that nasty schedule C on their tax return. So that means they need a letter from their tax preparer - me. The wife's business income is not needed to service the loan. The husband's income is more than sufficient. The wife's business is also one that is not likely to generate large losses which would impact their ability to repay the loan. If a thinking person were making this loan, they'd make a couple of notes in the file along the lines of my comments above and move on. However, the automated systems at Fannie and Freddie demand that there be a letter from their tax preparer in the file any time there is a business on the return.THAT is the difference between documenting a file and thinking about the borrower.--Peter
Husband has a W-2 job making about $200k a year. [...] The husband's income is more than sufficient. [...] However, the automated systems at Fannie and Freddie demand that there be a letter from their tax preparer in the file any time there is a business on the return.That's right. Sounds like prudent underwriting to me, which I presume you would agree is important. Her business income had to be documented to prove that the expenses of her business weren't bleeding the family dry--which can occur, for example, with a start up business. Again, you don't know anything about loan originating. The requirement for a letter from a tax preparer was nowhere to be found in the DU [Fannie Mae Desktop Underwriter] underwriting findings. That was prudent underwriting by the human who underwrote the file. In essence, the underwriter proved, not with "a few notes on the file"--what the hell is that?--but with documentation that the husband's income was sufficient.Sounds to me like you're irked that you were asked to provide a service to your customer for which you perhaps didn't get paid.
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