The Rules Change on Mortgage Buybacks

by 25 Sep 2012

(TheNicheReport) -- A new rule issued by the Federal Housing Finance Agency could begin inflating a new mortgage lending bubble in the next few years, allowing banks to relax their origination guidelines for home loans. To some observers of the housing and mortgage credit markets, this rule could signal a return to the careless American housing frenzy of the early 21st century

Many of the mortgages issued by U.S. lenders prior to 2008 were poorly originated, including many conforming home loans guaranteed by the two government-sponsored entities (GSEs) Fannie Mae and Freddie Mac. These two GSEs, along with the FHA and the VA, trust authorized lenders to originate mortgages following the guidelines that make them a security instrument worth investing in. In the wake of the housing market collapse in 2008, a portfolio review by Fannie and Freddie reviewed several discrepancies in mortgages originated by major lenders like Bank of America.

Fannie and Freddie have been holding lenders accountable for mortgage origination irregularities ranging from underwriting mistakes to fraud. They have been sending these deficient loans back to lenders, demanding that they buy them back and relieve the burden on taxpayers. In the case of Bank of America, these repurchase demands total $11 billion, but the bank has initiated a counterclaim against the GSEs. Should the matter be decided in court with the bank on the hook for those bad mortgages, Bank of America could face a significant financial loss.

The Relaxed New Rules

Starting in January 2013, loans sold to Fannie and Freddie will still be subject to scrutiny but a repurchase demand would be waived if the borrowers have been current on their monthly payments for 36 months in a row. Such is not the case with the current wave of buyback requests, but one economy professor recently interviewed by Reuters on the matter explained that these new relaxed rules are automatically assuming that there will never be another mortgage crisis in the U.S.

The problem with the new regulation is that mortgage lenders may find it easier to take a gamble on originating bad loans, as long as they think borrowers would be able to make monthly payments for three years. There is, however, a positive outcome for taxpayers under the new regulation: Fannie and Freddie must conduct mortgage reviews earlier than before, something that could keep lenders on their toes.



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