Freddie Mac and Fannie Mae’s regulator said the two agencies would address who receives bad loans. Over the past years, Freddie and Fannie have required banks to repurchase over a billion mortgages that have defaulted. As a result of this and for added protection, banks have since increased their lending standards above Fannie and Freddie’s minimum standards. These increased lending standards include: intense documentation of income and assets and scrutinized appraisals.
The FHFA said this week that it would provide guidance to lenders limiting the risk of buying back defaulted mortgages. Starting next year, banks will not have to buy back a loan if the mortgage was paid on-time for the first 12 months.
It is currently unclear if these new changes will help borrowers obtain mortgages with more ease. New mortgage demands are nearly the same as one year ago. Loan experts believe that before the market regains its strength, lenders and brokers need to figure out ways to improve.
Fannie and Freddie aren’t the ones to make loans, but they are the ones to guarantee loans made by lenders or banks. When a loan is made, these banks make warranties – Fannie and Freddie can decide at any point to make these banks take back loans if they are substandard. In the past year, many loans have defaulted simply as a result of an underwriting defect.
Since 2005, the mortgage giants have required banks to buy back almost $75 billion in loans. In exchange for stopping banks against certain loan put-backs, the mortgage giants will increase screening standards for loan defects. Buying back a bad loan can eliminate the profit on 30-40 good loans, so as a result, lenders are now extremely cautious before approving a mortgage.
Lenders are more stringent with their credit standards as they don’t want to have a risk of put-backs. The FHFA states that they wish to help facilitate more liquidity by being clear with lender expectations.
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