A new review system for mortgages could be put into place after January 1st, 2013. The system is designed to carefully evaluate the quality of the credit being extended to borrowers by identifying likely negative outcomes that could compromise mortgages and make them end up as a buyback requests. Both Fannie and Freddie charge fees to the lenders for their services as mortgage investors and guarantors, and these fees have increased considerably in the last few years.
The Buyback Debate
The mortgage buyback demands have weighed heavily on the balance sheets of some of the country’s largest banks. Between the major national and regional financial institutions, there are nearly $5 billion in reserves to buy back mortgages that Fannie and Freddie consider to have been made with deficiencies or in haste during the hectic days of the mortgage bubble. The government-sponsored enterprises (GSEs) set the guidelines for lenders to follow during their home loan origination process, and they trust lenders to do their part when they submit mortgages to Fannie and Freddie to purchase.
The partnership between the GSEs and the major lenders turned a bit sour after the failure of mortgage-backed securities in the United States triggered major credit and financial events around the world. Fannie and Freddie were affected to the point of requiring a federal bailout and conservatorship. The U.S. housing and mortgage market may appear to be anemic, but without the mortgage GSEs to act as investors, there would be no market at all.
As Fannie and Freddie reviewed their mortgage portfolios in the days after the housing market crash, a significant pattern of origination deficiencies began to emerge and a flurry of repurchase demands ensue. Although the lenders specifically set aside reserves for this situation, some banks have questioned the buybacks in court. Fannie and Freddie argue that in their present conservatorship status, the reluctance by some banks to take back bad mortgages equates to cheating taxpayers from their own funds.
The Effect on Borrowers
The current credit and underwriting guidelines make it difficult enough for scores of applicants to take advantage of the record low mortgage interest rates. This new loan review system that is aimed to minimize losses for American taxpayers could make it even more difficult for mortgage applicants.
The current system does not leave too much margin for origination errors, and the proposed future system will not question defaulted mortgages that Fannie and Freddie guarantee as long as there are no missed or late payments within 36 months. Home loans originated by federal foreclosure prevention initiatives will not be repurchased if borrowers made timely payments for at least 12 months.