Over the last 5 years, mortgage lending has seen some dramatic changes to eliminate the costly loan losses that occurred from the wild lending days of 2004-2008. These changes made it more difficult for consumers to qualify for a loan and for lenders to document the loan. These changes have been written about and have appeared in the news in many forms. Recently, we have started to see signs that common sense may begin to enter into lending once again. These signs are welcome relief as they represent the hope of a stronger future for consumers and lenders alike.
Sign 1. Fannie Mae has clarified how lenders consider recent large deposits in asset accounts like bank accounts. As we’ve discussed, documentation of large deposits in mortgage applications has been causing headaches for quite some time. Previous to this clarification there were many interpretations of what would be acceptable. Therefore, lenders created their own rules to fit what the intent of the guideline was. This made it more difficult for borrowers to obtain a loan, and very challenging for lenders as they were tasked with documenting the source of all new deposits for each loan file. The clarified guideline states if the applicant has a recent deposit larger than 25% of the gross monthly income, it is considered a large deposit and documentation to explain it is required. Below the 25% threshold, then no documentation is required. A much simpler guideline for borrowers and lenders.
Sign 2. Lenders of all sizes are selling their loans directly to Freddie Mac and Fannie Mae. In the recent past, the easiest and best execution for many lenders would be to sell the loans they made to banks and other aggregators of loans. These banks and aggregators would in turn package and sell loans to Fannie Mae or Freddie Mac. As the mortgage market turned in 2008, these banks and aggregators began to add additional lending guidelines on top of the existing Fannie and Freddie lending guidelines. These added guidelines are known in the industry as overlays. Overlays were designed to protect the aggregators by increasing the quality of loans and reducing the risk. Consequently, making home loans more difficult and challenging for borrowers and lenders to adhere to. By selling directly to Fannie and Freddie, these overlays are avoided and quality loans are still being made without the additional hassle.
Sign 3. Jumbo financing is back. A jumbo loan is where the loan amount exceeds the allowable loan size for sale to Fannie Mae or Freddie Mac. The lending guidelines in many cases are similar to other loans that are eligible for sale to Fannie and Freddie. Starting in late 2007, the jumbo marketplace fell apart. Initially, due to the heavy loan losses and liquidity concerns, the availability of these loans all but disappeared. Then, a few years later they slowly started to reappear. Recently, the number of jumbo loan buyers has increased to where there are now many products and offerings to fit the market demand.
Sign 4. Loan buyback statute of limitations defined. Loan buybacks refer to the risk lenders have of buying back loans from Freddie Mac or Fannie Mae if it was determined that the lending guidelines were not met when the loan was initially approved and closed. This particularly occurs when there is a loss related to the loan from a delinquency or foreclosure. There was no limit on how far into the loan life this could happen. This year, both Freddie Mac and Fannie Mae have clarified that if the borrower makes 36 consecutive payments, then pushing a loan back to the lender would not occur. This provides clarity on future risk and loss for all lenders.
Sign 5. Subprime loans are available. Subprime loans historically have targeted borrowers who could not qualify for more traditional lending guidelines. During the housing boom, things got out of control and certain lenders opened this up so anyone could be put into a subprime loan. Of course, we then saw the loan performance demonstrate they should not have been. The new subprime is once again developing like subprime was previous to the boom years. Subprime loan programs focus on one area that challenged the borrower, like credit issues. The offset to the credit challenge is solid income and employment history, a good down payment, moderate debt compared to income and strong collateral (the house). By having only 1 weak area of consideration, an acceptable loan program can be built. These are of limited availability and being held by the lender.
SIRVA Mortgage sees these 5 signs as indication we are heading in the right direction to a smarter lending environment. What do you think?