Why Mortgages Are Still Hard to Get

August 26, 2014 at 1:28 pm Leave a comment

If you’re wondering why people are still renting instead of buying the Wall Street Journal has an item that helps explain what’s going on. In short, the banks are covering their butts and doing whatever they can to not repeat the mistakes they made during the housing bubble. After having to buy back toxic mortgages and pay billions of dollars in fines they’re playing things extremely close to the vest:

One way to reduce the risk of having to buy back mortgages is to make sure than any loans sold to Fannie or Freddie or submitted for a Federal Housing Administration guarantee not only meet official standards but surpass them. That way, if a loan falls short of the bank’s standards for some reason, it still will likely meet official ones.

Federal housing officials refer to the higher standards as “overlays” and want to eliminate them. To that end, officials have tried to clarify what triggers a buyback and strengthening procedures that allow banks to resist repurchase demands.

So far, however, these have had little effect. Banks have made it clear that it isn’t just repurchase risk that is triggering the overlays. They are the result of internal rules prohibiting banks from making loans their analysis predicts will have a high rate of default.

That is, banks are second-guessing Fannie, Freddie and the FHA. Even if the agencies approve a certain type of loan and promise not to ask the bank to repurchase it, the banks refuse to make the loan if they view it as too risky. Their aim: avoid a situation similar to the one that just cost them billions.

Those of us of a certain age can remember when bankers were seen as stodgy and boring, then deregulation happened and all the sudden they were running with the wolves on Wall Street. Looks like it’s time to say, “Welcome back, stodgy.”

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Entry filed under: Economy, Financing, Housing Trends, Regulatory Issues. Tags: , , , , .

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