…in a couple of words, “government regulation” – really too much government regulation by Freddie and Fannie in an effort to combat the abuses by loan originators during the bubble. From the Wall Street Journal:
Loan officers say their job used to be fairly straightforward: Determine that a borrower could reasonably repay the loan. Today, they say the goal is to shield themselves from a put-back. This means asking borrowers for reams of documentation—tax returns, bank statements, pay stubs, and appraisals—in order to deliver loans that can’t be questioned.
Here’s how put-backs work:
Earlier this year, Mr. Cosgrove faced a demand from Fannie Mae to repurchase a $103,000 mortgage his bank had made in 2003 after the homeowner in Garfield Heights, Ohio, defaulted in late 2010. The latest example, because the borrower made regular payments for so many years, is proof that the loan put-back process “has become more and more ridiculous,” he says. In this case, Fannie reviewed the lender’s 2003 property appraisal and decided the valuation was inaccurate. The dispute hasn’t been resolved.
So loan originators are jumping through a crazy number of hoops, not to make sure you’ll repay your loan, but to make sure Freddie Mac or Fannie Mae don’t put the loan back to them because they didn’t cross a “t” or dot an “i.”
Are these t’s and i’s necessary due diligence in the traditional loan origination process where the goal is to simply verify that in all likelihood the borrower will pay back the money over the next 30 years? It doesn’t sound like it. It sounds like the biggest result of the increased regulations is that mortgages are simply much harder to come by.
The irony is that our tax dollars are currently funding and backing both Freddie and Fannie and, in return, they are making our financial lives immeasurably more difficult while putting a major damper on the nascent housing recovery.