If there is one story I hear over and over these days, it’s about the terrible service people are getting when applying for a mortgage. I hear it from consumers and I hear it from my associates in the industry. Unfortunately, some of my clients have experienced it, too. Shamefully, I will admit that one of my main jobs is being the wall between a lender and my client when the lender is not able to “perform to my expectations.” Bluntly, I have been unable to shield some of them from it.
Loans are taking longer to originate these days. The best loan I have done in my career is a 20% loan-to-value loan to a borrower who makes $8 million per year and who has a 760 FICO score. It took six months, mostly because the underwriter was afraid that it was going to cost her her job because she might have missed something that would come back to bite later. The ex-employee of a BIG BANK said that one loan she did took over a year to fund.
I think that it is worthwhile to explore some of the reasons for this.
The fear factor
The most important is the fear factor that dominates lenders these days. To be sure, most lenders are merely “originators” of loans these days. 90 percent of loans are sold ultimately to Fannie Mae, Freddie Mac, or are FHA or VA loans. All of these entities are, in effect, operated by the Federal government.
Not all originators sell their loans directly to Fannie or Freddie. They are sold to an intermediary investor who, in turn, sells the loan to Fannie or Freddie. These intermediary lenders are, not so strangely, the exactly same institutions that dominate retail mortgage lending, Wells Fargo, BofA, Chase, Citicorp, and GMAC.
During the 2005 to 2008 time period Fannie and Freddie were stupidly trying to “maintain market share,” and they correctly calculated that they could get more business if they lowered lending standards. Apparently, there was no thought of the potential higher default rate on those lower quality loans. We know the rest of the story.
But the latest chapter is that Fannie and Freddie are trying to get some of these lenders to buy back billions of dollars of loans from that period that went bad. As you might expect, that is making them quite jumpy, to say the least. BofA has paid of $5 billion to settle some but not all of these claims.
What this has caused among these lenders is the possibility that they might someday have to buy back loans they are originating today. Consequently, they want to make sure that the loans they are evaluating today are “squeaky clean.”
At this point you should understand that it is virtually impossible to do a “bad” loan today. We get an appraisal from a pristine system so we know values and we know what equity is. We get credit reports that are from a fool-proof system. In addition to what income documentation the borrowers provide, we get them to sign a Form 4506T what allows a lender to get almost immediate feedback on the last tax returns. What is left that could be a problem?
Next page: System overload »
Image: James West, via Flickr.com