Just last week, the Federal Housing Finance Agency released a memo to two government-owned companies that guarantee home loans through banks. According to the communication sent, underwriting companies that guarantee home loans cannot make lenders accountable when mortgages go bad. But according to economists, this is a proof that the lessons learned during the housing crisis are so easily forgotten. They add that this hasty decision could set up billions of dollars of losses if the lending bubble re-inflates into the credit system.
Based on the current rule, US government-backed underwriting companies can now force banks to buy back mortgages if they have been proven to be fraudulent and/or not properly underwritten. This means banks can approve bad credit loans on housing more easily because they will be loss-resistant.
However, there is a special exemption to the buy-back procedure. It is also stipulated in the communication that if the borrower has already made 36 monthly payments consecutively then banks cannot be forced to buy the bad credit loans back even when there underwriting or appraisal concerns. Therefore, if the government-backed agency that guaranteed the bad credit loan suddenly realizes that the costumer does not have enough money to pay for the home loan then the bank cannot do anything about it. The bank cannot be forced to buy the loan back.
What About New Home Bad credit loans?
If there are new bad credit loans that have been guaranteed by government-backed companies, the bank can still be forced to buy them back. But this should only be done when the reason behind the return would be fraud or errors in the data submission.
So in order to avoid any loss, the banks must willingly submit their new home loan application for review while they are still in the early phases of business transactions. According to a professor at the Louisiana State University, these new regulations assume that the US economy will never get into another mortgage crisis. He hopes that the assumption be fruitful; otherwise, all these rules will only make government-owned underwriting companies lose more.
How Does The New Rule Fare?
At present, the companies Fannie Mae and Freddie Mac still have about $17.5 billion-worth of repurchase requests pending. These are composed of bad credit loans for housing that have been submitted at the height of the housing crisis from 2005 to 2008. These requests take time to resolve so one can already ascertain the length of time that the realization of the new rule imposes.
However, taxpayers are the main beneficiaries of the new law because they will be better protected against errors and fraud. As long as they don’t go beyond the 60 days after they took the home loan, they should be able to avail of the buy back.
Limitations Of The New Rule
The new rule which gives banks more freedom when it comes to home loans is limited in terms of its reach and effect. First, it means that the underwriting companies will only interact with banks. This completely disregards the other, newer forms of financing companies that operate online.
Lending has contracted so much over the years and regulating one aspect will leave others behind. Although the purpose of the new law is to encourage home loans by giving banks more assurance as to when they will have to buy back craggy loans, they are only limited to government-backed underwriters.
There is also a huge possibility of the proliferation of shenanigans under the new law; unless the limitations are quickly fixed. But if banks do their jobs well and offer only high-quality loans that are error-free then they should not stumble into any issues – with or without the new rule.