Fully documented loan applications – the type now demanded by virtually all lenders – require a lot of paperwork. They’re tedious to complete. They’re also not especially different than the loan applications required before the mortgage meltdown.
But what has changed for lenders is the cost of getting loans wrong. Here’s why:
The company you see as a “lender” will probably originate your mortgage and then sell it in the secondary market. With cash from the loan sale, the original lender can then make new loans.
When a loan is sold, the sellers (the loan originator and the “packager” who pulls loans together on Wall Street to create mortgage-backed securities) make certain promises to the buyer.
If there are problems with the loan, such as non-payment during the first 120 days, the loan sellers can be forced to buy back the mortgage, something called a putback.
In the past few years, however, lenders claim they have been forced to buy back loans because of small clerical errors – even though the mortgage is actually being paid. The result is that the loan process has become excruciatingly precise, because lenders want to avoid what they see as unfair putback demands.
In early September, the Federal Housing Finance Agency proposed a new rule that is expected to go into effect in January. The new standard – to be used by Fannie Mae and Freddie Mac – says lenders “will be relieved of certain repurchase obligations” if the borrower makes full and timely payments for 36 months.
Also, lenders who modify mortgages under the government’s Home Affordable Refinance Program will get “warranty relief” after 12 payments.
Starting in January, lenders will have fewer worries about clerical errors and putback demands because of the new FHFA standards. That should make loan applications faster and easier for everyone.