Mortgages: Why It May Be Easier to Get One Now
Good news came out of Washington recently. Fannie Mae and Freddie Mac, the government-chartered agencies that purchase mortgages from private lenders, agreed to rules that would potentially open mortgage markets to borrowers with less than perfect credit. (For more, see What You Need to Know About Fannie Mae Mortgages.)The Problem
To understand why this news is so important, you first have to understand the problem. Fannie and Freddie, as they are known, don't lend money. A consumer would never call them to get a good-faith estimate on an upcoming home purchase. Instead, Fannie and Freddie are publicly traded companies created by Congress that help provide stability and liquidity to the mortgage market.
When a lender makes a loan to finance a housing purchase, often that lender's ultimate goal is to sell it to Fannie or Freddie in what is called the secondary market. By selling the loan, the lender clears it from his or her books, freeing up money and making an immediate profit on the loan. Fannie and Freddie are charged by Congress to help low-, moderate- and middle-income families achieve their dream of purchasing a home. That makes the agencies eager to buy these loans from the original (primary) lender to add to their portfolio.
But here's where the dark side of mortgage lending comes to light. Fannie and Freddie are two of the most eager buyers in the secondary market. Because of that, when lenders are deciding if a person is eligible, they're not so much thinking in terms of keeping the loan; they will only approve the loan if they think Freddie and Fannie would purchase it.
As lenders found en masse during the aftermath of the housing crisis, Fannie and Freddie can force them to buy back the loan if something isn't right. Or, if the agencies didn't force a bank to buy back an unsatisfactory loan, they could slap it with penalties. As buying back the loan often equates to losses for the lender, banks try to avoid having that happen.
First, the underwriting standards have become higher. If you have applied for a mortgage since the financial crisis, you know that the level of digging into your financial affairs is much higher than it was before 2008. Second, lenders won't lend to borrowers who barely meet underwriting standards. This leaves minimally qualified borrowers without a loan because lenders don't want to take the chance of having problems reselling to Fannie, Freddie or any other buyer in the secondary market.The New Solution
That's where the recent news becomes important. Fannie and Freddie announced that they're putting rules in place that will put lenders' minds at ease about making loans to borrowers who are barely qualified. The change largely involves disputes. If a dispute between the lender and Freddie or Fannie happens, Freddie and Fannie aren't the ultimate deciders anymore. Instead, it will go to an independent arbiter.
This adds to other changes that have eased restrictions over the past few years, including Fannie's and Freddie's commitment not to force lenders to buy back a loan unless the borrower missed more than two non-consecutive payments or there was evidence of fraud. In 2014 the agencies defined fraud better, and last year they made clearer the penalties for errors in underwriting, causing fewer severe penalties for smaller problems. All these changes have contributed to a loosening of the market, opening the door to allowing less qualified borrowers to get mortgages.The Bottom Line
In theory these new rules should make it easier for some potential borrowers to qualify for a mortgage. Whether or not that happens remains to be seen. Some experts say that standards will soften, while others believe that consumers won't see a change. (For more, see What to Expect From Mortgage Rates in 2016.)