Q. Why is underwriting so difficult? A. “Defensive Lending”

Posted on July 17, 2012 by - Uncategorized

This article introduces the idea of “defensive lending” as a main reason that underwriting is so difficult. “”Defensive lending is the mortgage equivalent of defensive medicine,” where doctors run more tests than needed to reduce litigation risk. “Rather that more medical tests, mortgage lenders are adding underwriting requirements and program restrictions to avoid overstepping a sometimes ambiguous line” that will trigger penalties from Fannie, Freddie, or FHA.”

Two U.S. agencies try to get lenders to ease tough mortgage rules

The Federal Housing Finance Agency and the Federal Housing Administration say many lenders’ underwriting restrictions go beyond what the agencies themselves require.

July 08, 2012|By Kenneth R. Harney

WASHINGTON — Two federal agencies with far-reaching influence over the mortgage market are working on a problem that could affect the ability of many consumers to obtain a home loan: How to encourage private lenders to ease up on their underwriting restrictions that go beyond what the agencies themselves require for mortgage approvals.

Both the Federal Housing Finance Agency, which oversees giant investors Fannie Mae and Freddie Mac, and the Federal Housing Administration, which runs the low-down-payment FHA program, are considering steps they might take to persuade lenders to open the mortgage spigots a little wider.

Together, Fannie, Freddie and the FHA account for 90%-plus of all home loan funding. The focus of their little-publicized reform projects: the “overlay” rules many lenders have adopted that call for extra fees, larger down payments and higher credit scores than Fannie, Freddie or the FHA require.

Fannie Mae, Freddie Mac launch foreclosed home summer sale

Posted on July 2, 2011 by - Uncategorized

This article by Ken Harney was recently published in the San Antonio Business Journal. I checked out both of the websites and it doesn’t appear that there are many homes available in our historic districts or center city neighborhoods; mostly along the northern loops of San Antonio. Also, the incentives are for individuals that will occupy the homes and not for investors.

WASHINGTON — Looking for a deal where the home seller pledges in advance to contribute potentially thousands of dollars to your closing costs? If so, check out the summer sale terms available from two of the largest and most motivated sellers of foreclosed homes in the country — Fannie Mae and Freddie Mac.

You may know the companies for their troubled mortgage businesses or the financial foibles that crashed them into the control of federal conservators in 2008. But the flip side of those problems is that they now have massive numbers of properties taken back through foreclosures.

Fannie Mae had 153,549 of them at the end of the first quarter. Freddie Mac owned 65,174. That’s nearly 220,000 houses for which they need to find new owners — quickly — or they’ll rack up even bigger losses for taxpayers.

To move that bulging inventory, both companies have begun time-limited sales campaigns with significant incentives for new owner-occupant purchasers — no investors allowed — and even extra cash for the real estate agents who bring buyers to the table.

Fannie and Freddie both are offering to pay up to 3.5 percent of the price of the house toward buyers’ closing costs, plus they’ll hand over a bonus of $1,200 to participating real estate agents. Fannie’s program covers properties on which contracts are accepted and close no later than Oct. 31. Freddie’s sale requires contracts no later than July 31 and closings by Sept. 30.

Fannie’s program even offers mortgage money to help finance these purchases, sometimes with as little as a 3 percent down payment. The company also has what it calls a “renovation mortgage” option that provides additional mortgage amounts to cover fix-ups.

Freddie does not offer special mortgage financing for buyers during the sale period, but has other inducements including two-year home warranties and 30 percent discounts on appliances.

All the foreclosed properties are listed with photos and descriptions at either HomePath.com (Fannie) or HomeSteps.com (Freddie), where you can search by price, local markets, ZIP codes and entire states. They run the spectrum from expensive detached homes, low-budget urban condos and suburban tract townhouses nationwide. Featured offerings on HomePath recently included:

– A six-bedroom, five-bath house in Littleton, Colo., with 4,990 square feet of space. Asking price: $424,900.

– A two-bedroom condo with 1,164 square feet in Las Vegas for $43,999.

– A $184,900 two-bedroom, one-bath home in Long Beach, Calif.

– A four-bedroom, two-bath house in Brentwood, Md. Asking price: $65,000.

The summer clearance sales are part of rapidly accelerating efforts by both companies to get ahead of the tidal waves of foreclosures flowing into their portfolios in recent months. During the first quarter of this year, Fannie Mae acquired 53,549 properties alone. However, during the same period, it managed to sell off 62,814 houses — a record number that produced a net outflow.

Freddie Mac also sold more foreclosures than it took in during the first quarter, acquiring 24,709 houses while selling 31,628. In some parts of the country, Freddie’s offerings are even stimulating multiple bids on houses, according to spokesman Brad German.

Both companies are targeting only buyers who plan to live in the homes — rather than non-occupant investors who want to flip or rent them out — as part of a larger neighborhood real estate stabilization effort.

The contribution of up to 3.5 percent of the sale price toward the buyers’ closing costs can be substantial. On a $200,000 house the buyers could receive $7,000 toward their closing expenses, which might well be the difference between their ability to afford to buy or not. Combine that with additional incentives, such as favorable financing or warranties, and the total package can look extremely attractive to first-time and moderate-income purchasers.

Are there downsides or restrictions for would-be buyers on either HomePath or HomeSteps? Absolutely. Top of the list: Keep in mind that these are foreclosed properties and some of them have been abused by previous occupants. Fannie and Freddie both do repairs to bring houses up to what they believe are marketable standards, but don’t be surprised to find they are not in pristine condition.

Second, though foreclosures do generally sell for less than non-distressed houses, you need to understand that both Fannie and Freddie are in the business of maximizing returns on assets for their federal creditors. Do not assume the listing prices are deep-discount giveaways. Be diligent in comparing prices and values before bidding and negotiating — just as you would with any other real estate purchase.

Fannie Mae issues guidance on appraisal quality standards

Posted on August 9, 2010 by - Uncategorized

This is a great article by Washington Post Housing writer Ken Harney. I’m glad to hear that Fannie Mae has listened to buyers, sellers, REALTORS, and lenders and have made changes to the way appraisals will be conducted. These changes begin September 1st.

By Kenneth R. Harney
Saturday, July 10, 2010
Picture this: You’ve signed a contract to sell your house. Your buyers say they have nailed down the right mortgage. All is well. But then the appraisal comes in low — $25,000 to $50,000 under what was agreed upon in the contract.
The lender insists on cutting the mortgage amount to reflect the lower appraised value. You refuse to negotiate anywhere near the price indicated by the appraisal, and suddenly — poof! The whole deal is off. You, the buyers and the agents involved are all left sputtering over the appraisal that scuttled the transaction.
This scenario is not unusual in many markets across the country, say home builders, brokers and appraisers. Here’s one little-publicized reason why: Lenders unilaterally may be lowering the numbers on the appraisals submitted to them, in order to avoid accusations that the loans they sell to giant investors Fannie Mae or Freddie Mac are based on inflated appraisals — even slightly inflated. Such value inflations can expose lenders to dreaded “buyback” demands, forcing them to repurchase loans at huge costs.
The vice chairman of the National Association of Realtors’ Appraisal Committee, Frank K. Gregoire of St. Petersburg, Fla., says it’s a widespread problem. Large numbers of legitimate home sales are “sabotaged by lenders and underwriters arbitrarily reducing the value estimate” provided by the appraiser.
Typically, Gregoire says, the lender orders a low-cost electronic valuation — based on publicly available statistical data, with no onsite inspections — to review the accuracy of what was submitted by the appraiser. If there’s a discrepancy between what the computer says and what the appraiser reports, the lender’s underwriters sometimes simply cut the number — even if this means knocking the real estate transaction off track. Or they demand an immediate explanation from the appraiser.
All this may be about to change. Effective Sept. 1, Fannie Mae is prohibiting lenders who sell it loans from changing appraisers’ numbers. In guidance issued June 30, Fannie said lenders must contact appraisers to “resolve” any disagreements about the valuation. If that’s not possible, they should order a second appraisal — not just chop the value.
Appraisers applauded the new rule. “This is huge,” said Gary Crabtree, president of Affiliated Appraisers of Bakersfield, Calif., and a member of the national government relations committee of the Appraisal Institute, an industry group. Pat Turner, an appraiser in Richmond, said Fannie’s new requirement “is great news for consumers” because loan underwriters hundreds of miles from the property “no longer will be able to change the appraiser’s valuation” simply because they pulled a lower number off a computer.
Turner said these electronic models “are often inaccurate” and provide no information on a property’s condition. He said an appraisal completed recently in Virginia was challenged by a review company based in California using a proprietary electronic-valuation system. The reviewer wanted to know why Turner hadn’t used a specific property in the area as a “comparable” in doing his appraisal on the house. Turner checked out the suggested “comp,” and it turned out to be a vacant lot, worth far less than the house — not a true comp “by any stretch of the imagination.”
Fannie’s new guidelines also attempt to clarify other issues that have arisen during the past year, including the widespread use of inexperienced appraisers who are unfamiliar with local market conditions. Real estate agents, builders and mortgage brokers have complained to Congress that rules adopted by Fannie and Freddie last year encouraged lenders to use “appraisal management” companies to value properties.
Those companies, in turn, often pay appraisers deeply discounted fees — half off traditional prevailing rates in some cases — and require them to complete their assignments far faster than normal turnaround times. Critics have said that low-budget appraisers working for management companies frequently travel long distances to do their valuations, have minimal access to local data, and make excessive use of foreclosures and short sales as comparables — thereby depressing the values of non-distressed sales in the area.
Fannie’s letter attempts to clarify its “appraiser selection” standards. Top on the list: Appraisers should be experienced, “have the requisite knowledge” about local market conditions and have access to all local data sources. Fannie also emphasized that the demonstrated experience of an appraiser should always trump fees or turnaround times — a clear swipe at management companies that bid out their work on the latter two criteria.
Asked whether Freddie Mac plans to issue similar rules on appraisal-quality standards, a spokesman said, “We’re definitely looking at it.”