Qualifying for a Mortgage Is Getting Tougher

01 Feb Qualifying for a Mortgage Is Getting Tougher

Borrowing for a home has been tough ever since the subprime securitized loan market collapsed a couple years ago. Without government help through the FHA, many such loans would not be made right now.

But although the government is backing FHA, Fannie Mae and Freddie Mac and shoring up the mortgage market by backing many of these loans — and the Federal Reserve helped further by buying a lot of mortgage paper — it is also trying to avoid taking excessive risks and losses. So recently the the government-backed entities are forcing originators — mostly banks — to take back bad or risky new loans. And mortgage securitized trusts are following suit.The process is known as “repurchase.” Fannie, Freddie, the trusts all agree to buy loans from originating lenders if the loans conform to their guidelines about the type of property, loan, and borrower qualifications. And FHA (and other mortgage insurance providers) agrees to guarantee the performance of some of these loans. But if the loans don’t in fact conform — for example, the loan was for a primary residence but the borrower is actually buying a second home or a rental — then they can force the originator to take it back –along with the risk of default losses.

In the past, the right to force repurchase was more a theory than a fact. But in the last quarter the compelled repurchases have jumped as much as 125%. Ultimate lenders and insurers of loans are demanding originators be more careful and not simply make loans for the sake of closing loans. Average credit scores for Fannie and Freddie loans have climbed over the last two years from 720 to 760, as a result.

The net result is and will continue to be a tightening of the mortgage market. Riskier loans with little or no down payment and lower credit scores will be harder to find, and harder to resell if made.

In the long run this is a good thing for the marketplace. Original lenders ought to have significant “skin” in the game so they don’t simply make a loan in order to score a quick profit (and earn a commission for the salesman). A return to more careful mortgage lending will help communities stabilize and keep real estate prices in line with actual values than the hyperinflated fantasy prices of the last decade.

In the short term, it’s going to mean consumers will have more trouble getting a new mortgage and property sellers will have to wait longer to find a buyer. It took a decade for us to dig the hole and it could take as long (or longer) to dig back out of it.

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I have been a bankruptcy attorney since 1989. Our firm represents consumers filing bankruptcy almost exclusively, although I have represented bankruptcy trustees as well as creditors. For 2017-2019 I served on the American Bankruptcy Institute's Commission on Consumer Bankruptcy. Our Report recommended numerous changes to improve bankruptcy law to make it serve everyone in the process more effectively. If you live in Eastern Missouri, visit our website, send an e-mail or give us a call (314) 781-3400. Our website: STLBankruptcy.com
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