Banking Law

Some lenders have taken to complaining that Uncle Freddie's and Aunt Fannie's penchant for loan buy-back demands has had a chilling effect on the ability of the average homeowner to take advantage of historically low interest rates by refinancing higher interest loans.

Lenders have responded to repurchase requests with more stringent background checks on borrowers, and tightening lending requirements even beyond what Fannie Mae and Freddie Mac require.

The consequence of the "overlays" that banks put on lending requirements has been that fewer homeowners have been able to take advantage of record low interest rates and save money through refinancings, an important economic stimulus.

"Why are we having these overlays? Because we are having a fear of repurchasing these loans," said McCord, who said Fannie Mae and Freddie Mac were essentially using taxpayer dollars to make cases for repurchase demands.

"We're trying to be out there lending to help this recovery," he added.

I've heard a couple of anecdotes recently that tend to support the complaint that qualifying for a home refinance loan is getting to be as difficult as finding an honest man or woman in Congress. A former hedge fund manager told me that he was so exasperated with the constant "come-back" requests for more and more documentation and verifications that he finally told the lender (who had the existing loan that he'd applied to refinance) that he'd just "pay the damn existing loan off" (since he had the liquid assets to do so many times over and was borrowing for tax reasons). A partner in a national law firm told the attendees at a recent conference I attended that she was required to produce more paper by her lender than she think's she's cranked out in decades as a deal attorney (which is usually enough to depopulate a redwood forrest). Of course, both these high-income, high-net-worth individuals eventually were approved for the loans they requested, but if they are being run around in circles by loan underwriters, you can imagine how difficult things are for Joe and Jane Sixpack.

I'm sure that Fannie's and Freddie's push for buybacks based upon whatever technical reasons they can find after scouring loan files plays some part in this. However, if the linked article's allegation that standards have tightened beyond those required by Fannie and Freddie is correct, then something more is at work here. Certainly, lawsiuits by holders of CDOs and other securities ultimately backed by less-than-stellar mortgages add to the caution by originators. Overall, however, I think that this is a classic example of the same type of penduluum swinging that we see in reaction to every banking crisis. The last time around, lenders also tightened their lending standrads (primarily for commercial, not residential, real estate loans, in that case). The regulators are also tightening the screws on many banks in order to fight the last war and to make certain that no one can ever blame them for not being conservative enough as to underwriting standards. Nevertheless, even without those factors, the penddulum always swings from the too lenient side to the too restrictive side following a bubble burst. It's like fine-tuning your shower in the morning: first too cold, then too hot, then too cold, then too hot, until you finally reach a happy, tepid medium. While they're not blameless, Fannie and Freddie shouldn't take all of the blame, or even most of it.

Moreover, this, too, shall pass. It may take a little while, but in the not-too-distant future, rest assured that somebody, somewhere, will be making loans again to borrowers who haven't got a snowball's chance ih Gehenna of paying them back. You just have to be patient enough to wait for the penduluum to reach its apogee and start back down the curve.