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Friday, November 11, 2011

4% Mortgage Unreal

Government efforts to make lenders pay for soured mortgages may be keeping potential borrowers from record-low interest rates, slowing home sales and refinancing as banks tighten standards to avoid more demands for refunds.
Lenders are insisting on higher credit scores and more documents than required by the Federal Housing Administration and government-backed Fannie Mae and Freddie Mac. Quicken Loans Inc. and Vision Mortgage Capital are among firms saying they are increasing scrutiny of would-be borrowers in response to pressure to cover losses incurred on U.S.-backed housing debt.

Mortgage rates as low as 3.94 percent are proving insufficient to revive housing. Sales of existing homes fell 3 percent last month, National Association of Realtors data show, and 18 percent of the group’s members reported contract cancellations, at least twice as high as in normal circumstances. Among the reasons were refusals of loan applications after appraisals came in below sales prices.

Faulty mortgage lending and foreclosure practices have cost the five biggest U.S. home lenders more than $68 billion since 2007, according to data compiled by Bloomberg News. Much of the amount has stemmed from losses tied to Fannie Mae, Freddie Mac and the FHA, which together buy or insure more than 90 percent of new mortgages.

“Documentation standards are getting more and more onerous because no one wants to manufacture an imperfect loan, even if the imperfection is really insignificant,” said Quicken Loans CEO Bill Emerson, who leads the eighth-largest U.S. home lender and No. 1 online mortgage originator.

President Barack Obama’s latest push to help more borrowers refinance into cheaper rates may hinge on the effectiveness of changes to Fannie Mae and Freddie Mac repurchase rights. FHFA acting Director Edward DeMarco told reporters yesterday that the companies would offer “substantial” relief from buyback demands without providing “blanket or absolute” protection as they expand the federal Home Affordable Refinance Program for borrowers with little or no equity in their houses.

While the average rate on a 30-year fixed loan was 4.11 percent in the week ended Oct. 20, the historically low costs don’t capture the “very, very harsh underwriting standards” that potential home buyers face, said Ron Peltier, CEO of HomeServices of America, the property brokerage owned by billionaire Warren Buffett’s Berkshire Hathaway Inc. The process is “the most embarrassing, difficult thing you can imagine,” Peltier said in an Oct. 13 interview at Bloomberg headquarters in New York.

The average time between mortgage application and closing rose to about 52 days last year, three weeks longer than in 2008, according to J.D. Power and Associates surveys.
Pressure from the GSEs has “definitely stanched the flow of credit to the mortgage market, but we had clearly gone too far,” said Richard Eckert, an analyst in San Francisco at securities firm B. Riley & Co. who wrote research on subprime lenders during the housing boom and then joined a hedge fund betting against property loans during the collapse. “We’ve got to return to some kind of happy balance.”
Bank of America Corp. (BAC) has scaled back mortgage lending as CEO Brian T. Moynihan prepares for new capital requirements and grapples with demands that it compensate investors including Fannie Mae and Freddie for losses.

While the FHA allows down payments as low as 3.5 percent from borrowers whose credit scores are at least 580, lenders are setting the bar higher, such as at 620, he said.

Lenders “feel like they’re being held accountable for things beyond their control,” he said. “The only thing the industry can do is tighten up on the front end.”

The unit of Plymouth Meeting, Pennsylvania-based Continental Bank also started taking additional looks at consumers’ credit files shortly before completing loans, based on Fannie Mae and Freddie Mac guidance, Lowrie said. It finds more situations like the potential borrower who took out a new car lease while waiting for the application to clear, “and now that loan’s going back to underwriting again,” she said.

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