In a move that aims to lighten up the lending standards for national lenders and banks, Melvin Watt, the new director of the Federal Housing Finance Agency (FHFA) has authorized 3 changes in the FHFA rules pertaining to the purchase and buyback of loans on the open market. These rules are aimed at reducing the risk to banks and lending institutions as listed below:
- Banks will not be responsible for mortgages paid by borrowers consistently on a monthly basis after a 3-year time period even if borrowers are late twice on payments during that time period.
- Lending institutions who undergo the new underwriting spot checks will likewise be off the hook for liability on these mortgages.
- Lenders will not be expected to cover the cost of a bad loan, if the mortgage insurer instantly denies the mortgage insurance claim.
With high hopes, Watt went on to claim that he expected the relaxation in these crucial rules should increase home sales and new homes sales by 5% in 2014. Economic analysts also adjusted their home sales numbers from $4.96 million to $5.21 million which will exceed 2013’s sales numbers of %5.07 million by 2.8%.
The reason that the implementation of the new rules is so critical to the recovery of the real estate market in the United States is because the cost to “buy back” all of the bad loans made on subprime mortgages from 2001 – 2007 was the reason for the government bailout of the major banks on Wall Street. This caused banks and lenders to tighten up their own credit standards in addition to new Federal standards for credit for buyers of new homes. The banks and lenders now use what are called overlays to “overlay” the Federal credit standards for programs such as FHA loans, which are backed by Fannie Mae and Freddie Mac. In fact, the money given to these two lenders to bail them out has helped these organizations reach record sales during the real estate recovery.
The overlays that lenders and banks have put in place require buyers to not only qualify for the loan for their new home with proof of consistent income in the form of check stubs and income taxes, but also, they cannot have a debt-to-income ratio that exceeds 36%. The relaxed credit standards for Fannie Mae and Freddie Mac will allow an FHA-backed loan of up to 43% debt-to-income ratio.
“It means a restart for the real estate recovery,” said Mark Zandi, chief economist of Moody’s Analytics Inc. “We’re not going to get back on track until we start making credit more available to potential buyers.” He said he expects Watt’s moves to spur “meaningful” sales growth.
Another bit of good news from this meeting is that unlike his predecessor, Edward Demarco, Melvin Watt has committed himself to working with banks and lenders, keeping an open line of communication, and even hoping to ease some of the regulatory practices of the previous administration. This along with steady interest rates and less liability to lenders and banks, which will be implemented on July 1, 2014, should help to convince the lenders and banks to loosen up slightly on the almost impossible credit standards now required of new home buyers and home buyers as well as those existing homeowners who are interested in refinancing.
Ron Lee Homes, a new home builder in St. Tammany Parish has been in the real estate business in the Greater New Orleans area for over 20 years. We have relationships with our local banks, lenders, and title companies, and we would be happy to direct you to a few banks and lenders that could help you get pre-qualified for your new home purchase. Call 985-626-7619 or E-mail Info@RonLeeHomes.com for more information.