I had dinner last week with a friend who went to high school with me in Southern California. His wife is a very experienced mortgage underwriter, and it gave me an opportunity to ask some candid questions that are not easily answered in this crazy mortgage world.
Basically, she confirmed my synopsis of the current state of the mortgage market. Let me summarize our mutual thoughts:
- Lenders do not want to hold loans in their portfolios. Selling loans on the secondary market ensures fee income, reduces interest-rate risk and replenishes the capital lenders need to make new loans.
- The government-sponsored entities (GSEs) and now government-owned mortgage giants Fannie Mae and Freddie Mac are, practically speaking, the only customers on the secondary market. Because of the mortgage meltdown of 2007, there is still very little demand in the private sector for what by now should be very good quality mortgage-backed securities.
- Because Fannie and Freddie have been taken over by the federal government, they are in a conservatorship, which means their objective is to conserve assets.
- Despite their claims of extending credit and making efforts to relieve the credit crunch, Fannie and Freddie actually are doing everything they can to force lenders to buy back loans - something lenders do not want to do. Perfectly good loans, by any reasonable common-sense standard, are being rejected by the GSEs over an irrelevant detail, such a page missing from a bank statement.
- This is putting enormous pressure on underwriters, such as my friend's wife, whose job, in her own words, has been "reduced from one that required knowledge, common sense and autonomy to [being] a mindless clerk [who] simply checks off a series of requirements. A loan applicant can be a zillionaire with perfect credit and 90 percent equity in his home, but if one thing on the list can't be checked off, he can't get his loan."
This is why my very capable processor, who puts the paperwork together, is frustrated. This is also why it's more expensive to process a loan. And this also is why I tell my clients that if they want a loan at today's low interest rates, they need to say "How high?" when I politely ask them to jump.
With any luck, the gun-shy private sector soon will realize that the mortgage loans being granted today are indeed safe investments. And Fannie and Freddie should ease up on the threat to force loan buybacks and allow their lenders to use a little common sense. Otherwise, Federal Reserve Chairman Ben S. Bernanke's successful efforts to reduce interest rates will continue to do very little to help the economy.
Henry Savage is president of PMC Mortgage in Alexandria. Send email to email@example.com.