Tuesday, June 1, 2010

What are Loan Buybacks and Why Do You Need to Know About Them?

When a borrower stops making payments on a loan, Fannie Mae, Freddie Mac, and Ginnie Mae – the government sponsored enterprises that purchase mortgages from lenders after the loans close – review the loan to make sure that the lender underwrote the loan according to the published guidelines. In other words, they audit the loan file to make sure the lender followed the rules.

If the lender didn’t follow the rules, then Fannie Mae, Freddie Mac, and Ginnie Mae can force the lender to buy the loan back from them. If that happens, the lender is stuck with a loan that no one is paying.

Lenders don’t want to be stuck with loans that no one is paying, so they have recently begun to enforce the rules, meaning they now follow the underwriting guidelines very carefully. In the past, underwriters had a great deal of discretion when they underwrote a loan. Now they do not.

Fannie, Freddie, and Ginnie are making lenders buy back loans so the flood of foreclosures will stop. That is certainly a good thing, but borrowers and real estate agents need to be aware that loans are now being underwritten much more carefully than they were even a few weeks ago.

As long as a borrower meets all the underwriting guidelines, their loan will still be approved. However, underwriters are requiring much more documentation than ever before because they have to be able to prove they did their job correctly if the loan goes into default. That means it sometimes takes longer to get a final approval for a loan.

It’s hard to find fault with someone who is doing their job a bit more carefully in order to hang onto their job, so underwriters really shouldn’t be cast as the enemy. They still get paid to approve loans, not to deny them.

If everyone is aware that a loan might take an extra week or so to be approved, everything generally goes pretty smoothly.

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