Put away your put-backs, Frannie
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Originating a home loan imposes a degree of risk on the lender, the stakes of which are made all the worse by Fannie Mae’s and Freddie Mac’s (collectively Frannie’s) strict punishment for underwriting flaws. If a lender makes a mistake on the loan documents it submits to Frannie, the lender is forced to repurchase the loan from Frannie, a process they call a put-back. These mistakes include misrepresenting (intentionally or unintentionally) the home’s appraised value or the homeowner’s creditworthiness.
This repurchase rule is essentially a put option included in standard agreements between lenders and Frannie. When exercised by Frannie it is to the lender’s detriment – a backwards strategy. Frannie is supposed to be taking on the lender’s risk when they purchase the loan, not the other way around.
However, a “secondary wave” of repurchases is now underway, demanded by Frannie on loans they now reject but purchased from big mortgage lenders who in turn obtained the flawed loans from other banks.
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About The Author
Carrie B. Reyes
is lead writer in charge of the Real Estate Practice and Due Diligence and Disclosures books.
![iStock_000012073034XSmall[1]](http://firsttuesdayjournal.com/wp-content/uploads/iStock_000012073034XSmall1-106x75.jpg)
I believe Frannie is doing the right thing. First of all, the banks that originated the loans of properties going into foreclosure never should have originated them in the first place. Loan officers were using the No Doc requirements to sell homes to people that couldn’t afford them. Everyone overinflated their incomes and most of the people getting these loans knew it. So these so called “Homeowners” are harsh as this might sound, would have never been “Homeowners” through conventional loans or FHA loans. Yes, it is unfortunate that these families and individuals will loose their newly found properties but again, they are just paying the price for liying about their income and knowing and willingly signing zero interest loans going from fixed 0 interest for the first 3-5 years to an ajustable. All these homeowners figured, somehow they’ll come up witht those payments. Second, Frannie, should punish those banks who abused this lending scheme and what they should do is put in thresholds that if a bank stays within then they should not be penalized. As the article states, mistakes will happen, so not all banks/loans should be penalized. Sorry but when you play the corruption game, you have to take responsibility and not act like the victim. I don’t buy that all these people who took out these loans did not know what was going on.
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Yea, at a quick glance, this is good; appears takes the upward pressure off of value and the appraisers; get’s to an less engineered equilibrium for lending purpose. Forces the loan officer and Bank to get to the most probable and stabilized value, especially when Bernanke is unwilling to adjust interest rate for risk. Downside: Bernanke is unwilling to adjust interest rate for risk hyper inflating the market so that government can collect more in real estate tax, supporting public sector lifestyle, among other things. Business as usual in this regard. Most government budgets are driven by the real estate tax. Interest rates need to be around 7-9%.
Federal Reserve Chairman Ben Bernanke reported assets of as much as US$2.28-million last year while refinancing into a cheaper 30-year mortgage. Bernanke, 58, and his family owned financial assets valued between US$1.07-million and $2.28-million, according to annual financial disclosures released today. That compares with a range valued between US$1.06-million and US$2.31-million in last year’s disclosure, and US$1.15-million to US$2.48-million for 2009. The forms from the U.S. Office of Government Ethics require officials to report only a range in the value of holdings.
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