If FHA, Fannie Mae, or Freddie Mac will guarantee the loans, what are the risks? Well, there are costs associated with failed loans even if the government guarantees them via the GSE’s. However, in the interest of getting the real estate economy moving more and sooner, wouldn’t erring on the side of writing more loans more than make up for such perceived costs? What do you think?
The federal government is taking steps to ease a problem lenders have been complaining about for several years, and that’s the buy-back risk they face if they underwrite a federally backed loan that goes bad and the guarantor of the loan—whether FHA, Fannie Mae or Freddie Mac—determines that the loan was never underwritten in compliance with their “representation and warranty” requirements.
Lenders in the wake of the mortgage meltdown cited this buy-back, or repurchase, risk as one of the reasons they were imposing their own set of underwriting requirements above and beyond what the federal guarantor was requiring. With these credit overlays, as they’re called, loan applicants who met the requirements of FHA, Fannie or Freddie could still find themselves getting turned down for a loan, because they didn’t meet these more stringent lender overlays.
Read the whole article: FHFA Gives Banks Reason to Revisit Overlays.