Mortgage Lenders Many Headaches

GSEs Mandate: No More Defective Loans

Fannie Mae and Freddie Mac have created new quality control programs to flag problem loans early. The government-sponsored enterprises are electronically validating 100% of the loans they purchase. Lenders will be subject to loan reviews and risk assessments, and if loans have any defects at all, lenders will be asked to take them back much sooner than they would have in the past. Lenders say they will need to hire more staff to help them comply with the new mandate, which takes effect in January.Image: Fotolia

Lower Conforming Loan Limits

Ed DeMarco, acting director of the Federal Housing Finance Agency, wants to reduce the size of loans that Fannie Mae and Freddie Mac can buy. The current limit is $417,000 in most areas but $625,000 in high-cost cities such as Los Angeles and New York. Limits were raised during the housing crisis but never fell back to lower levels and lenders are concerned that lowering them now would slow the housing recovery.Photo: Bloomberg News

Flaws in Appraisal Oversight

The Office of the Comptroller of the Currency says it sees serious deficiencies in many home appraisals and is ordering banks to beef up their oversight of the appraisal process. Many banks lack an audit, quality control or internal control function to even be able to evaluate the performance of their appraisal programs, according to Darrin Benhart, the OCC's deputy comptroller for credit and market risk. Fannie Mae also says it is still finding serious flaws in appraisals and is urging lenders to provide more consistent data.

Loosening Lender Standards

The Federal Housing Administration's Commissioner Carol Galante shocked lenders with a rule change in August that allows borrowers who lost their homes to foreclosure or a short sale to qualify for a new home loan within a year. Lenders are concerned that even if a government agency loosens credit standards, they will still be on the hook if the loan goes bad.

Shock from Home Equity Loans

Home equity lines of credit are a major risk to banks because many of the 10-year loans made in the boom years of 2004, 2005 and 2006 will come due next year. The OCC has warned that 58% of all HELOC balances will start amortizing next year. Many of these loans are interest-only, so borrowers will have to start making principal payments at much higher interest rates. Regulators are urging banks to help them refinance or restructure to avoid payment shock.Image: Fotolia

Fair Lending Clampdown

Regulators are cracking down on fair-lending violations. Nonbank lenders are at the biggest risk because often they do not analyze data for fair lending criteria. Regulators are urging all lenders to hire fair lending compliance officers to improve quality control and ensure all borrowers are treated in a consistent manner.Image: Fotolia