Dave: This has become a very controversial subject. It has to do with Fannie and Freddie’s quest to become public again. As you know, they were put into government conservatorship during the last crisis. Since then, they have paid the bailout money back to the government—and then some. The problem is—they have grown so large during the past decade, the risk of failure is now many times greater than it was previously.
The previous administration moved for the agencies to start building up capital in order to provide a cushion against such a failure, but studies have shown that this cushion was not large enough. Thus, just before the new administration took office, they moved to limit their taking on certain risky loans to facilitate the process.
Second homes and investors comprised one class. Another segment was defined as high LTV loans with one other risk factor (low score or a high DTI). Basically, there were limits placed on what percentage of their holdings could come from these categories. Why does that affect pricing?
In effect, if a mortgage company reaches the agency “limits” on these loans, the agencies will not purchase them. This means the lender must find another source to sell these loans. The agencies represent the largest and most efficient secondary markets for conforming loans. You could be assured that whatever source is found to sell these loans to, the price will be lower (which means the rate will be higher).
Therefore, the vast majority of lenders have placed a premium upon these loans to keep their volume down. If they did not, they would be adversely selected by the consumer, thereby putting the lender in a bind. And if a lender is primarily serving a resort/second home area, they are more likely to be more severely affected. The same for a lender who services a lower income segment with borrowers who have lower scores and smaller down payments. Though I could see the latter situation conflicting with the new administration’s goals of fair lending, so we will see if this agency directive winds up sticking for very long.
Dave Hershman is Senior VP of Sales of Weichert Financial and the top author in the mortgage industry. Dave has published seven books, as well as hundreds of articles and is the founder of the OriginationPro Marketing System and Mortgage School – the online choice for expert mortgage learning and marketing content. His site is www.OriginationPro.com and he can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..
