You got a couple million lying around?…paranoia and the underwriter
… from one of our favorite mortgage voices, David Reed, CD Reed Mortgage Bankers
You want to know how to scare a lender? Just say two words: Buy Back. AAIIIIEEEEEE !!!!
What’s a buy back? It’s when a lender has to buy back a loan they had already sold to another lender or to Fannie/Freddie. Lenders have purchase and selling agreements with one another and loans are bought and sold in the secondary market. That creates the liquidity needed in the mortgage world.
A lender might have $10 million dollars in their vaults. If they issued $10 million in mortgages one day they’d be out of money. They would no longer be lenders because they wouldn’t have any more money to lend. So instead of making mortgages and simply collecting the interest on the note they sell the mortgage to others which then replenishes their mortgage money coffers.
If however a lender issues a mortgage loan and it doesn’t meet the requirements of either the secondary market or the requirements of the lender buying the loan then the loan goes back to the original mortgage company. The original mortgage company has to buy that loan back. If that happens too often then the lender runs out of money to lender and/or uses up their credit lines.
That’s what underwriters do: make sure the loan meets the requirements of the secondary market or the lender they’re selling the loan to. Underwriters put their stamp of approval on each loan saying: "This loan meets the standards required."
Sometimes though, it doesn’t happen that way.
When loans are sold, the purchaser audits the file to make sure its guidelines are met. If the loan passes muster then the loan goes on its merry way. If it doesn’t pass, the lender contacts the old company and says "we’ve got a problem: fix it." If the original lender can’t fix the problem, the lender must buy the loan back. Most pure-play mortgage bankers can’t do that very often. It can put them out of business.
Why would a loan be subject to a buy back? The obvious one would be some sort of loan fraud where the documentation in the file doesn’t match up to the loan application. Or perhaps the loan soon goes into default and the file is audited and finds some misrepresentations in the file. (lies)
But there are other reasons. Perhaps the lender who bought the loan doesn’t like the comps used in the appraisal and wants more. Or the lender didn’t like the way the underwriter calculated the income of the applicant.
Some lenders, even Fannie/Freddie, are employing auditors to scour through loans that might be subject to a buy back. If a lender wants to free up some cash and get out from under some mortgage loans, this is a way to do it…find a problem loan then force the issuing lender to buy it back.
Most loans aren’t bought back. They sail right on through the system. But if you think your loan officer or underwriter is acting a little paranoid and asking for "too much" information it’s likely they’re only doing a little more to protect themselves and the lender.
If they didn’t, they’d soon be history.
The Nelson Project at Keller Williams Realty in Austin strives to bring you valuable real estate information and news through this blog and our other online resources. Find more about The Nelson Project and search for Austin homes at www.TheNelsonProject.com. if you like this blog, you may want to visit our totally useful Austin neighborhood portal. If you really like what you see, tell your friends to call us with all their Austin real estate needs.
© Julie Nelson and The Nelson Project at Keller Williams Reatly, 2008-2010. Unauthorized use and/or duplication of this material without express and written permission from this blog’s author and/or owner is strictly prohibited. Excerpts and links may be used, provided that full and clear credit is given to Julie Nelson and The Nelson Project at Keller Williams Realty with appropriate and specific direction to the original content.
Entry filed under: Smart Real Estate.