Here’s the real reason many people have trouble getting a mortgage

Mortgage rates have been at historic lows, but a lot of people still have trouble getting a mortgage because the lender makes them jump through hoop after hoop after hoop.

What most people don’t know is that a big reason this is happening is something called “put-backs.”

About 90% of the home mortgage loans in the U.S. are sold by the lender to federal agencies or to government-sponsored companies, chiefly Fannie Mae and Freddie Mac. These purchasers buy loans that meet certain specific standards.

Increasingly, when a loan goes bad, Fannie and Freddie are combing through the original documentation looking for flaws and mistakes. When they find one, they demand that the sale be undone and that the bank take back the loan – which is known as a “put-back.” This results in a big loss for the lender.

Recently, Fannie and Freddie have demanded that banks take back $66 billion worth of mortgages that were made between 2006 and 2008. The amount of “put-back” demands last year was up 37% over the previous year.

As a result, banks are increasingly scared. Rather than just making sure that the borrower can repay the loan, they are triple-checking everything and trying to make the loan documentation “bulletproof” so that they won’t be stuck with a put-back.

According to a recent survey by the Federal Reserve Board, fear of put-backs is the number one reason that banks are tightening standards and refusing to make loans to people.

In many cases, banks are demanding full explanations for any recent bank deposit, however small, to make sure that the applicant isn’t borrowing money from family members for a down payment. Other banks are refusing to loan money unless the applicant makes repairs to the property first, rather than allowing the applicant to fix the home up after moving in.

The new standards are especially tough for people who have recently moved, people who work on commission, people whose income consists largely of bonuses or tips, and people with seasonal income.

In August, the average person who was denied a conforming mortgage loan had a credit score of 734 and a 19% down payment. In the past, such a person would probably have breezed through the process without a problem.

In an effort to help, the Federal Housing Finance Agency recently issued regulations limiting put-backs somewhat. Starting with mortgage loans made in 2013, Fannie and Freddie won’t be able to demand a put-back for certain types of flaws if the borrower has made payments on time for three years.

On the other hand, provisions in the Dodd-Frank financial overhaul law will increase penalties starting in 2013 for banks that make mistakes in loan documentation. So banks may still be “playing defense” for a while longer.

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