We hear it on the news and read about it in newspapers. “Credit is tight.”
Business owners in need of capital complain, “Banks aren’t lending.”
And home buyers are still experiencing HUGE problems and delays when dealing with the “Big Banks.”
Is the problem that banks don’t want to lend? Or is it something else entirely?
The truth is banks DO want to lend. The money IS available. But it’s not tight credit that’s restricting lenders; it’s tight lending guidelines.
Commercial lenders have specific capital requirements they must maintain for every dollar they lend. Although banks would like to lend more (to qualified borrowers of course), federal and state regulations instill lending caps based on a bank’s net worth. These limitations result in banks cherry-picking borrowers, presenting the perception of tight credit.
The residential side works a bit differently. Most banks sell their loans in the secondary markets, with pools of collateralized mortgages eventually being sold to Fannie Mae and Freddie Mac. In order for Fannie or Freddie to purchase these loans, each loan must meet their explicit guidelines regarding the borrower’s qualifications.
Years ago, these guidelines were just that: guidelines, where the underwriter had flexibility to approve a loan based on the strength of a borrower’s qualifications. However, since 2008, guidelines have become tighter and flexibility has been eliminated. Fannie and Freddie are under federal conservatorship and federal auditors are requiring lenders buy back loans for even the smallest of discrepancies. Underwriting guidelines have become rigid and inflexible.
For example, a recently published article described a California borrower whom was asked to document an un-sourced deposit into his bank account. (Both Fannie and Freddie guidelines require that a borrower verify the source all “large” deposits into his bank account before the loan is approved and closed.) This one borrower was asked to source an $8,111.13 deposit. He provided proof via two checks deposited on that date, totaling $8,110.88. Yet there was a 25 cent discrepancy. The underwriter would not clear the condition. Mind you this was a solid borrower with excellent credit and a sizable down payment. Yet a 25 cent discrepancy was holding up the file!
It turned out the borrower received a 25 cent dividend check on a stock he owned and included it with the other two checks deposited. While this cleared the condition, it gives you some insight into the level of detail required in today’s lending environment.
With tight lending guidelines abound, what’s a borrower to do?
Work with a Certified Mortgage Planning Specialist® like myself, whom has demonstrated time and again a mastery of these Fannie and Freddie guidelines. By consulting with me well before you find your new home, we can address any small issues before they become major problems. We can position you to negotiate with strength and ensure a winning bid. And we can ensure the mortgage matches your needs, complements your financial plans, and helps you attain your financial goals.
Warren Goldberg is President of Mortgage Wealth Advisors, a Certified Mortgage Planning Specialist®, and a published author. His interviews include Blog-Talk Radio, Newsday, and the Long Island Herald. Since 1992, he’s been sharing his financial knowledge and wealth-building strategies, including how to properly use your mortgage as a financial tool. His clients regularly express their trust and appreciation by recommending friends and family call when in need of mortgage, real estate, and financial guidance.