Fannie Mae and Freddie Mac are chasing the losses they took from the subprime meltdown and all the bad paper they purchased during the event. The Companies under their federal regulators are out to get the cash back. The question is who from. Many of the companies that made the loans are gone along with the employees and executives who were behind them. The party is over and its tough to see where cash comes from to make things right with the U.S. tax payer.
Right now, the companies are using the subpoena power they gained last fall to bring in the records and begin examining the facts. They are looking for misrepresentations and incomplete documents that point to fraud. I'd say that some loan brokers and underwriters may find themselves on the wrong end of an arraignment for fraud and other charges. Perhaps in some cases large lenders took over. However, in those instances the probability of recovering significant cash is likely very remote.
In the midst of this, we also have to ask the question about what does this mean to the housing industry. I believe a few conclusions stand out:
Lending brokers are likely to face a higher bar than in the past for their own liability and responsibility to make loans only to borrowers with the resources, the intent, and the future to become and remain a reliable payer of the note that they sign. Lending underwriters will face intense scrutiny and have to meet strict requirements when approving borrowers in the residential single family homeowner market. Because of these emerging factors getting a loan past the underwriters will become much more challenging for every borrower. And the demands of the lending broker is likely to be significantly more demanding. The processing time for loans and the technical review is going to become much more painful for borrowers. In the end, fewer loans will be approved and the cost for loans is likely to increase. In tandem with this we can expect a parallel set of demands to fall on appraisers. The requirement for an accurate conservative appraisal is going to increase further.
As an investors, the sum total of this is that borrowing for repeat participants is going to become easier relative to their single family home buyer competition. The net will be an environment where home borrowing and lending will tilt in favor of the investor and away from the buyer in a further cascading of events toward renting versus owning.
Blake Ratcliff (US Naval Academy Graduate & Marine Officer, Serial startup entrepreneur, COO/CEO, multifamily / residential investment founder, and property manager).
Blake's crafted 100
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