Banks hesitant to embrace mortgage solution

Nonbanks to fill in gap?

The government released a new proposal for Fannie Mae and Freddie Mac to start purchasing more low-income refinancings in order to show support for such loans. But there is one problem: banks are unlikely to jump on board with the idea. Per The Wall Street Journal.

The article explained that the Federal Housing Finance Agency hopes that increasing demand for low-income mortgages from Fannie and Freddie will spur lenders to make more of these loans.

This time around, lenders might not be so willing to follow Fannie's and Freddie's lead. The risk is that the expansion of low-income goals may actually lead to a lending contraction. That is because banks don't want to make any type of loan that they wouldn't want to keep on their balance sheet.

As multibillion-dollar mortgage settlements with the Justice Department and other government entities have made clear, doing otherwise opens them up to liability for allegedly faulty underwriting. And repurchase demands can force them to take back loans they never planned on holding.

However, this does not mean the door is completely shut on low-income families. The article said there is a chance that nonbanks will step in but that carries its own set of risks

Compared to its peers in the market, the booming non-bank mortgage servicing market — dominated by Ocwen (OCN)Nationstar (NSM), Walter (WAC) — should not be required to fulfill formal capital requirements and other types of prudential regulations, according to a white paper from Kroll Bond Ratings Agency.

Meanwhiel, "According to Fannie Mae documents, 46.6% of its mortgages were purchased from nonbank mortgage companies in the first three quarters of 2013, which was up from 33.2% in 2011," the FHFA-OIG report states. “Freddie Mac data shows that its share of mortgage purchases from nonbank mortgage companies more than doubled from 8.4% to 20.5% over that same period, but its share remains significantly lower than Fannie Mae’s share.”

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