The banking disaster that befell a number of homeowners in recent years was created by the misguided belief that everyone should own a home. It was a prevalent and accepted belief. At a National Association of REALTORS® convention, the President stood up and said "We are responsible for putting 69% of the American people in their own homes." Everyone clapped. Fannie Mae and Freddie Mac were told by Congress to buy up all types of loans, not just your Class A ones with conservative guidelines to which banks had, in the past, strictly adhered. Mortgage lending companies packaged up loans and sold them to investors. The creativity was astounding. You could walk in and say I earn this and they would say "OK." It was the time of the ridiculous "no Doc" loan. If it ever comes back, get ready for another disaster. Overtime pay, maybe overtime, maybe part time, maybe no time, were included in your income. Who cared? Hey, it is only going to keep getting better. The real estate engine pulled the economy along until it ran out of track. I jest to some extent but it was a wild ride. In my many years of selling real estate I learned that cycles happen. And depending on what is the popular norm, it can modulate to different extremes. We created a bubble that had to burst. That is what happens to bubbles.
As the engine stalled the economy did, too. The foreclosure rate was astounding. First to go were those who were not qualified to own a home in the real world, then those who lost their jobs, then those that paid too much and had little money invested. What they all had in common is they just couldn't hold on. As a Fannie Mae broker, I have been involved in many of these houses and people who each had a heartbreaking story. I am thankful to work in an area with relatively few foreclosures. Other areas were not so lucky.
This set the stage for Dodd Frank Act. Gone are the days of the mirror test when if you fogged the mirror you got a loan. And I say with conviction, rightfully so. Some of the lending was predatory, put together by unscrupulous individuals. But many loans were made following established guidelines flawed as they were. The enactment of some type of new legislation was only a matter of time.
Now we live with the aftermath. The banking industry will pay for its sins. Unfortunately so will homeowners and buyers. It makes sense that without the borderline loans there will be less loans made and only to well-qualified buyers. We are only beginning to feel the effect of the changes. As a buyer, when you get your mortgage it will be stamped with the Home Owner Stamp of Approval or be called a QRM, "Qualified Residential Mortgage" something that will give you piece of mind.
We once lived in a world where if a buyer could fog up a mirror strategically placed under his or her nose, the buyer got a mortgage. Why this happened is another whole conversation, but I mention this because it's a whole new world. The financial collapse of many banks and the bailout of Fannie Mae and Freddie Mac resulted in the Dodd Frank Act. While the mirror test was the result of the pendulum swinging too far in one direction, the Dodd Frank Act swings it completely in the other. Banks now have to scrutinize every aspect of the buyer's financial situation to the extent that buyers have said they feel violated. Why? One reason is The Dodd Frank Act requires banks to buy back mortgages they sell if the loan goes bad in the first seven years of its life. They don't have a crystal ball to tell them who is going to get divorced, lose their job or have some other disaster befall them rendering them unable to pay, so they use the tools they have. To add insult to injury the banks are fined for the casualty. The Act also dictated that in order to be sold to Fannie or Freddie, the Mortgage must be a "Qualified Mortgage," meeting strict ratio guidelines; and that every rock must be overturned to determine the buyer's income and assets, employment, credit history and any debt obligations, all of which affects the rate you will ultimately pay. To add insult to injury, they must re-check three days before the closing to see if anything has changed. Some banks may just check employment; some may run through the whole checklist.
But there is life after Dodd Frank and it's a good one. Houses are still being sold and people are happily transitioning. Bankers should not be seen as an enemy, but a guide to help you through the process. They have a lot invested in your success, too. More than ever, it is collaboration between you, your banker and your REALTOR® to be sure that the information about you and the property all adds up.