LAST WEEK I WROTE ABOUT THE COMMON PERCEPTION that obtaining a mortgage loan today is very difficult. One reason that mortgage lenders scrutinize loan applications so carefully is the fear of “buybacks.”

The vast majority of residential mortgages are sold to Fannie Mae and Freddie Mac by mortgage companies and banks after they are originated. Fannie and Freddie are the essential link that ensures a steady flow of capital into the mortgage market. A buyback occurs when Fannie or Freddie determines that the originating lender made a mistake in underwriting and approving a mortgage loan request, and the lender is required to buy back the loan.

Buybacks erode profitability and in extreme cases cause mortgage lenders to go out of business. Over the last several years Fannie and Freddie have forced banks and mortgage companies to buy back billions of dollars in defaulted loans — more than $80 billion between 2011 and 2013 alone. Many in the industry say this is why the average score for approved borrowers is about 740, well above the sub-700 average prior to 2007: As lending costs have risen, consumers have been hit by higher borrowing costs through increased fees and interest.

So what’s wrong with requiring borrowers to have stellar credit and impeccable qualifications? The problem is really one of balance. No one wants to return to the days when getting a mortgage was as easy as fogging a mirror. But when you make the process so difficult that even well-qualified borrowers find it onerous, many potential borrowers who should be given the opportunity of responsible homeownership are locked out of the market.

The increased level of buybacks began after Fannie and Freddie collapsed and were forced into federal conservancy. The government wanted to make sure the taxpayer wasn’t left on the hook for all the bad loans from the bubble days.

The issues began when the agencies began heightened reviews of newly originated loans. The new loans, underwritten to standards far different than loans before 2007, were not even in default, but lenders feared they could be forced to buy back a loan simply because of clerical or minor documentation errors.

The result: lending standards and qualifying criteria tightened up even further. This made it even more difficult for borrowers, further restricting access to credit and limiting growth in the housing sector and overall economy.

Washington is finally waking up to the stifling effects these policies have had on the housing market and the wider economy. Melvin L. Watt, the federal regulator charged with oversight of Fannie and Freddie, announced last week significant changes to how the agencies handles buybacks. The new rules are a first step in a long-term effort to clarify policies and ease lender fears. Hopefully with these new rules, getting a home loan will soon become just a little bit easier.

Guy Benjamin (CAL BRE License #01014834, NMLS 887909) writes a weekly column for The Herald, offering general information on real estate matters. As it is impossible to address all possibilities and variations, he will try to answer individual questions by readers who contact him at 707-246-0949 or gbenjamin@rpm-mtg.com.

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