Congressman Barney Frank is currently pushing legislation that would require banks to hold on to at least a portion of each mortgage they create, instead of selling the entire loan to investment groups.

A recent Reuters article reports:

“He said part of the reason the country finds itself in its current fiscal crisis is a shift from traditional bankers, who made loans but found themselves on the hook if the loans went bad, to complex financial deals that allowed mortgages to be combined and then sold — with little financial risk to those making the loans.

‘If only banks made mortgage loans, there would be no crisis,’ he said.”

As most borrowers know, the mortgage market is very tight right now. Although these laws may curtail another mortgage meltdown, they are likely to make it even more difficult to take out a loan in today’s market. Perhaps we’ll see yet another influx of borrowers seeking creative financing in the months to come.

photo credit: rjs1322

See Also:

FHA Mortgage Guide

Fannie Mae and Freddie Mac Conforming Loan Standards

Fannie Mae and Freddie Mac are Government Sponsored Enterprises (GSE) that set the lending standards used by banks. They set terms such as limits on the maximum loan amount, down payment requirements, credit score requirements, and more. When banks make loans that meet these standards, they are called “conforming loans.” Banks are always able to sell conforming loans to other lenders or to Fannie Mae / Freddie Mac. Lenders view these loans as safe because they all meet the same lending standards.

If you cannot meet the conforming lending standards (i.e. your needed loan exceeds the limit or you have a poor credit score), a bank may still be willing to give you a mortgage. Instead of using the standards set by the GSEs, the bank will use its own requirements. The bank will not be able to sell your non-conforming mortgage to Fannie Mae or Freddie Mac. It may also have a more difficult time selling the mortgage to other lenders. Because of the perceived risk of default and the difficulty of selling your loan on the secondary market, the bank will give you a higher interest rate. Read more…