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Heard back from a mortgage broker in Salt Lake City about Casey Serin, the blogger who posted his foreclosure woes and was profiled in USA Today earlier this week.
Click here to read the question reader BL asked Wednesday. I asked for some help answering her questions, and got a great e-mail from Nigel Swaby in Utah. He has his own real estate blog – check it out here. He posted his own take on the Casey Serin saga yesterday.
Here are his thoughts:
Lenders are typically pretty well protected. Most mortgages these days are sold in bundles provided they fit certain guidelines. These “mortgage backed securities” are sold to Wall Street and investors buy into them. Unless a whole bunch of mortgages go bad at the same time, in the same bundle, it’s unlikely the investors will get hurt.
Those loans that don’t get sold as MBS may be kept by the originating lender or sold to another lender to “service” the loan. If a loan like that goes bad, the lender has insurance that covers 20% of the loss, so if it does eventually become bank owned, they automatically have a 20% cushion. Sometimes the borrower pays the mortgage insurance premium, sometimes it’s the lender that pays. Because of “reserve requirements” from the FDIC, if a lender ends up with too many foreclosed properties, they lose the ability to lend as much money, which hurts business and profits. If they own too much real estate, they may be declared insolvent. This is what happened to the Savings and Loans in the late 80’s.
If a loan defaults too early – 1st payment missed – goes into foreclosure within 90 days, the originating broker or lender will be forced to “buy back” they loan they originated. If it’s a small lender, or if there are too many “buy backs” the originator may go out of business. That provides incentive for originators to avoid fraudulent loans.