Government control of bank lending … non-conforming or “portfolio” loans

Does it bother anyone else as much as it bothers me that the federal government controls who gets loans and who doesn’t. Let me say that again …. the FEDERAL GOVERNMENT sets the lending standards for the vast majority of the loans that get issued by banks. It’s just another example of extreme governmental overreach but don’t get me started. So just how does the government exert this control?

Well, Fannie Mae and Freddie Mac, which are technically “Government Sponsored Enterprises” or GSEs rather than actually governmental agencies, buy up the majority of loans originated by local banks. Why? Well, to provide “liquidity” of course. Liquidity means that any given local bank, or even a “Too Big to Fail” can originate a loan, not forgetting to charge the borrower a healthy “loan origination fee” and other random fees (if you’ve ever read a Truth in Lending Statement, you’ll know what I”m talking about), and then sell your loan off to Fannie Mae or Freddie Mac!

What a deal! The originating banks get to charge the upfront fees, but don’t have to be bothered actually servicing the loan. Even more, they don’t have to take on the risk of a borrower defaulting or runaway inflation taking hold. PLUS …. they get their money (or “capital”, as they like to call it) back once the loan is bought by the GSEs. This lack of accountability in originating a loan is what got us into the sub-prime mess, but that’s a topic for another day.

The topic for today is “non-conforming” or “portfolio” loans. Every once in a while, you’ll come across a bank that doesn’t intend on selling your loan to the GSEs but rather keeping it in their portfolio of loans (hence the name). Sometimes they say they will keep the loan “in house”, meaning that it will remain an asset on their own books until it is paid off.  The “non-conforming” comes in because the qualifications for getting a portfolio loan do not necessarily conform to the lending standards of our friends Fannie Mae and Freddie Mac. Maybe your credit isn’t where it should be, maybe you haven’t been in your job for two years or more, maybe you have more than 5 financed rental properties, maybe you’re a student, and the list goes one. Chances are, if you have been denied by a single bank that intends to sell your loan to Fannie and Freddie, then you will get denied by ALL the banks that intend to sell your loan.

And that’s what bothers me. Personal relationships don’t matter and neither does your reputation. A job doesn’t matter unless you’ve had it for more than two years. That in and of itself disqualifies a huge percentage of otherwise very eligible borrowers. If you own rental properties, or should I say, if you own more rental properties than Fannie Mae and Freddie Mac deem acceptable, then you are considered a credit risk.  All that matters for most banks today is whether they will be able to sell your loan to the FEDERAL GOVERNMENT! That’s it!  They just want to get the loans off of their own books so they can originate another loan with those funds.

If you’ve been denied time and time again but believe yourself to be credit worthy, there is still hope. Non-conforming loans are not easy to find but they do exist. Smaller local banks are far more likely do issue non-conforming loans than the big dogs. Try to establish a relationship with a banker. Back in the “It’s a Wonderful Life” era, trust was the key element in a lender / borrower relationship. Today is all about the numbers. However …. you can still find pockets in the banking industry where trust is still a factor. When you approach a bank, be open about the issues that disqualify you from a conforming loan, state why those issues do not make you a credit risk, and inquire is there’s any chance of getting a portfolio loan. It’s definitely worth a shot.

Lastly, do not despair. The systematic way in which the banking industry is disqualifying worthy borrowers is simply causing more people to “opt out” of the system all together. There are other ways to buy a house than to grovel at the feet of banksters. The rise in peer-to-peer lending, land contracts, lease options, and rent-to-own contracts is an encouraging indication that an ever-increasing number of people are starting to circumvent the banking system all together.

If you have any insights on the banking system, peer-to-peer lending, or portfolio loans, please leave a comment below. Thanks.

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