photo compliments of veggiefrog via Flickr
Effective on loan applications taken on June 1, 2010 or later, Fannie Mae is requiring lenders to confirm that undisclosed liabilities are not present prior to funding a transaction as part of their Loan Quality Initiative (LQI). Currently a credit report is pulled and is valid for a specific amount of time–as long as the transaction closes prior to the expiration of the credit report, it typically is not repulled. Fannie Mae is now requiring the lender to make sure that there is no new or undisclosed credit at closing. Relying on the original credit report pulled at application is no longer good enough.
Fannie Mae’s FAQs suggest these tips for lenders to help confirm there are no undisclosed liabilities:
- Retrieving a refreshed credit report just prior to the closing date and reviewing it for additional credit lines.
- Utilizing new vendor services to provide borrower credit report monitoring services between the time of loan application and closing.
- Direct verification with a creditor that is listed on the credit report under recent inquiries to determine whether a prospective borrower did in fact obtain credit or enter into a financial arrangement that is not disclosed on the loan application.
- Running a Mortgage Electronic Registration System (MERS) report to determine if the borrower has another mortgage that is being established simultaneously.
This means days before funding a Fannie Mae loan, the transactions are subject to being re-underwritten and if the borrower is “borderline” (which is a 620 mid-credit score in today’s climate and/or higher debt-to-income ratio) or decides to purchase their appliances for their new home before closing…they could potentially “kill” their deal and find themselves being “unapproved”.
Fannie Mae states that loans should be resubmitted to underwriting if:
- additional debts have been incurred which would increase the debt-to-income ratios
- if new derogatory information is detected
- if the credit score has materially changed
Borrowers should understand that the loan application is intended to represent their financial scenario and whenever (even before LQI) changes are made to their application, their mortgage originator needs to know. This is not new. When changes occur and a borrower is aware (such as taking on more debt or changing their employment) and they hope they “won’t get caught” before closing, they’re committing fraud. This is what Fannie Mae is trying to prevent with LQI.
Borrowers with conventional financing need to be extra mindful of LQI. Using a credit card to fill your SUV full of gas could potentially ding your score if you’ve carry a balance of 30% or more of the available credit limit. Even closing a credit card during or just before a transaction could drop your score low enough to where the lender may have to reconsider your loan approval AT CLOSING.
For mortgage companies and banks (anyone who sells loans to Fannie Mae) it boils down to having to refresh, repull or face re-purchasing the loan if changes to the credit report are found between application and funding. Fannie Mae is not specifically requiring credit reports be repulled prior to funding–they are holding the lender responsible for changes if they don’t.
Borrowers, real estate agents and originators need to be prepared for potential delays in closing, repricing of their mortgage loan (which would trigger another delay due to MDIA) or the loan potentially being denied. It’s more important than ever that borrowers work closely with a qualified mortgage professional who can help guide them through the process.
I wish I could find a very old picture of me holding a phone with a cord and typing on a typewriter from the late 1980s to match Ardell’s pic because what’s old is new again. We use to do this in the way back days, Rhonda.
In a way it’s kind of stupid because as soon as the transaction closes, the new homebuyer goes out and charges up their credit cards purchasing furniture, a lawnmower, and other things they didn’t realize they’d need before the home purchase.
I’m waiting for front and back end ratios to rewind down some more.
Exactly, Jillayne…this does not stop the borrower who’s going to wind up in trouble regardless…the one who’s going to buy a big SUV for their new garage with a huge flat screen TV for their new home when they were pushing their ratios anyhow.
The rate our government is going, I’m confident they’ll have consumer spending reform soon which will help fix this.
I’m sorry this is all seeming very normal. In the 1980s I had deals fall apart because a guy bought a truck “to haul stuff.” It was always a guy, always a squeaky guy.
Another one was the multi property owner, or person with his name, this time not always a guy, on multi properties that they failed to mention. A childhood friend of mine had title to over 200 properties, and was caught in a mortgage loan application.
What I’m responding to is the Loan Quality Initiative. The quality of today’s loans is extremely questionable. Any one dealing with loans on the secondary market has to know that the loan is as worthless as the paper it is printed on.
As I understand it lenders are backing away from mortgages. The government is the primary lender in today’s market place. God bless them for helping more people get involved with unsecured debt, but there is a time to just say no.
Mortgages were meant to be secured loans. We have an entire, important, segment of our economy based on that. When the security of those loans is questionable a huge segment of our economy is wiped out.
So, for me, all of these new regulations are supposed to calm the secondary market. It seems many people are confused, duped, or oblivious about this, but the price of housing, and property is declining.
I can’t remember a time when this happened for real. I mean the price of housing and property declining for real, by 20%, 30%, 40%….
David said: “I can’t remember a time when this happened for real. I mean the price of housing and property declining for real, by 20%, 30%, 40%….”
I can. 1989 to 1991. up to 50% drops after a steady and much higher increase. Basically went up 100% or more and then corrected back to half or nearly half that. (NJ/PA)
If home prices doubled and then came back down 25% as a correction phase…they still went up 75% in a short period. That is pretty much the case in areas that had the highest appreciation in a short time.
Once again the WordPress system wouldn’t let me post my comment. So what I did is save the comment to Word and submitted in two separate comments. After that the system seems to allow my comments, but I’m thinking other people may not have the patience.
As a contained market, yes, there have been severe flutuations, but not nationally, and globally.
David,
Look at these headlines from the “80s bubble”. Look familiar? Especially 1990 “Bank Failures and Foreclosure”. To me this is all Deja Vu.
http://njrereport.com/80sbubble.htm
By 1998 the previous prices were back…and went up from there.
I’ll bring the message over here. This is absolutely nothing like the 1970s or 1980s.
Number one it’s global. Our banking system, our way of doing business, was exported globally. During this process Europe formed an Economic Community, that actually issued a new currency, the Euro.
The Euro started at eighty cents on the dollars, and is now, with all of the devaluing of the currency, at a dollar twenty cents to the dollar.
Here in the United States the price of Real Estate, that mortgages were based on, was over actual value. The value of Real Estate is based on sound economic principles. Banks know that. Here, In the United States, the price of property went way up, as much as 17% per year. In Europe, it went up faster, and higher. In economies, such as in South America, prices doubled with new availability of mortgage loans.
Now that banks are having to reconcile some bookkeeping, governments are having a hard time floating economies. http://money.cnn.com/2010/06/04/markets/thebuzz/index.htm
As the European Economic Community unravels all economies will find it hard to get funding. China, who holds United States debt, may be caught up in the economic down turn.
The country that will weather this storm the best will be where it all began, here in the United States.
Real Estate pricing will return to 1998 prices at best, and possibly below. We lost all of the economic momentum that would have appreciated the value of properties, so I don’t see how we will be getting that back. I also don’t ever see a repeat of 17% property appreciation without hyper inflation.
The hyper inflation aspect of the economy was what I actually expected. I thought George Bush the Second had so badly damaged the American economy that we would just inflate our way out of that mess with wild inflationary activity. It certainly seemed that way with oil hitting $140 per barrel.
What I never saw was the pricing of Real Estate in Europe until I went with my family back to Barcelona Spain. It’s where I always expected to retire. My children were both born there. Condos I looked at for $30K in 1996 were $180K in 2008. Help me with the math on that.
OK, all of that brings us back to the income that the American worker can expect. It will take at least a decade to unwind the global economy. Workers in the United States will be competing for jobs globally. The securities held by American Corporations will be severally devalued, no more bonuses. That will put greater downward pressure on the price of Housing Units, and commercial properties.
Anyway, that’s it in a nut shell. This is severally different than a Savings, and Loan scandal.
In the 80s they blamed it on the appraisers and over-appraising. Sound familiar? Then they revamped the whole Appraisal Industry as a safeguard…sound familiar. They they said there would only be 3 banks left when all was said and done…
There’s a lot of similarity, David.
You said: “The price of Real Estate will be tied to what people can afford.
You are completely ignoring the global aspects of the problems we have today.
Yes, the government is trying desperately to reenact the same tired policies that they thought worked in the 1980s. You are of course also ignoring that the price increases of that era were tied to inflation, but the results this time will be very different.
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I have always joked with clients that now is not the right time to buy matching BMWs. It is meant to be funny, yet intended to drive home a serious point. It was worthy of a post about the need for home buyers to restrain themselves.
But now I am also warning people not to open any credit even at IKEA for fear that their ratios will get screwed up and they will default on their contract. In our real estate contract in Northern Virginia, if you do something like add credit lines and you can’t get get financing and fail to close (settle) then you are in default of the contract.
Your post is an excellent warning to real estate agents to have “the talk” with their clients!
Do you run that risk in Seattle?
that would be a better question for an agent 😉 In our area, there is a financing contingency to our purchase and sales agreeements which is 30 days unless the time period is modified on the contract.
Fannie Mae Loan Quality Initiative (LQI) is all about making the loan process more transparent and end ensuring that loans funded don’t default. Fannie Mae’s primary objective is updating the policy is to support borrowers’ ability to sustain homeownership.
This is a huge change to the process.
At our company we have taken huge steps to help educate the consumer and the Realtors regarding this process. I have produced videos to help them understand this process and not be caught off guard when a delay in closing their loan is cause by a consumer who heads out to Home Depot to purchase the new Washer/Dryer and new Refrigerator before the closing is completed.
Even if they can afford it in the debt ratios it will slow down the process because the additional QC checks at 5 days before closing (we pulled an updated soft pull credit report). This requires us as a lender to go back to the underwriter to re-qualify the borrower.
Being a mortgage originator working for a mortgage broker – I would think that is would be a huge show stopper as they can’t control the turn times at the Wholesale Investor.
But to us education is the key. We have produced Videos, Mailers and post application additional notices to our consumers regarding this topic.
Joe, have you ever worked for a mortgage broker? I don’t see how LQI will be different for a broker than a non-broker. For the record, I work for a correspondent lender so we fund from our credit line and are not depending on the wholesale lender to fund… but I’m missing your point here.
If a borrower’s credit scenario (or anything) has changed since application, the funding can be delayed or jeopardized regardless of what type of institution the mortgage originator works for.
Even thought I’m not a mortgage broker, I get really tired of other originators kicking them to the curb. I feel like I’m having to defend the little kid on the playground from all the big bullies.
Rhonda –
I agree with your point and we all understand you are not a mortgage broker. I have been a mortgage broker, Lender, wholesaler and correspondent lender and like you I am licensed. My point is that as a lender with today new regulations from Fannie Mae the process get off track at the end of the process. Thankfully I can control the process flows on my end as a lender.
For the mortgage broker this is a little bit tougher as underwriting takes way too long as it is today (biggest issue by mortgage brokers regarding wholesalers) and when it gets off track and a borrower does have new debts and it requires the loan file to go back into underwriting hopefully it will not take another week to get cleared.
Then the question comes – Who’s credit report? Mortgage Brokers copy of the credit that was originated? Or is this the lenders credit report?
As for defending the mortgage brokers I agree with you. A licensed Mortgage Originator is a license mortgage originator. Broker or Banker it should be treated the same.
I also agree with your point (in other posts) that a non-licensed mortgage banker is a problem for our industry. They should be held to the same standards.
I like it when we agree, Joe 🙂
And I agree that it is more challenging for a broker to originate — just issuing the GFE alone must be a nightmare as I’ve heard that some wholesale lenders are requiring the broker to submit it for approval.
I think the LQI is too much and B S. They require all Conventional loans that get selected for QC Audit after the loan closes to verify each borrower’s social security number- which costs $8 to $11 per one to verify – when over 99 % of them will be accurate. That is a pain and costly, Fannie Mae is up in the bad night for this.