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Yikes! Fannie Mae is Cracking Down!

There are some new rules going into effect shortly that will have an enormous effect on some mortgage transactions. Here's the biggest one:

Effective for all loan applications dated June 1, 2010 and later, Fannie Mae is "requiring lenders to determine that all debts of the borrower incurred or closed up to and concurrent with the closing of the subject mortgage are disclosed on the final loan application and included in the qualification for the subject mortgage loan."

Here's what it means. If a borrower opens a new account or increases the balance on an existing account between the time of application and the closing, the new debt has to be included. The best case is that the closing gets delayed. The worst case is that the borrower no longer qualifies for the loan and the deal is dead.

Fannie Mae provides the following "tips for lenders to consider" when attempting to find undisclosed liabilities. That's Fannie Mae Speak for "Do these things or else!"

- Refreshing a credit report just prior to closing may uncover additional debt or credit inquiries.

- Credit inquiries found on the credit report should be investigated to determine whether the borrower did in fact open additional debt resulting in repayment obligations. In some cases, it is possible to obtain a direct verification with the creditor associated with the inquiry.

- Fraud-detection tools are available through multiple vendors that assist lenders in identifying undisclosed mortgages or other potentially fraudulent scenarios.

Fannie Mae is not requiring these things until June 1, but lenders are allowed to implement them earlier. Many lenders probably will.

Be prepared! The mortgage industry has changed and continues to change. Being in the industry for 20 years means nothing if you don't stay up to date with all the changes. If your current lender has not already told you about these new rules, ask him why he hasn't. Maybe it's time to change lenders.

Posted by Chris Thomas on 03/04/2010 05:33 PM

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81 Comments on Yikes! Fannie Mae is Cracking Down!

MAR

2010

So the question is will the underwriter do some of these checks? Will he/she go back and call the creditors listed as "inquiries"? Also, you know that no creditor will simply give that information over the phone. I also do not think mortgage professionals are going to run credit reports one week before closing to verify whether there is additional debt.

I think the best you will get is a letter to the borrower during application that states they cannot apply for any new credit before the loan closes or they risk having the lender deny and/or rescind the loan commitment.

This is insanity

Another day, another rule...

Thanks for the update!

Add to this eventual rate increases and it appears the latter half of 2010 is gonna be alota fun !!!!!!!

Worst closing ever; buyer shows up to drop off his stips, in a brand new BMW w/ a $600 payment, 4 days before closing. After I spent 15 minutes explaining to him what "no new debts until after the loan closes" meant, some of it screamed, then my manager spent 10 minutes explaining how that extra payment would effect his DTI, which was already stretched thin.

Then, back at my desk, I'm on the phone disclosing new information to our account rep, on the loan, and she started screaming at me, about managing the process, informing borrowers, etc. Then my line starts ringing, UW calling, and they inform me that they repulled the credit report, and Joe Buyer has a new credit line for a $50,000 BMW, with a $600 payment.

I heard Fannie Mae is going to take a DNA test of each applicant before they fund too!

I love this stuff... thanks for sharing... but if I hadnt have already told my clients this news they would have been better of using you!... so thanks for the reminder (:

Two things:

"Being in the industry for 20 years means nothing if you don't stay up to date with all the changes" GREAT statement.
"If your current lender has not already told you about these new rules, ask him why he hasn't. Maybe it's time to change lenders." I don't agree. I'm all for communication - but a Realtor changing lenders because their loan officer didn't tell them about something that is roughly 3 months away? That is a little excessive. It is not like the impact of FHA condo spot approvals, or the 620 FICO guideline.

Thanks for bringing this to our attention. Another nice blow to home buyer of America!

I've always told buyers not to decorate the home or the driveway until they have keys in hand. I don't see this as a negative toward homebuyers, it's more a level of responsibility and accountability -- and in this economic climate, maybe we need it.

It challenging finding a lender that is up to date on all the issues, the other day I was talking to a lender and naturally he said that he could work miracle, and I ask about the Fannie Mae Homepath program, he was not aware of and was going to look into it.

Maybe its something they should have been doing all along?

Of course they'll run a new credit report just before closing...that's already been happening.

What I want to know is how a guy gets a $50K BMW for $600 a month? I have excellent credit and paid $780 a month for mine.

I am glad that I did not renew my mortgage license this year. Happy to be just a real estate professional

I don't see this as a huge negative at all....in fact, I already thought this was in place. I've always told my clients to not get any new toys that aren't paid for in cash until AFTER the closing. This could affect their borrowing power. I don't see the big "hoopla" over this. Maybe I"m missing something?

Despite discussing this kind of thing in advance, have you had a buyer call a couple of days before closing with news: "You need to come see my new car!"? I assume that everything is subject to eleventh-hour reverification these days. Certainly, opening new lines of credit is an issue. I have even had lenders that re-ran employment verifications after closing and before funding. Leave nothing to chance these days, and be as blunt as necessary with buyer-clients to avoid surprises and failed closings.

I am not surprised, and I think it is a pretty good idea. Lenders have been checking, at the 11th hour, people's employment, so why not credit, etc. Yep, I bet it WILL be an issue for some folks, but hopefully buyers will not do anything during that time that will show up and cause a delay. Of course if MY buyers get into trouble with this I will not be so sympathetic. LOL

Jeff

This is a conversation I always have with my buyers. I am with Gregory on this, should have been doing it all along. Maybe we wouldn't be in the economic mess that we are in.

Chris...

It's getting harder and harder for lenders, but BORROWERS need to be aware that they should not incur more debt even AFTER the house closes, as it will affect their ability to pay the mortgage.

Aside from running a new credit report, I've always been under the impression that buyers might be checked out just before closing to be sure they haven't incurred any new debt...

Chris,

Well, this one actually makes sense. If a borrower qualifies and then adds debt, they may not qualify any longer. I approve of this one! We don't need people in homes and in mortgages that cannot pay for their home.

I don't think this is anything new. I have always told buyers not to buy anything new (furniture, cars, etc.) until after closing. Then I don't care what they buy. I have had lenders over the years and recently run a credit report right before closing.

I thought this was already being done. A couple of years ago another agent in our office had a closing fall through because the buyer went out and bought a new car right before closing. I always counsel my buyers (in very strong language) to not purchase anything on credit until after the closing.

wow...im glad i already give my buyers the advice not to apply for any new credit while searching for their home and up until AFTER they close on their house. this has been my practice since i started selling real estate and i also counsel them to keep their credit clean after purchasing not to go furniture wild and wrack up a bunch of debt furnishing their home. i tell them to keep in mind that they never know when they will need to refinance or anything for that matter....they are cracking down but it's not really so bad. if we ALL do good jobs in keeping our clients in line and stress stress stress the importance of keeping their credit in line, this new guidline won't hurt much. so far i haven't had anybody ignore my advice..probably because i make sure to reinforce it numerous times with my clients.

I've been practicing for 11 years, and I've always instructed my clients NOT to change: jobs, banks, open up credit, etc. I've know how the income-to-debt ratios can change. This isn't anything new.

I have been getting the stips to explain all credit inquiries for at least 1 year now for FHA loans, and since 2009 for all loans.

Thanks for sharing this information with us. I wish they'd done this cracking down 5 years ago.

Now we also get to be mind readers. Thanks for the post

Tony

Thanks for the update Chris!

Glad to see there is job security for the feds!

By the time this all ends there will only be about 10 people in the entire US who will qualify to buy a home.

This post deals with just one of the many changes that are to come. As others have said, if some of these policies were in effect in the past, perhaps we wouldn't have quite the mess we have right now.

Chris

Actually this isnothing new. Lenders have been running back-up credit on a case by case basis for quite a while. That said, I am sure they will obviously use more due diligence down the road.

Just another hurdle we lenders and Realtors will have to deal with in the future.

Communicating with the borrower will be even more critical from this point.

Thanks for the post.

Hi Chris-

I am truly with both you and Richard on this one. We can't control the lending industry, but personal behavior is another story...

--Sara in San Antonio

I had not heard this yet. I'm glad you thought to share in the blog post!

Just signed contracts with my buyers today. Last thing I told them was not to open or close any credit lines!

We've pretty much have been doing this for a couple of years now. I only had to turn down one person and that's because they decided to buy a $45k car in the loan process. It was only a refi and not a purchase transaction. It all goes back to taking a good loan application and listening to the client to see if any red flags pop up.

So many changes! Why can they not get it right and leave it alone? I guess it is government.

Chris- Buyers should not be getting themselves into debt with new credit cards before buying a home anyways. Also, people need to stop living so much on credit. Pay as you go is the healthy option. The only things we should go into debt for is college, a home and a car if you need a car to get to work.

Ever changing landscape, I dont know how lenders deal with all this.

This is certainly the time for more financial responsibility!

This is really scary. More than the potential of new debt and not qualifying, we can educate our clients not to purchase new stuff on credit and not to open new accounts. The problem is that we may be forced to pull a new credit report within a week of closing to prove that no new credit was incurred and what happens if the score drops? Our client may not qualify for a mortgage anymore, Or his rate can go up or it may cost extra up front points. As the mortgage lender I am not allowed to change the Good Faith Estimate to reflect additional fees. Would this qualify as a "changed circumstance" or would I have to eat the cost since I wouldn"t be allowed to pass in to the applicant. So confusing!!

Thank you for this post!!

FANNIE MAE... Closing the barn door after the animals have escaped.... or as Grampa Simpon would say "tooooo Late".

This goes in line with what should have been done all along. Buyers are told not to have their credit checked or inquire new debt. Some did this anyway and kinda slipped through the cracks. This sounds like a new checks and balance for them.

This could make a huge difference to many borrowers who make changes just before the loan is made. It's why we've always told people not to change anything prior to the close of the loan, like buy a car, quit a job, get new cards, etc.

Hi Chris,

Thanks for the heads up, I'll be sharing this with the agents in my office.

For some reason I believe that they should not have been so lenient to start off. If someone does not have any skin in the game there not as much motivation as someone who has more skin in the game. It should never had been made so easy to buy.

MAR

2010

So I pull credit and get my fannie mae DO findings based on that report, underwrite the loan on that report, price the loan on those scores, lock the loan on those scores, excersize a binding lock in agreement on those scores, issue a biniding good faith on those scores and dare to pull another? Forget that. Under that model, I could find myself buying my customers their loans for them. Forget Fannie.

Freddie Mac all day, baby!

Just had a loan ready to close, and the lender did pull a new credit report - alas, a medical bill was filed against them 3 days before - luckily, the buyers had the $3,000 to pay it off, the loan officer got a statement from the credit bureau showing it paid, it held it up for about a week, closing in a couple of days, late, with the bank (REO) charging $50 per diem.

It happens all the time, more lately.

"Now remember, it's very important that you not create any new debt before the closing. No furniture, no new car, no credit card. NOTHING. Don't even think about filling out a credit application until after the closing. Lenders will pull credit at the very last minute." This is something that I repeat often and can't do it often enough. So, like most of the commenters here, we're already on it.

Attn all home-buyers! Don't do anything until you get the home. Well..that's what I've been telling them since I got into the business. Nothing new. Don't apply for any credit, buy a car, charge anything until the house is yours.

Then when you take posession, have fun! Charge away and buy a hundred cars in one day! Ha!

If the buyer isn't smart enough to listen and NOT make purchases prior to the closing then they probably won't be too worried about making their mortgage payments! I have seen people inherit property mortgage free to use it as an ATM and then have an issue when they get foreclosed on! Only in America!

It's really always been this way. There is verification and re-verification going on throughout the whole loan process. And I sure hope the people who insist on doing this don't become the very ones who blame the "big bad lenders", or the realtors, or whoever is on hand that day when they lose their home to foreclosure.

I drill it into my buyer's heads not to change their credit situation. Don't open or close accounts. Don't fall for the "get 20% off your purchase if you open an account" ploy.

Before, you could get everything with nothing. Now, you can't can something with everything.

Is it so difficult to have a middle?

Soon or later, no more loan of any kind for FICO of 830 or less....

Chris.. I knew therer were going to be more changes and stricter rules to follow.. which will make it *So* much fun. :( Will the possible borrowers need to pee into a cup next to make sure they are not on drugs? Enough is enough.

valerie osterhoudt

Chris....thanks for the information.....we need all the help we can get right now trying to understand all the changes taking place. Hope you have a great day!

It seems to make sense. I would not call this a bad thing. If a marginal buyer buys a car two weeks before a closing with a high payment, the buyers qualifications have definitely changed.

I really don't see nothing new here. At every closing I go to the buyer has to resign the original loan application and sign something saying that no material changes have occured to his finanacial situation. Many times they check employment a day before closing also. It's just good common sense to verify these things.

Chris,

Good point to share. It really is critical for buyers to have their ducks in a row and change nothing until after the property closes.

In years past, we moved up a closing so that a buyer could quit her job after the closing. She was employed at the closing, but not 2 hours later. I was representing the seller and to be fair, she was just taking a new promotion at another company, but didn't want to rock the boat for the mortgage application.

All the best, Michelle

It's always been common sense not to incur new debt in the home buying process. I've seen people tank their home purchase because they decided to get a new car. Foolish.

I too do not find this surprising. It just seems like common sense to me.

"Being in the industry for 20 years means nothing if you don't stay up to date with all the changes."

Being in the industry for 20 years means nothing if you haven't done a loan in the last 30 days.

I've been seeing explanations for inquiries being required for quite some time now.

Thanks for the heads up. I tell all of my clients that they are financially frozen until the closing takes place. No new credit!

The key is to stay up to date with what is going on. As far as switching lenders if they haven't informed the Realtor of upcoming changes, why? That logic makes no sense. This is just a check and balance being reinforced by Fannie Mae. Think about the guideline, is it really a change? Haven't we always had to address inquires and document that no new debt has accrued? Haven't lenders pulled new credit from time to time prior to closing or not allowed you to use your report? Seems like we will just be held accountable for things that we were expected to address previously. Educate your customer in the beginning. Develop a list of "do's" and "don'ts".

Thanks for sharing.

Thanks for writing this blog. While I always urge buyers to not buy anything between contract and close....it is nice to show reference to someone esle saying it. I re-blogged.

Chris,

Thanks for the information, however a real estate agent should always inform their borrower that once application has been filed and approval made not to increase credit limits, apply for any other type of credit or change jobs. After all, most borrowers are basing their ability to repay on their current situation so changing anything just makes no sense.

Even after closing changes to their credit can drastically affect their ability to repay.

I learned the hard way back in 1990 about not buying anything before closing that beats you to the courthouse. This is nothing new, but it is a great reminder and a cautionary tale. The no brainer home loan era is truly dead.

Thank you for the update. Things continually change, and we need to keep up with them.

This will NEVER work. It is completely understandable for NEW accounts. However, balances change daily. Plus, if you order a report, then most likely, there will be creditors that have not reported yet. So, if a closing gets delayed 3 weeks, will the lender need to run another credit check? If so, if the balances change again, does the cycle start over? Or, if a borrower's credit score was just above qualifying, and the new report shows them one point below, does that disqualify them for a loan or change their rate? Granted, this is for extreme balance increases, hopefully. Hmmm.

Thanks for the great post.

Hi All,

Very interesting to read everyone's comments. It looks like there are a few distinct themes:

"I already do this, so it's no big deal."
"It's about time they started being sensible about underwriting."
"This is just one more thing they're doing to kill the industry."
"Not being kept up to date by my lender is no reason to change lenders."
"Thanks, I didn't know this."

Here are my very jaded responses:

I don't think too many people really are pulling a new report right before the closing and including the new minimum payments on the loan application, despite what they may say. Pulling a new report is one thing. Re-doing the loan application is an entirely different thing. The new guidelines say the application must be re-done. This is going to be a problem. I'm not saying it's a bad thing, but it will be a problem, and I think in many more instances than most people think.
This is the strategic view. It might hurt now, but it will help us all in the long-term. Couldn't agree more.
All the new regulations are meant to improve the industry, not to kill it. A decade of excess is finally being brought under control.
I hope your lender is paying for a lot of your marketing because if they don't tell you about what is coming down the pike, they are certainly short changing you when it comes to looking out for your long-term business health.
You're welcome!

The purpose of the original post was to make people aware of the fact that there is a different attitude in the lending industry these days. Common sense is coming back. Unscrupulous lenders will be driven from the marketplace. Real estate agents who insist on believing the glory days of sub-prime will return in their professional lifetimes are kidding themselves.

I couldn't be happier about these changes (and they are indeed changes, opinions notwithstanding). Our country is in a very deep mess and the people who put it there are the loan sales people (retail and wholesale) who sold crappy loans, the agents who used the lying lenders, appraisers and inspectors, and the borrowers who believed anything we told them. We are in for a very painful few years. Regardless of what the NAR tells us, this mess is going to last for quite a while. Be ethical and learn your job and you will weather the storm very easily. Be self-serving, and you might not make it.

Thos eare some great ideas. The undiclosed debts can really kill a deal. I'm going to forward this post to my loan officer!

While I see the merit of making sure that the borrower still qualifies, any last minute disruptions of the closing reflect negatively on the mortgage broker. I advise my client not to do anything that would change their credit profile but the concepts of "significant" and "material" are lost on some of the underwriters. The dates of the initial and final credit report could affect balances and minimum payments. Certainly an auto purchase/payment is both significant and material but I am afraid that some underwriters will feel the need to ask for an explanation of any line item that increases even if the resulting ratio still fits within the guidelines. If they want another cushion, build it into the automated underwriting system and better define what is a significant change in the credit profile.

Too much time is being spent on trying to score another "Gotcha!"

Have a great day!

very interesting changes going on in the lending industry, and the reactions are just as interesting. thanks for the post

Thanks for sharing this information. I tell all my clients not to incur one dime of debt after we go under contract. If they want to buy a car, wait until the house closes. Don't buy the furniture before closing. Wait, wait, wait.

We have been doing this also. The banks have been checking for quite awhile with our customers.

I am like a lot of the others in that we always tell the customer not to do anything credit wise before closing.

Chris,

Things are a slowly tightening but it makes the mortgage industry much more stable in the long term. This should've happened a long time ago.

Chris,

I think we need to tell our clients.... "Do not spend a penny, until your loan closes! No new cars, furniture, jewelry, etc. until you walk away from the settlement table!"

Chris: Thanks for the update. Things aren't getting any easier that's for sure!

Loverly...

This will make it even more difficult for many of our buyers to get these loans that have been labeled as "ideal" for many due to the fact that they were eligible for loans.

As another reader stated, "another day, another rule"....so true indeed!!!!

MAR

2010

Thanks Chris. This is for sure going to be a fun ride!

MAR

2010

Chris, thanks for the post! Good information. I just had a buyer become unqualified a week before closing. He paid off a couple credit cards & they both pulled new reports to determine the remaining line. His score dropped 8 points below eligibility. Wow!

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Chris Thomas

Denver, CO

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