The Secret Word is "Risk"

Ok, Maybe it is not so secret but it is a term that is the most important in our industry right now.  When it comes to making a loan the rules have changed.  In looking at the Three "C's "of Capacity( can they pay), Credit ( do they pay) and Collateral (the property) there are new rules for each. Actually, they are not new rules at all. They are old rules.

Starting with Capacity we have seen many "reduced doc" and "no doc" loans go by the way side.  In fact, in many states, including Ohio, it is illegal to make a mortgage loan without verifying the borrowers ability to pay. In some cases the automated underwriting systems from Fannie Mae and Freddie Mac will ask for only verbal verifications of employment.  We are now seeing many investors asking for pay stubs, W-2's and/or Tax returns regardless of the findings. 

Trying to cover the credit changes would possibly overload the servers.  Just know that there is true risked base pricing now.  Buyers with scores at 679 will have considerably less financing options open to them than the borrower with 680 scores.  Additionally, and this applies to all of the three "C's", most investors and the GSE's are auditing as many files as they possibly can.  Even files that are fully performing are being audited looking for "mis-representation". I am not talking about fraud but a broad definition of the term.  Credit is a major example of this "mis-representation" net. Changes in the buyers credit profile during the process can trigger buy back clauses for the lender.  What I mean is this.  Fannie Mae and Freddie Mac will allow credit reports to be good for 120 days.  So lets say 45 days after pulling the credit the loan closes and the buyer bought furniture on credit for the house during this 45 day period.  Now they do not qualify and the lender closed the loan based on the original credit report. Well, due to the language in most buy sell agreements the lender may be required to buy the loan back even if they did not know the borrower took out additional credit. Even if the borrower does still qualify and the loan is performing the lender may be required to buy the loan back because this is looked at as a "mis-representation".  In my 20 years I have always told borrowers not to take on additional credit during the process but knew that in 99% of the cases no one was going to check.  Not any more.  You will now see lenders checking credit at pre-approval, at full application, at closing and prior to sale to secondary market.  Be prepared and put your buyers on a financial diet until the loan closes.

We all know about declining markets and issues there but lenders are dealing with issues from 3 and 4 years ago on the collateral side.  It seems that one of the favorite tricks of the trade for Fannie and Freddie when it comes to "mis-representation" is to discredit the appraisal. The will audit a loan( even performing loans here too), order a desk review and ask an appraiser to recreate the appraisal.  Any comp that was not used in the original appraisal, any adjustment, any value is questioned and if the GSE's or the investor can discredit just one thing it may trigger a buy back.

 I know some of this sounds harsh but it is life in the mortgage industry right now.  Lenders are dealing with high amounts of risk even on good loans that are performing. So if your lender starts asking for additional information know that it is most probably a CYA action and does not necessarily mean there is something wrong with the file.

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