Important Changes to Mortgage Underwriting Could Affect Many Buyers
By Jim Dinkel and Ken Trepeta
The real estate industry and especially the mortgage industry have been overwhelmed with changes, regulations and consolidations recently. In the last couple of months, many transactions nationally have experienced delayed closings or worse as a result of the application of new guidelines affecting APR, Good Faith Estimates (GFE), Truth in Lending (TILA) and condo project approvals to name a few.
There is one more issue that is critical for real estate agents, loan officers, and anyone else who deals with consumers purchasing a home or obtaining a refinance. Effective with applications on or after June 1, 2010, Fannie Mae has issued new lender mandates (FNMA LL-2010-03 Loan Quality Initiative) on a national basis that if not understood properly could have devastating consequences for many buyers and sellers. We want to be certain that everyone understands the implications of the new rules and ensure that all interested parties know what they need to know to minimize negative repercussions.
The intent of this initiative is to assure that all applicant information is disclosed and is honest and accurate as of the moment of closing. Lenders will now be required to re-pull credit report information just prior to closing, re-verify employment, validate social security numbers, verify intent to occupy and verify that all parties to the transaction have been checked against the national "excluded party" list, which is managed by HUD and by the General Services Administration. Changes in any of these factors are likely to result in a re-underwrite, the need for additional documentation, or suspension of loan closing.
The most onerous of these is the credit re-pull. It is important that this is done as a "soft pull" so it does not show as an inquiry which could potentially change the borrower's credit score. Firms will, however, have to match the outstanding debts and inquiries with the report used to approve the loan. Additional credit or increased balances that change the debt-to-income ratio more than 2% (or less if it now exceeds guidelines) will require the loan to be suspended and re-submitted to underwriting.
Any additional delinquencies will result in a new, full credit re-pull and re-underwriting utilizing the new credit. Any and all inquiries from other lenders or credit suppliers must be verified by the credit bureau and certified that new debt did not occur. If new credit has been extended, the new debt must be included in the borrower's debt-to-income ratio and the loan must be re-underwritten.
Other considerations are W-2 employees that may own more than 25% of a business mandating business returns and cash flow analysis and full disclosure of child support and alimony. Changes could render the applicant unqualified or could delay the closing. As a result of TILA, GFE, and risk-based pricing changes, additional debt could result in re-pricing the loan due to a change in credit score, which even if approvable, would delay the closing 3 business days as re-disclosure would be required.
So how do we manage the new process?
Real estate agents and lenders must impress upon the applicants the need for full and honest disclosure at the time of application, during the loan process and at closing. Buyers must be cautioned against applying for new credit during the process, changing jobs (30 day pay-stub requirements are being enforced), and charging to their credit cards. It is imperative that they notify the lender if anything changes from application to closing.
We must all be aware that an applicant that signs an erroneous initial or final closing application- could be committing fraud. Lenders choosing to approve loans without the proper loan quality processes and documentation are only endangering the buyer. Any lender or real estate agent that encourages someone to falsify information could be equally responsible. It is noteworthy to mention that many loans go through immediate quality control audit post closing so this could affect highly qualified applicants as well. Identified fraud of this nature could be investigated by the FBI.
While this new policy was implemented first by Fannie Mae, it is already a mandate of all national lenders and based on experience will soon be required on every loan. It is important to keep this in mind on every deal, not just ones that may involve Fannie Mae.
Jim Dinkel is Vice President of FM Lending in Raleigh, North Carolina
Ken Trepeta is Director of Real Estate Services for the National Association of REALTORS®