Friday, June 11, 2010

Loan Quality Initiative - second credit report can derail closings

The Loan Quality Initiative is a mortgage loan quality control measure enacted on June 1 to help cut down on Fannie Mae foreclosures. In most cases the Fannie Mae Loan Quality Initiative calls for lenders to pull a borrower’s credit report a second time when closing the deal. If the borrower has applied for credit given that the mortgage loan was approved, then the resulting change could squash the deal.

Source for this article: Loan Quality Initiative – second credit report can derail closings

The Fannie Mae Loan Quality Initiative

Fannie Mae’s Loan Quality Initiative means lenders can be checking up on all of the mortgage borrowers until the day they close. Individuals who make an effort to extend their credit to get a new washer-dryer or furniture for their new home could possibly be in for a rude surprise.

Lou Barnes, a mortgage banker in Boulder, Colo., told smartmoney.com that the initiative will probably "blow up an unknown number of closings because of mistaken or ambiguous findings in new credit reports."

Debt-to-income ratio is the key

It was reported by Smartmoney.com that applying for credit of any type between the date of the loan approval and closing could snag the deal. The new lines of credit could affect the borrower’s debt-to-income ratio – which is the percentage of monthly gross income used to pay monthly debts is a primary tool lenders use to determine loan eligibility. Additional debt could very well push the borrower over Fannie Mae’s debt-to-income ratio threshold of 45 percent.

Control on mortgage loan quality

Boston.com reports that numerous lenders already pull second credit reports right before the closing, but the Fannie Mae Loan Quality Initiative makes this mandatory for all mortgage lenders who sell their loans to Fannie Mae. New loan quality control measures require lenders not only to pull two credit reports for each mortgage transaction but to perform additional verifications of a borrower’s plans for the property, plus Social Security numbers and Individual Taxpayer Identification Numbers, among other changes. These last minute credit checks could result in a closing delay, pricing adjustment or, at worst, loan approval cancellation.

How it is possible to hurt a second credit report

Lenders can verify nevertheless they want with the Loan Quality Initiative. But mortgage blogger Bob Phillips reports that most will pull one more credit report just prior to closing. Even following the loan has been approved, underwriters could be looking for 3 things:

  1. The credit card will show minimum monthly payments. Those numbers will replace the original numbers made at the time of application. If the numbers exceed Fannie Mae's threshold, the loan will likely be denied.
  2. The updated credit score. If the FICO has dropped below lending standards, the loan can be denied, or be subject to a new loan-level pricing adjustment. Loan level pricing adjustments are loan fee based on the credit score.
  3. The credit inquiry section of the credit report. They want to make certain no credit is being borrowed anywhere else. Underwriters can use this data at their discretion.

Foreclosures for Fannie Mae overwhelming

The Loan Quality Initiative is an try by Fannie Mae to stem the tide of foreclosures overwhelming. Fannie Mae reported an $11.5 billion loss in the first quarter of 2010. $8.4 billion was asked by Fannie Mae to be given by the US Treasury to keep them afloat. Fannie Mae and Freddie Mac own or guarantee more than 50 percent of mortgages in the United States. Mortgage foreclosure statistics reached an all-time high in the first quarter of 2010. The combined share of foreclosures and mortgage delinquencies was around 14 percent, or about one in each and every seven U.S. mortgages. Mortgage foreclosure statistics are expected to peak with a lot more than 2 million borrowers losing their homes.

Additional data at these websites

Smartmoney.com
smartmoney.com/Personal-Finance/Real-Estate/borrowers-beware-the-second-credit-report/
Boston.com
boston.com/realestate/news/blogs/renow/2010/05/fannie_maes_loa.html
Bob Phillips
southorangecounty.wordpress.com/2010/06/08/fannie-mae-loan-quality-initiative/



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