November 12th, 2010 8:42 AM by Lehel S.
THE final weeks before a mortgage closing can be nerve-racking for any borrower, but new guidelines from Fannie Mae calling for an 11th-hour inspection of finances may mean even more headaches.
These new quality-control guidelines were rolled out this summer and call for a second credit review. They are designed to ferret out borrowers who, in the weeks between applying for a mortgage or refinancing and closing on it, might have changed jobs, taken out additional consumer loans or fallen behind on monthly bills. Such activities could affect their credit rating — and delay or torpedo a new loan.
Even having an informal credit inquiry before the purchase of a big-ticket item like a washer and dryer could affect the closing, or prompt the mortgage lender to change the loan terms.
Freddie Mac has similar new guidelines for lenders that go into effect in February.
“We’ve heard of many instances of a loan not closing or of having to be reunderwritten,” said Karen Deis, a real estate agent and mortgage broker in Hudson, Wis., who publishesLoan Officer Magazine, a trade publication.
Lenders have yet to assess how the new requirement might financially affect borrowers, who so far have not been hit with extra fees, Ms. Deis said. But she added that they could eventually face “processing” fees of hundreds of dollars.
Fannie Mae, the largest buyer of mortgages, instituted the guidelines in part to root out a type of mortgage fraud known as “shotgunning,” in which borrowers take out multiple loans on one or more properties, unbeknownst to the lenders. They often skip town with the cash and default on the loans.
The guidelines are also designed to uncover that fresh car loan or run-up on credit-card limits, all of which would appear on a credit report, or the fact that in recent weeks you lost your job or switched employers — changes that lenders now verify through phone calls. A salary cut in those final weeks also could prompt lenders, under the guidelines, to reunderwrite a loan.
“Fannie is looking for undisclosed liabilities,” said Matthew Cammarota, the senior vice president for consumer finance operations at Webster Bank in Waterbury, Conn.
It sounds clear enough, but lenders have taken different approaches to the guidelines, with varying impact for borrowers.
In August, Fannie Mae clarified that it was not suggesting the only option for banks was a second “hard pull,” or formal, credit check, which can adversely affect credit scores, just before closing. It outlined other ways to comply, including the use of credit monitoring services.
But Terry Clemans, the executive director of the National Credit Reporting Association, a trade group based in Bloomingdale, Ill., noted that “by definition of what Fannie is trying to accomplish, a ‘hard pull’ is really the only way.”
He said many banks were opting to use credit monitoring, a “soft pull” process in which banks hire third-party vendors to put red flags on a consumer’s credit report without depressing credit scores. But the cost of credit monitoring, which could run into the hundreds of dollars, could get passed on to the borrower, Mr. Clemans said.
Other banks are asking borrowers to sign consent forms stating that their debt-to-income ratios did not increase more than 3 percent in the final weeks, and did not total more than 45 percent. Increases of more than 3 percent that still keep the ratio below 45 percent are not permitted, according to Janis Smith, a Fannie Mae spokeswoman. (The ratio used by Fannie Mae measures the percentage of a borrower’s monthly gross income that goes toward debts.)
Thomas A. Kelley, a spokesman for JPMorgan Chase, said his bank did only soft credit checks, through credit monitoring. Mark C. Rodgers, a spokesman for Citibank, said that the bank complied with Fannie Mae guidelines but that the details of how it did so were “proprietary.”