Chance Gates' Blog

By Jim Dinkel and Ken Trepeta

RISMEDIA, August 9, 2010—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 three 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 an 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.

As a Reno/Sparks real estate professional, I encourage all questions and comments on the Reno/Sparks real estate market or any of the articles posted in this blog.  You can email me @  chance at ballard-company.com or http://www.myspace.com/chancegates

RISMEDIA, July 19, 2010—“Homeowners and buyers who are sitting on the sidelines should get moving today, unless they want to get blindsided by the impact of a new law,” said Gibran Nicholas, Chairman of the CMPS Institute, an organization that trains and certifies mortgage bankers and brokers. “The massive financial reform law that just passed Congress has two main components that could very negatively impact homeowners and home buyers in the future.”

Harder to qualify for a mortgage
“The new law dictates certain guidelines that lenders must follow when making loans,” Nicholas said. “Some of these guidelines are simply a copy of the current situation. However, now that the guidelines are built into law, lenders will find it even more difficult to loosen their guidelines once the economy and housing market improves.” For example, consider a business owner with a very high 750 credit score, plenty of equity in their home, no history of late payments, and plenty of cash in the bank. If this responsible homeowner experienced a loss in their business last year, they may be prevented from qualifying for a home mortgage under the new law because of the temporary decline in income from their business. The new law requires lenders to document a borrower’s income, but it does not specifically state the terms under which loans can be made. “Regulators may address this ambiguity when writing the regulations implementing the law,” Nicholas said. “However, if they don’t, many lenders will be tempted to tighten their guidelines even further in order to err on the side of caution and stay in compliance with the new law.”

Higher mortgage rates
“There are two sections of the law that will cause mortgage rates to increase in the future,” Nicholas said. “The new law requires lenders to keep a 5% stake in the mortgages they originate unless the loans meet a certain criteria. This means that lenders won’t be able to offload some of the higher risk associated with these loans, and interest rates on these types of loans will go up.” For example, homeowners who have had financial or credit challenges due to divorce or bankruptcy, business owners with fluctuating income, and other homeowners and buyers who fall “outside the box” may need to pay higher rates on their home loans in the future. “Also, the future of Fannie Mae and Freddie Mac remains uncertain,” Nicholas said. “The market doesn’t like uncertainty, and mortgage rates could go a lot higher in the future depending on when and how the issue of Fannie and Freddie is resolved.”

“To be clear, there are a few positive elements to the bill,” Nicholas said. “These include consumer protections involving pre-payment penalties and loans originated in states that have laws that prohibit lenders from pursuing judgments against homeowners who owe more than the value of their homes. However, the main takeaway for homeowners and buyers is that mortgage rates are currently very low, and lending guidelines are not as bad as they could be once the new law goes into effect. This means that if you can qualify for a mortgage now, you should do so, and not gamble your homeownership goals on the future impact of the new law.”

For more information, visit www.cmpsinstitute.org.

As a Reno/Sparks real estate professional, I encourage all questions and comments on the Reno/Sparks real estate market or any of the articles posted in this blog.  You can email me @  chance at ballard-company.com or http://www.myspace.com/chancegates