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Wednesday, July 6, 2011

Why loans are now FULL Documentation with NO exceptions

"I have NEVER been under the microscope in ANY of my other mortgage loan applications like I have been this time!", said my "perfect" (they really were a perfect borrower) investment property borrowers after visiting with them about some underwriting conditions in my office the other day. 

Many things have changed in the mortgage lending world over the past 3 years; some occurred subtly and other suddenly.

Why are ALL loans now so accurately and completely documented?  This is the subject of my Blog post today.

EVEN PERFECT borrowers with walking on water credit scores, several retirements worth of reserve income on deposit, and no obvious reason for concern regarding their ability to repay the mortgage debt are paying the price of Mortgage regulation. 

WHY all the scrutiny? 

Why do loans need to be FULLY Documented with NO Exceptions?

Here's the short list?
  • Initial Loan Application Accuracy
If the initial loan application isn't complete and if there are too many changes from the initial application to the final application the loan is UNSALABLE in the secondary market.  Banks have the lowest deposit to loan ratio in 16 years.  Do they want to service a loan for 30 years or sell it on the secondary market?  They want to sell it!   COMPLETE loan application information with ALL the blanks filled in with correct, accurate, verified information is necessary!
  • NEW Mortgage Lending Laws since 2008  
What if the loan successfully closes and is delivered to the secondary market BUT because we have new laws over the past 3 years that govern everything from the application to the appraisal, otherwise know collectively as GFE / TIL / MDIA / DODD-FRANK the loan could potentially be unsalable in the secondary market.   Auditing refinements and additional technology support will make these rules and regulations even more fundamental to the definition of file quality.  More  regulations are to come. Savvy attorneys will make the financial risks of file error greater than ever; downstream investors will not want to hold this risk - which means faulty files will be pushed back as repurchases without question. 

  • EASE of information gathering (in quality control from Underwriting to pre-investor purchase to post investor purchase) NOW requires the information to be as accurate as ever!
Documentation requirements have clearly gone overboard, but I don't suspect we will return to days of old.
  • Need for appraisal quality
    The upcoming appraisal changes are the next step on the continuum of technological advances in our business.  I have 3 files in process which required-for different reasons-a 2nd appraisal, which in turn necessitated  more processing time, more expense to the lender (the cost of the additional appraisal can't be charged to the borrower if not disclosed on the initial Good Faith Estimate), and delayed closing times.  The present appraisal rules are just another beginning to more changes.