The Loan Quality Initiative is a mortgage loan quality control measure that was enacted June 1 to cut down on Fannie Mae foreclosures. In most cases the Fannie Mae Loan Quality Initiative needs lenders to pull a borrower’s credit report a second time at closing. If the borrower has applied for credit given that the mortgage loan was approved, the resulting change debt-to-income ratio could totally stop the deal.
The initiative for the Fannie Mae Loan Quality
Fannie Mae’s Loan Quality Initiative means lenders will be checking up on mortgage borrowers until the day they close. Individuals who extend their credit to buy a new washer-dryer or furniture could 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.”
The big key is debt to income ratio
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 might just the borrower over Fannie Mae’s debt-to-income ratio threshold of 45 percent.
Control on mortgage loan quality
As outlined by Boston.com, many 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 are going to 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 a second credit report can hurt
The Loan Quality Initiative lets lenders verify however they want. But mortgage blogger Bob Phillips reports that most will pull an additional credit report just prior to closing. Underwriters can be looking for these things:
- The credit card will show minimum monthly payments. Those numbers could be replacing all of the original numbers. The loan could be denied if the debt exceeds Fannie Mae’s threshold.
- Updated the credit score. If the FICO has dropped below minimum lending standards, the loan denied. Loan level pricing adjustments are mandatory loan fee depending on the credit score.
- The credit inquiry section of the credit report. They’re trying to see if credit is being applied for elsewhere. This details can be used by underwriters however they want.
Overwhelming Fannie Mae foreclosures
The Loan Quality Initiative is a huge try by Fannie Mae to stem the tide of foreclosures overwhelming the nation’s largest mortgage buyer. Within the first quarter of 2010, Fannie Mae reported $11.5 billion in losses. In May, Fannie Mae asked the U.S. Treasury for an infusion of $8.4 billion to stay afloat. Fannie Mae and its sibling Freddie Mac own or guarantee a lot 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 seven U.S. mortgages. Mortgage foreclosure statistics are expected to peak this year with a lot more than 2 million borrowers losing their homes.
Read a lot more on this topic here
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/
