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 entirely stop the deal.
The Fannie Mae Loan Quality Initiative
Fannie Mae’s Loan Quality Initiative means that all lenders will be checking up on mortgage borrowers until the day they close. People who make an effort to extend their credit to get a new washer-dryer or furniture for their new home 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.”
Key is debt to income ratio
According to Smartmoney.com, 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.
Mortgage loan quality being controlled
It was reported by Boston.com that 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 methods require all of the lenders not only to pull two credit reports for each mortgage transaction but to also 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 just result in a closing delay, pricing adjustment or, at worst, loan approval cancellation.
How a second credit report can hurt
The Loan Quality Initiative gives lenders the freedom to verify however they choose. But mortgage blogger Bob Phillips reports that most will pull another credit report just prior to closing. Underwriters can be looking for these things:
- The updated credit report will show current credit card bills and minimum monthly payments. Those numbers can be replacing all of the original numbers. The loan could be denied if the debt exceeds Fannie Mae’s threshold.
- The updated credit score. If the FICO has dropped below minimum lending standards, the loan can be denied. Loan level pricing adjustments are mandatory loan fee based on the credit score.
- The credit inquiry section of the credit report. They want to make sure no credit is being borrowed anywhere else. Underwriters use this details however they want to.
Fannie Mae foreclosures overwhelming
The Loan Quality Initiative is an try by Fannie Mae to stem the tide of foreclosures overwhelming. 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 more than 50 percent of mortgages within the United States. Mortgage foreclosure statistics reached an all-time high within the first quarter of 2010. The combined share of foreclosures and mortgage delinquencies was 14 percent, or about one in every seven U.S. mortgages. Mortgage foreclosure statistics are expected to peak this year with borrowers losing their homes each and every day.
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/
