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 requires lenders to pull a borrower’s credit report a second time when closing the deal. If the borrower has applied for credit since the mortgage loan was approved, the resulting change within the debt-to-income ratio could squash the deal.
The initiative for the Fannie Mae Loan Quality
Fannie Mae’s Loan Quality Initiative means lenders could be checking up on all of the mortgage borrowers until the day they close. People 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.”
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 — 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
Boston.com reports that numerous 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 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 hurts
The Loan Quality Initiative gives lenders the freedom to verify however they choose. But a mortgage blogger reports that most will pull another credit report just prior to closing. Underwriters will be looking for these things:
- The credit card will show minimum monthly payments. Those numbers will replace the original numbers made at the time of application. If the numbers exceed Fannie Mae’s threshold, the loan will likely be denied.
- The updated credit score. If the FICO has dropped below minimum lending standards, the loan could be denied. Loan level pricing adjustments are loan fee based on the credit score.
- The credit report’s Credit Inquiry section. The goal is to see if the borrower has been applying for credit elsewhere. Underwriters can use this info at their discretion.
Overwhelming Fannie Mae foreclosures
The Loan Quality Initiative is an attempt by Fannie Mae to stem the tide of foreclosures overwhelming the nation’s largest mortgage buyer. Fannie Mae reported an $11.5 billion loss in the first quarter of 2010. $8.4 billion was asked by Fannie Mae to be given by the US Treasury to keep them afloat. Fannie Mae and its government-controlled 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 also the mortgage delinquencies was 14 percent, or about one in each and every seven U.S. mortgages. Mortgage foreclosure statistics are expected to peak with a lot more than 2 million borrowers losing their homes.
Citations
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/
