Underwriting Guidelines Too Tight?

On Shaky Ground??Ben Bernanke, is they guy a lot of people on Wall Street like to hate these days.  They blame much of the problems with “future” debt amassing on his shoulders.  Weather you like him, or you hate him – there’s no denying he is setting Financial Policy for the future – and he’s impacting mortgage Interest rates.

In his speech at Operation HOPE Financial Dignity Summit in November, he discussed the challenges facing the housing market and mortgage lending.  One of the challenges that Chairman Bernanke commented on, was a Mortgage Underwriting Standard that he believes might be headed in a direction that is going to put further pressure on a weak system because it’s become “overly tight”.

“…Some tightening of credit standards was an appropriate response to the lax lending conditions that prevailed in the years leading up to the peak in house prices. Mortgage loans that were poorly underwritten or inappropriate for the borrower’s circumstances ultimately had devastating consequences for many families and communities, as well as for the financial institutions themselves and the broader economy.

However, it seems likely at this point that the pendulum has swung too far the other way, and that overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.’

We would agree – and any of our Borrowers who have recently purchased a home or closed on a non-streamlined refinance would most likely agree with Ben Bernanke’s views on the current underwriting guidelines / system as well.

Sourcing Payroll checks? Some of the conditions coming back from Underwriting is STAGERING.  Gift Funds, past Tax Returns, deposits – every document that can be scrutinized, will be.  For example, Form 4506 (which was once used primarily for stated or no-income verified loans) is now pulled on every mortgage in process to obtain a copy of the tax transcripts for the the past two years. Any discrepancies between the 4506 and income supplied must be addressed, which often leads to the borrowers having to provide complete tax returns instead of just their W2′s.

If a borrower has deposits on their bank statements that are not easily identified, they can expect to show proof of where that deposit came from. Credit reports may disclose information that the borrower may need to address as well beyond the good old “inquiry letter”. Now they disclose information about activity associated to a borrowers address that may or may not relate to the borrower. Don’t get me wrong, loans are closing however the process for some can require a great deal of patience and paperwork.

For Instance

We’ve had borrowers come to us in the past who just happened to have $3000 in cash, at their house, in a safe deposit box, wherever, that they wanted to use for a down payment on a home.  They didn’t want to put it in a bank… in one case, because of their ethnic and historical distrust for banks, we were able to show where they had legitimately been making contributions to their Parrish.  The Parrish gave them the money for the down payment.  We documented their contributions, and it worked.  In general, however, it is almost impossible to use large chunks of cash that you just “have” – that are not on deposit, and “seasoned” been in the bank for more than 60 days.

“When lenders were asked why they have originated fewer mortgages, they cited a variety of concerns, starting with worries about the economy, the outlook for house prices, and their existing real estate loan exposures. They also mention increases in servicing costs and the risk of being required by government-sponsored enterprises (GSEs) to repurchase delinquent loans (so-called putback risk).”

“Putbacks” are also referred to as “buy-backs”. And buy-backs tend to roll down hill to the source that originated the mortgage, including  banks and correspondent lenders like Mortgage Master Service Corporation. This happens when the loan (borrower) is not performing. The lender will go over the loan documents with a fine tooth comb to try to find fault in the underwriting so they can justify sending the loan (forcing a buy-back) to the originating lender. This is why many borrowers are having to over-document their finances.

While The Fed and Chariman Bernanke can not affect Underwriting Guidelines, they can continue to make general comments about the need to “over document” or the need to use “Common Sense” in underwriting loans.  Many people believe his is in a “Short Term” position – the next “guy” needs to look at this situation as well (along with the next head of FHFA).

In the mean time – as you prepare to purchase a home or Refinance… be prepared

  • Don’t buy a new car, quit your job or open a new Bank Account
  • Don’t buy a refridgerator or a sofa BEFORE you have the keys to the house
  • Read this if you receive alimony or Child Support
  • Keep every bank statement, every paystub, every receipt…
  • If you have been bankrupt, paid off collections – go ahead and get ALL of those documents together
  • If you are going to refinance, find your closing documents now
  • If you sell something on Ebay or Craigslist document it, document it, document it, document it!!!!!
  • Complete list of Do’s and Don’ts right before a mortgage loan closing

For more information about mortgage loan underwriting guidelines and  Qualifying for a mortgage in NC, Call Steve and Eleanor Thorne, 919 649 5058 – we have the best rates, and we will take the time to help you come up with a game plan so that you can buy your next house!

I try and answer all questions :)