The Loan Quality Initiative is a mortgage loan quality control measure that was enacted June 1 to cut down on Fannie Mae foreclosures. In the majority of the cases the Fannie Mae Loan Quality Initiative requires lenders to pull a borrower’s credit report a second time at closing. If the borrower has applied for credit since the mortgage loan was approved, then the resulting change could squash the deal.
The Fannie Mae Loan Quality Initiative
Fannie Mae’s Loan Quality Initiative means lenders will 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 for their new home might 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.”
Debt-to-income ratio is the key
As outlined by 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 could push the borrower over Fannie Mae’s debt-to-income ratio threshold of 45 percent.
Control on mortgage loan quality
Boston.com reports 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 actions 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 just result in a closing delay, pricing adjustment or, at worst, loan approval cancellation.
How a second credit report hurts
The Loan Quality Initiative lets lenders verify nevertheless they want. But a mortgage blogger reports that most will pull another credit report just prior to closing. Three things will be looked for by underwriters:
- The credit card will show minimum monthly payments. Those numbers will replace the original numbers made at the time of application. The loan will be denied if the debt exceeds Fannie Mae’s threshold.
- The credit score updated. If the FICO has dropped below minimum lending standards, the loan can be denied, or be subject to a new loan-level pricing adjustment. Loan level pricing adjustments are mandatory loan fee that are based on the credit score.
- The credit report’s Credit Inquiry section. They want to make sure no credit is being borrowed anywhere else. This details could be used by underwriters nevertheless 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. Fannie Mae reported an $11.5 billion loss within the first quarter of 2010. The US treasury was asked by Fannie Mae to give them $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 within the first quarter of 2010. The combined share of foreclosures and also the mortgage delinquencies was 14 percent, or about one in each seven U.S. mortgages. Mortgage foreclosure statistics are expected to peak this year with borrowers losing their homes each and every day.
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/
