Second credit report can derail closings - Loan Quality Initiative

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 at closing. 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.

Source for this article: Loan Quality Initiative – second credit report can derail closings By Personal Money Store

The Fannie Mae Loan Quality Initiative

Fannie Mae’s Loan Quality Initiative means lenders will be checking up on mortgage borrowers until the day they close. People who extend their credit to purchase a new washer-dryer or furniture for their new home could possibly 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

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 could push the borrower over Fannie Mae’s debt-to-income ratio threshold of 45 percent.

Mortgage loan quality control

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 actions 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 nevertheless they choose. But mortgage blogger Bob Phillips reports that most will pull an additional credit report just prior to closing. Three things will be looked for by underwriters:

1. The updated credit report will show current credit card bills and minimum monthly payments. Those numbers will replace the original numbers made at the time of application. The loan can be denied if the debt exceeds Fannie Mae's threshold.
2. The credit score updated. If the FICO has dropped below minimum lending standards, the loan could be denied, or be subject to a new loan-level pricing adjustment. Loan level pricing adjustments are loan fee depending on the credit score.
3. The Credit Inquiry section. The goal is to see if the borrower has been applying for credit elsewhere. Underwriters can use this data at their discretion.

Foreclosures for Fannie Mae overwhelming

The Loan Quality Initiative is an attempt by Fannie Mae to stem the tide of foreclosures overwhelming the nation’s largest mortgage buyer. $11.5 billion in losses were reported by Fannie Mae. The US treasury was asked by Fannie Mae to give them $8.4 billion to stay afloat. Fannie Mae and Freddie Mac own or guarantee more than 50 percent of mortgages within the United States. Statistics for mortgage foreclosures reached an all time high. 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 a lot more than 2 million borrowers losing their homes.

A lot more information on this topic

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/