The Loan Quality Initiative is a mortgage loan quality control measure enacted on June 1 to help cut down on Fannie Mae foreclosures. In most cases the Fannie Mae Loan Quality Initiative calls for 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 in the debt-to-income ratio could totally stop the deal.
The large Fannie Mae Loan Quality initiative
Fannie Mae’s Loan Quality Initiative means that all lenders can be checking up on mortgage borrowers until the day they close. Individuals 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
Smartmoney.com reports 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 — 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
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 measures 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 hurts
The Loan Quality Initiative lets lenders verify however they want. But a mortgage blogger reports that most will pull one more credit report just prior to closing. Even after the loan has been approved, underwriters could be looking for three things:
- The credit report will show credit card bills. The numbers will replace original numbers. If the numbers exceed Fannie Mae’s threshold, the loan will likely be denied.
- The updated credit score. If the FICO has dropped below 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 depending on the credit score.
- The credit report’s Credit Inquiry section. They are trying to see if credit is being applied for elsewhere. Underwriters use this data however they want to.
Fannie Mae foreclosures overwhelming
The Loan Quality Initiative is a huge 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. $8.4 billion was asked by Fannie Mae to be given by the US Treasury to keep them afloat. Fannie Mae and Freddie Mac own or guarantee more than 50 percent of mortgages in the United States. Statistics for mortgage foreclosures reached an all time high. The combined share of foreclosures and mortgage delinquencies was around 14 percent, or about one in every seven U.S. mortgages. Mortgage foreclosure statistics are expected to peak with a lot more than 2 million borrowers losing their homes.
Find more data 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/
