Local Agents Raise Questions Over New Fannie Rules

‘Loan Quality Initiative’ May Prove Burdensome, Not Bountiful

By Colleen M. Sullivan

Banker & Tradesman Staff Writer


Richard VetsteinLocal brokers and bankers have some unanswered questions about new Fannie Mae rules for auditing loans, and the lack of clarity could create havoc for borrowers at the closing table.

The rules, part of an ongoing so-called “Loan Quality Initiative” on behalf of the government lending agency, are intended to filter out poorly-underwritten loans before they reach Fannie’s books. A big sticking point is a new regulation requiring a second credit check within days of a planned closing. If a borrower’s debt-to-income ratio has worsened during that time, Fannie could refuse to accept the loan.

The requirement would help catch fraudsters trying to take out more than one mortgage without informing a lender, or reckless borrowers who’ve made other large purchases at the same time that they’re trying to purchase a home.

But having to re-check credit for borrowers who’ve already been qualified could disrupt the chain of contracts and commitments that occur before a closing, which incur obligations on all parties to the transaction.

“You’re moving the point of conception to after the birth,” said Brian Koss, managing partner of The Mortgage Network, an independent mortgage company based in Danvers.

While lenders have always had certain checks in place to verify the quality of a loan before it’s made, “The difference now with this new piece that really throws off [the closing process] is that they want to make sure there’s no changes to the credit profile prior to closing,” said Koss.

Crossing The Threshold

Exactly what the thresholds are at which Fannie will refuse a loan are unclear, and even minor possible alterations to an individual’s credit report–like a new credit card offer–would have to be investigated.

“Between commitment and closing, the average person has three inquiries that would have to be addressed,” said Koss.

But it’s not merely borrowers making big purchases who might have reason to be concerned. Smaller changes in credit status might mean that a borrower no longer meets the criteria for a previously quoted mortgage rate.

“If there’s even a minor fluctuation in the credit score – one point – that can impact the pricing on a loan,” said Amy Tierce, president of Needham’s Fairway Independent Mortgage.

If a borrower’s score drops, “Are we going to raise the rates? Those are still questions that are out there,” said Geof McLaughlin of Mortgage Master in Walpole. “I haven’t gotten guidance from the lenders.”

No More Outs

Also unclear is what will happen to borrowers’ deposits if they are unable to close because of the second credit check.

“In lots of other parts of the country, people buy real estate with nothing more than $1,000 to $5,000 at risk. Often, you put $1,000 down, and that is all the money that you’re going to lose if you end up not being able to close the transaction,” said Tierce. “But in our state with the [purchase and sale piece], you could have 10 percent, you could have $50,000 on the table. So I think some of the legalities around this could be very complicated.”

Under standard purchase and sale agreements, if financing falls through because of a fault on the buyer’s part, the seller can keep the deposit.

“Once you’re past the loan commitment deadline, you don’t really have any more outs, as a buyer – if your loan gets pulled, you’re up a creek without a paddle,” said Richard Vetstein, founding partner of Framingham’s Vetstein Law Group, which specializes in real estate law.

An alert attorney can draft a modified agreement that gives a buyer a little more leeway, but Vetstein said he worries that that many in the industry aren’t cognizant of the possible effect of the law.

“It’s amazing how many loan officers I’ve talked to who aren’t aware this is on the horizon,” he said.

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