The Loan Quality Initiative can make second credit report derail closings

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 of the cases the Fannie Mae Loan Quality Initiative needs 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 squash the deal.

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

The big 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 try to extend their credit to get 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."

The big key is debt to income ratio

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

Mortgage loan quality control

It was reported by Boston.com 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 result in a closing delay, pricing adjustment or, at worst, loan approval cancellation.

How it is possible to hurt a second credit report

Lenders can verify nevertheless they want with the Loan Quality Initiative. But Bob Phillips reports that most will pull another credit report just prior to closing. Three things can be looked for by underwriters:

1. The updated credit report will show current credit card bills and minimum monthly payments. The numbers will replace original numbers. If the debts exceed Fannie Mae’s threshold, the loan could be denied.
2. The credit score updated. If the FICO has dropped below minimum lending standards, the loan will 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 report's Credit Inquiry section. They’re trying to see if credit is being applied for elsewhere. Underwriters can use this data at their discretion.

Overwhelming Fannie Mae foreclosures

The Loan Quality Initiative is a huge attempt by Fannie Mae to stem the tide of foreclosures overwhelming the nation’s largest mortgage buyer. In the first quarter of 2010, Fannie Mae reported $11.5 billion in losses. $8.4 billion was asked by Fannie Mae to be given by the US Treasury to keep them 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 with a lot more than 2 million borrowers losing their homes.

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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/