The Conservative Shift of Mortgage Lending

Wow! … You know the old saying that the more things change, the more they stay the same? That has been especially true with the changes to the secondary market (Freddie Mac and Fannie Mae) lending guidelines for residential mortgages.

We’re living with and through a very conservative shift in the secondary market’s credit requirements and a dramatic emphasis on the evaluation of a borrower’s income, assets and credit profile.

Some examples of what feels like an overly conservative swing in the underwriting evaluation would include a borrower’s need to address and explain any unusual deposits reflected on a bank statement (typically anything outside of what looks like a paycheck – explanations of deposits used to be limited to just large deposits but not anymore), obtaining written and verbal verification of employment several times during the processing of the loan even up to the day of closing, and explaining any and all credit inquiries on the credit report to ensure that no new debt has been incurred.

The investor (Freddie and Fannie) has set the expectation for the lender to double and triple check the borrower’s ability to support the mortgage payment. Keep in mind that these are not requirements of the lender, they are the requirements of the secondary market – the investors’ expectations of what is needed from a quality performing asset.

As a mortgage lender, we feel the increased scrutiny has been pushed to the extreme and are equally frustrated with having to continue to ask the well-qualified borrower for either additional documentation or explanations. However, we also recognize that with the poorly performing mortgage loans across all price points and all segments of borrowers, an overhaul of the mortgage lending guidelines was necessary.

Having been involved in lending a long time – long before there were FICO scores and automated underwriting; long before the value of a borrower’s asset portfolio could outweigh their documented monthly income; back when every loan was fully documented and a downpayment was expected and when the lender presented the borrower’s individual story to the underwriter – it is amazing at how loose and deregulated the lending guidelines had become over the past several years. Equally amazing is how far the pendulum has now swung in the extreme conservative direction.

Surely we will eventually see a relaxation of some of the excessive scrutinizing of a borrower’s purchase capability, but not until the lending markets begin to stabilize. Until then, helping our financing buyers understand what to expect from a documentation perspective – what the underwriters will want to know about the borrower’s past, present and realistic future of their income, their assets and liabilities and the need to double and triple check facts and figures throughout the mortgage process – will prepare our buyers for a more pleasant and well-managed experience.

Good Luck!

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