The Perfect Loan File

The media has it all wrong –

securing mortgage approval and

satisfying credit underwriting

guidelines are not the difficulties

plaguing mortgage consumers. It’s in

meeting the rigorous documentation

requirements that most people fall

flat. The good news is, the fix is

simple. Just scan, photocopy, fax,

and deliver every aspect of your

financial life. Then, shortly before

closing, check everything again.

Mortgage consumers who enter the mortgage approval process ready to battle

their chosen mortgage lender will come out with a nightmare story to tell. As

the process, requirements, and guidelines are the same for everybody, your

mindset is the game-changer. Accepting the redundant documentation

necessary for lender approval will make everyone’s life easier.

When I was a kid, my father occasionally issued directives that I naturally

thought were superfluous, and when asked why I needed to do whatever it

was he wanted me to do, his answer was often: “Because I said so.” This never

seemed to address my query but always left me without a retort, and I would

usually comply. This is exactly what consumers should do during the

mortgage approval process. When your lender requests what seems to be over

-documentation and you wonder why you need it, accept the simple edict –

“because I said so.” You will find the mortgage approval process much less

frustrating.

So, what’s the perfect loan? Well, it’s one that (a) pays back the lender and (b)

pays back the lender on time. Underwriting the perfect loan is not the goal

that mortgage lenders aspire to today.

The real goal is the perfect loan file.

Mortgage lenders have suffered staggering losses and gone out of business

because of the dreaded loan repurchase. As mortgage delinquencies

increased, FannieMae and FreddieMac began to audit mortgage loans they

had purchased and discovered substandard and fraudulent underwriting

PERSONAL FINANCE

| 3/09/2012 @ 10:23AM | 3,690 views

The Perfect Loan File

Mark Greene

, Contributor

see photos

MoneyBuilder

MAKING SENSE OF YOUR FINANCES

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practices that violated representations and warranties made, stating these

were high quality loans. Fannie and Freddie began forcing the originating

lenders of these “bad” loans to buy them back. So a small correspondent

mortgage lender is forced to buy back a single mortgage loan in the amount of

$250,000. This becomes a $250,000 loss to a small mortgage business for a

single loan, because it will never be repaid.

It doesn’t take many of these bad loan buybacks to close the doors on many

small mortgage operations. The lending houses suffered billions of dollars of

losses repurchasing loans from Fannie and Freddie, and began to do the same

thing for loans they had purchased from smaller originators.

The small and medium sized mortgage originators that survived created

underwriting guidelines and procedures to eliminate the threat of future loan

repurchase losses. The answer? The perfect loan file.

It’s no longer necessary to have excellent credit, a big down payment and

stable employment with income sufficient to support your debt service to

guarantee your loan approval. However, you must have a borrower profile

that meets the credit underwriting guidelines for the loan you are requesting.

And, more importantly, you have to be able to hard-copy-guideline-document

your profile.

Every nook and cranny of your financial life has to be corroborated, doubleand

triple-checked, and reviewed again before closing. This way, if the

originating lender has created a loan file that is exactly consistent with

published underwriting guidelines and has documented while adhering to

those guidelines, the chances are that your loan will not be subject to

repurchase.

Borrowers also need to prepare for processing and underwriting. Processors

and underwriters are the people trained and charged with gathering

(processors), all of your required-for-approval financial documents, and then

approving (underwriters), your loan. You can assume these people are well

trained and very experienced, as they are tasked with assembling and

approving a high-quality-these-people-will-pay-us-back loan file. But just

how do they go about that?

The process begins with the filter – the loan originator (a.k.a loan officer,

mortgage consultant, mortgage adviser, etc.) – tasked to match the

qualifications of a particular mortgage deal to the appropriate underwriting

guidelines. It is the filter’s job to determine if a loan scenario is approvable

and to gather the documentation to support that determination. It is here, at

the beginning of the approval process, where the deal is made or broken. The

rest of the approval process is just papering the file.

The filter determines whether the information provided by the borrower can

be validated and documented. This is simple, since most mortgages are

approved by automated underwriting engines such as Desktop Underwriter,

and the automated approval generates a list of the documents needed to

paper the loan file. An underwriter can, at this stage, request additional

supporting documentation evidence at their discretion, as not all

circumstances neatly fit into the prescribed underwriting box. If the filter

creates a loan file with accurate information, then secures the documentation

resulting from the automated underwriting findings, the loan will close

uneventfully.

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So, let’s begin with the pre-approval call. Mortgage pre-approval is typically

accomplished with a telephone interview. A prospective borrower calls a

mortgage rep (filter), and the questions begin. There will be lots of questions

as this critical phase of the process is akin to the discovery period in a trial –

you’ll need to disclose everything. Expect to answer queries on what you do

for a living, how long you’ve been employed in your current field, and what

your salary is. If there is a co-borrower, they will have to answer the same

questions.

Every dollar in checking, savings, investments and retirement accounts, also

known as assets to close, as well as gifts from relatives and non-profit grants,

has to be accounted for. Essentially everything appearing on a borrower’s

asset-radar-screen has to be documented and explained.

If you were previously a homeowner and sold your home in a short sale, or if

you own a home now and plan to keep it as an investment or rental property,

there are new and specific underwriting guidelines created just for you. In

these cases, full disclosure of your credit and homeownership past can

potentially eliminate unforeseen mortgage approval woes. For instance,

FannieMae has a new underwriting guideline called “Buy-and-Bail,” for

current homeowners’ planning on keeping their existing home as an

investment/rental property. Properties not meeting the 30% equity test for

“Buy-and-Bail” result in additional asset requirements to purchase a new

home. Buyers with a short sale history may have to wait two to three years

before they are eligible for mortgage financing again. Full vetting of your

previous mortgage life will save you the dreaded we-have-a-problem call from

your mortgage lender.

It all comes down to your proof. If the lender asks for a specific document,

give them exactly what they are asking for, not what “should be OK,” –

because it won’t be. This is where the approval process tends to go off the

rails, when the lender asks for specific documentation and the borrower

supplies something else. Here, too, is where both sides get frustrated. So if the

lender asks for a bank statement and there are 5 pages for that bank

statement, send them all 5 pages, and not just the summary. If you send them

the summary page and they ask again, don’t complain that the lender keeps

asking for the same thing when you never sent it in the first place. This may

sound elementary, but the vast majority of mortgage approval process woes

stem from scenarios just like this.

The reason the mortgage approval process is now so rigorous is simple.

Avoiding defaults and loan buybacks has become the primary goal of

mortgage lenders. Higher standards are reducing loan defaults, which

should mean fewer foreclosures in the future. Government data shows that

less than 2% of loans originated in 2009, that were resold to

Freddie Mac and

Fannie Mae

went into default after 18 months, down from more than 22%

default rates for 2007 loans.

So when your lender requests specific documents from you, give it them just

“because they said so.”

You can thank my dad for that.

This article is available online at:

http://www.forbes.com/sites/moneybuilder/2012/03/09/the-perfect-loan-file-2/

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