Once, what was a simple and straightforward process has become a complex, regulatory nightmare even for professionals.
New rules, new regulations and new compliance are all make closing a new mortgage more difficult.
There’s even been some data collected that suggests it is making each transaction more expensive.
Twenty years ago when MetFund was one of the first brokers in Northern Virginia the process for closing a loan was cleaner, more efficient. Even though lenders still evaluated the four major criteria of every loan, it was streamlined as a process. There was a greater human element, yet everyone sought to use common sense.
There have been changes, some small and some very large. The reasons for these changes can be discussed in another forum. We need to know what the changes are and how best to deal with them.
Your Credit Report and Credit Scores
There was a time when credit reports did not contain credit scores. And even when they first appeared no lender used them in their underwriting and pricing. Lenders relied upon their trusted and knowledgeable underwriters for review. Borrowers were required to write letters of explanation (LOX) for any credit dings which were found on their report. A typical credit parameter might have been something like no more than two 60 day lates in the last 12 months, as an example. Credit report underwriting was somewhat subjective and open to interpretation.
Fair Isaac began offering its FICO credit score model to the mortgage industry in 1989. It was a number of years before FICO became standard and required for mortgage underwriting. Once lenders realized they could reduce their discrimination liabilities by turning to a supposedly objective credit scoring model the industry embraced it wholeheartedly.
Today, your middle credit score or the lower middle credit score of a couple is used in several ways.
First, and foremost it is used as a parameter in determining eligibility for any particular lending program. Most lenders will not lend to a borrower with a FICO below 620. This seemingly arbitrary score is the result of Fannie Mae and Freddie Mac‘s requirement for any mortgage that they purchase from a lender and repackage to be sold in the secondary market.
Secondly, the cost of your mortgage rate is determined by combining your score with the loan-to-value of your mortgage. Your mortgage pricing is directly affected by your credit score. Lower score, higher cost.
The information in your mortgage credit report is input and utilized inside the automated underwriting system which is discussed below. The credit score is always noted in the findings from the AUS.
Automated Underwriting Systems (AUS)
Automated Underwriting Systems are computer generated algorithms that make underwriting decisions concerning your mortgage request. After collecting and compiling the borrower’s credit report and complete loan application data the system arrives at a discrimination free, logic based decision. The decision itself is frequently referred to as the “findings”.
This computer based underwriting was designed for uniformity and a more objective look at a borrower’s mortgage request. At first, it was revolutionary. I remember being a beta tester for a lender’s roll out among its brokers. Then complications arose.
Every lender had its own set of what are called ‘overlays’, adjustments to the findings produced by Desktop Underwriter or Loan Prospector. Challenges were found with the massive revisions such as Fannie’s version 9 change in the fall of 2012 which made it much more difficult for self employed borrowers. Loans already submitted to underwriting were required to produce two years complete personal and business tax returns as compared to the one year of personal returns prior to the revision’s release. That was painful!
Business Decisions that Made Sense
Until the advent of scores and automated underwriting the process was carried by an individual who reviewed your request. In the process, a loan officer could ‘tell a story’. I am not suggesting we created fairy tales. The best loan officers or processors crafted a reasonable thought path why a particular borrower would qualify and be approved for the mortgage being requested.
Last week I read about a borrower who had the potential to lower their total minimum mortgage payments by $500 per month. This was a rate and term refi, not a cash out refinance. But because of the new qualified mortgage back end ratio limit of 43%, the woman was not approved. She had an excellent payment history with the current, higher payments, but she could not ratio qualify for the lower payment. In the past, that’s where a savvy underwriter would have made a ‘business decision’ and approved that loan. There were compensating factors that made sense and justified the approval.
Compliance and Regulation
For decades the industry relied on the Real Estate Settlement and Procedure Act (RESPA) as the foundation for the protection of the consumer through compliance. RESPA mandated the use of the HUD-1 and the Good Faith Estimate of settlement charges. In addition, it was supposed to eliminate referral fees and produce disclosure of affiliated business arrangements.
For those of us in the industry that went by the rules even during the run up to the top last decade, the new compliance is like the road to hell. Don’t get me wrong; I am all for an environment where the consumer is well represented.
Now, compliance is a nightmare. In this loan officer’s opinion, what was once designed to protect the consumer and get them their best terms now seems to protect and serve the interest of lenders and Wall Street. Take for the instance the new GFE created by the Federal Reserve and mandated for use starting in 2010. The initial version released had a place for the consumer to sign as the old GFE did. That was quickly removed and now the consumer is not required to sign the Good Faith Estimate. The changes were so radical that they led to lenders getting bitten.
The average lender and third party fees that consumers pay to close on a mortgage have increased for the second year in a row, according to Bankrate’s annual closing cost survey. “The biggest reason (for the higher fees) is the additional regulations,” says Dan Stevens, sales operation manager and vice president of National Bank of Kansas City. “The No. 1 at the moment is the qualified mortgage rule. That alone has really added additional man-hours to the mortgage approval process.”
Not only has it added man-hours but it has added hours to the time it takes for your loan to get to the closing table. But in practice, complying with the new rules is costly to lenders and those costs are passed to the consumers, lenders say.
These are just a few of the newer compliance issues that we will or are already dealing with this year:
- Ability to Repay and Qualified Mortgage Rule
- Loan Originator Compensation Rule
- 2013 HOEPA Rule
- ECOA Valuations Rule
- TILA HPML Appraisal & Escrow Rule
- TILA & RESPA Servicing Rule
How does a borrower confront all these changes and the ensuing complexity and make it more simple for themselves? Find someone who has an understanding of the process. Elicit the help of a trusted originator who has been successful and lenders know and trust.
Choose someone who displays a disdain towards a rule based authority instead of one founded on common sense. You will definitely need a problem solver because no matter how much care and attention is expanded upfront there can be inexplicable problems that develop during the process. You need someone who won’t stick their head in the sand but is willing to get their hands dirty. Choose wisely.