Mortgages – Turn Back The Clock

They say history repeats itself. The past twelve months are indicative that the same holds true for residential mortgage lending. The contents to follow depict what’s ahead and more accurately put, what’s already here.

This past year has brought many changes. While the aforementioned may be the understatement of the year, simply stated, the lending rules have changed. Or have they? Many would argue that we have returned to the mid 1990’s; a time when borrower’s actually had to qualify for a mortgage. While limited documentation loans are still available, they are harder to come by and are more heavily scrutinized.

What does this mean to those in the market to purchase a new home or refinance their existing home mortgage? In short, it equals more documentation. Limited documentation of employment, income and assets has quickly become a thing of the past. Prospective borrowers should prepare for a more thorough loan process where documentation is no longer “optional” but in most cases required. The majority of the transactions being processed and closed in today’s changed market are “full documentation” loans (proof of income and assets required).

Now that most lenders are back to underwriting loans based on the secondary marketing guidelines, it is at the discretion of the agency purchasing the loan as opposed to the lender as to what documentation is or is not required (regardless of whether or not the loan servicing is retained). It is simply a matter of square peg, round hole; if it doesn’t fit the requirements, it’s not salable on the secondary market.

Documentation requirements are in place for three reasons. I touched on the first reason in the previous paragraph; certain documents are the requirement of the agency that buys the paper or IOU. The most competitive rates and programs are typically underwritten according to guidelines put forth by FNMA, FHLMC or GNMA (a.k.a. Fannie, Freddie & Ginnie). If a consumer wants a 30 year fixed rate mortgage, the necessary paper work will be the same from lender to lender regardless of being a bank or broker. What would be the point of asking for more paperwork than is actually needed?

The second reason is of federal proportions. On a national level, our government has a paternal interest in making sure that each federally related mortgage transaction meets certain standards of uniform disclosure (much of which is in place to limit fraud by consumer and lending institutions alike).

Finally, each state will have varying additional requirements as virtually all have enacted some form of governing law covering mortgage lenders.

Yet many lenders still tout reduced and limited documentation loans. It is the lead for many lenders in getting the initial appointment – selling someone on a program that is not as readily available as it once was only to change them to another product well into the process. This is better known as “bait and switch.”

Should claims of “less paperwork” be taken with a grain of salt or is there further evaluation to be done? Not one for paralysis of analysis, I still find it difficult not to wonder what basis these claims are being made. Maybe it can be paralleled to “buy now, pay later.” Less paperwork at the front end of a transaction will inevitably require more paperwork (and potentially cause problems) as the closing day approaches. It is not uncommon for an application package to contain 18 to 20 “compliance” or required documents (in addition to the actual application, Good Faith Estimate of Settlement Charges and the Truth in Lending disclosure). Borrowers should also be prepared to provide income and asset documentation at application. Less paperwork may be indicative that something is amiss – and one should always be skeptical of lenders requesting signatures on blank or partially completed application documents.

A reputable mortgage professional will not play games when it comes to completing and signing your application documents. Aside from the matter of high ethical standards and good client relations (and hopefully word-of-mouth referral business in the future), a quality lender will provide full disclosure and detailed explanation of all required documents at application. The closing table is hardly the place to clear up confusion. Originators conducting themselves under the highest standards also preserve their company’s ability to do business and avoid potential violations of the Federal Truth in Lending Act and the Federal Real Estate Settlement and Procedures Act (RESPA).

Submitted by Buck Gieseke. Need a home loan in Sequim or Port Angeles? Buck Gieseke is a loan officer for Integrity One Home Mortgage, Inc., and can be reached by email or phone at: buck@iohmi.com or 360-565-2070. You can also find him on the Internet at: www.iohmi.com