Extra credit checks required by Fannie make some lenders anxious
People who applied for a mortgage as of June 1 might see their finances -- specifically their debt -- under renewed scrutiny days before they are scheduled to complete a home purchase.
Fannie Mae, the giant government-run mortgage finance company, rolled out a new policy this summer that encourages lenders to retrieve a borrower's "refreshed" credit report just before a loan closes.
The goal is to check whether the borrower has taken on additional debt or opened new lines of credit since applying -- such as a second mortgage or an auto loan. Such new debt could undermine the ability to repay the mortgage.
But the rule is causing angst among lenders, who say the policy creates logistical nightmares that could trip up home purchases at a critical time in the housing market's struggle to recover. They say new debt, even if it's a short-term obligation, could skew a borrower's credit profile enough so that preapproved loans do not get funded.
This week, Fannie said that it is reviewing the policy based on feedback from lenders and that it will offer more guidance by the end of July. In an update on its Web site, the company said it did not intend to require additional credit reports, but only to emphasize existing policies that require lenders to perform due diligence on loans before selling them to Fannie.
Deborah Slade-Horsey, a vice president at Fannie, said the company was merely making a suggestion to lenders. "Never was the intent that it is something that you are required to do on 100 percent of the loans," she said. "We think that this is one of the tools they can use."
On Wednesday, Fannie removed from its online documents any reference to refreshing credit reports.
Until Fannie settles the confusion, lenders are anxious about the consequences. They say a credit report is a mere snapshot and can be especially misleading at closing time. In those final days, borrowers tend to use their credit cards or open new accounts to pay for movers, furniture and appliances. These charges can add to their debt temporarily, even if they plan to pay off the loans the following month.
"Credit changes all the time. It's not a static thing," said David J. Bridges of McLean Mortgage. "People can't shut down their lives for 60 days while they're purchasing a home."
Lenders said that, in the past, they pulled credit reports when prospective borrowers applied for a loan. Those reports are valid for 90 days. Lenders would not update them unless they had reason, said Richard Green, a sales manager at Presidential Bank Mortgage in Bowie. For instance, if the original report showed that the borrower had applied for new credit cards, the lender would check to see if the credit was granted, Green said.
"The lender was always supposed to turn over the stones that were in front of him, but this goes beyond that," he said. "We never pulled an additional credit report unless we saw something suspicious early on."