By Dina ElBoghdady
Friday, July 16, 2010; A13
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.Lenders concerned
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."
When Fannie Mae's new policy kicked in last month, larger lenders started to pull fresh credit reports three to five days before closing, sometimes creating a mad scramble at the most stressful time in the home-buying process, said Mike McNamara, regional vice president of United One Resources, which supplies credit reports to lenders.
McNamara said that, for example, one lender pulled a new credit report the day before a home purchase was about to close and learned that the buyer had applied for a new credit card. That triggered an inquiry that left the borrower in limbo at the last minute, McNamara said.
"Imagine if someone had five or six inquiries on their credit report and we have to contact every creditor," he said.
Such delays can be costly to borrowers, especially if they are buying foreclosures or taking part in short sales that allow distressed homeowners to sell their properties for less than what they owe on the mortgage.
"These types of purchase contracts are very harsh in terms of late closings," said Faramarz Moeen-Ziai of Bank of Commerce in California. "In many cases, there's a $100-a-day fee to our borrowers for any delay."
Warning on new credit
Eric Gates, a mortgage broker at Apex Home Loans in Rockville, said people who locked in favorable interest rates might have to pay to extend the rate lock if their closing is delayed. They also might have to pay to store their belongings if they cannot move on time.
"We keep telling people: 'Don't open new accounts. Don't close existing accounts. Don't do anything whatsoever that will alter your credit situation,' " Gates said. "But there will be people who can't avoid increasing their credit card balances, or already have, and that's where the problems will crop up."
The initiative has riveted the lending community because of the critical role that Fannie plays in the mortgage market. It, like its sister company Freddie Mac, buys loans from lenders and sells them as mortgage-backed securities to investors. It will not purchase loans that do not meet its rules, meaning lenders have to abide by Fannie's guidelines or lose a key source of financing.
If loans sold to Fannie go bad because of fraud or poor underwriting, lenders risk having to buy back those loans or compensate Fannie for its losses. In the first quarter, lenders repurchased about $1.8 billion in loans, up from $1.1 billion a year earlier.
In announcing its new policy, Fannie warned that if a borrower defaults, any debts that were not adequately disclosed up to the time of closing would subject the lender to a repurchase. The company also said that if a lender pulls a credit report the day before closing that is consistent with the original report, the lender will remain responsible for any new debt.
"Imagine if a borrower is planning to close on a house tomorrow and goes out to buy a car this afternoon unbeknownst to the lender," said Brian Chappelle, a banking consultant. "That may not immediately show up on the credit report. But if that borrower defaults on the loan two years from now, the lender may have to repurchase that loan."