WASHINGTON - People who have applied for a mortgage as of June 1 might see their finances - specifically their debts - under renewed scrutiny days before they are scheduled to purchase a home.
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 since applying for the loan, or opened new lines of credit such as a second mortgage or an auto loan. Such new debt could undermine the ability to repay the mortgage, and this initiative is one of several recent rules from Fannie Mae that press lenders to do their due diligence before selling loans to the company.
But lenders complain that 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 fleeting, could inadvertently skew a borrower's credit profile enough so that pre-approved loans do not get funded.
This week, Fannie Mae said it is reviewing the policy based on feedback from lenders and will offer more guidance by the end of July. In an updated document on its website, the company said it intended only to reemphasize existing policies, not require additional credit reports.
Deborah Slade-Horsey, vice president of single-family risk policy at Fannie Mae, said the company was merely making a suggestion to help lenders establish prudent lending processes. "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 Mae removed from its online guidance documents any reference to "refreshing" or pulling new credit reports.
Until Fannie Mae settles the confusion, lenders are anxious about the potential consequences. They say a credit report is a snapshot in time and can be especially misleading as borrowers get close to closing on their homes. In those final days, borrowers tend to pull out their credit cards or open new ones to pay for movers, furniture and appliances. These charges can add to their debt at that moment, even if the borrower plans to pay off that debt the following month.
"Credit changes all the time. It's not a static thing," said David Bridges of McLean Mortgage Corp. "People can't shut down their lives for 60 days while they're purchasing a home."
Fannie Mae insists that it's not imposing any new requirements on lenders. "The lender has always been responsible for making sure the borrower meets our requirements," Slade-Horsey said. "We were trying to reiterate that if the borrower has a change in circumstances up to closing, that is the lender's risk."
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In the past, lenders say, they pulled credit reports when prospective borrowers applied for a loan. Those reports have a shelf life of 90 days, according to Fannie Mae's rules. Lenders would not update them within that window unless they had reason, said Richard Green, a sales manager at Presidential Bank Mortgage in Bowie. For instance, if the original credit 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.
In an incident this week, for example, a lender pulled a new credit report the day before closing and learned that the borrower had applied for an American Express card. The news triggered an inquiry that left the borrower in limbo as of Wednesday night, 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."
Eric Gates, a mortgage broker at suburban Apex Home Loans, said people who locked in favorable interest rates might have to pay to extend the rate lock if their closing is delayed and to store their belongings if they cannot move in 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's attention because of the critical role that Fannie Mae plays in the mortgage market. Fannie Mae, like its sister company Freddie Mac, buys loans from lenders and then sells them as mortgage-backed securities to investors. The company will not purchase loans that do not meet its rules, meaning lenders have to abide by Fannie Mae's guidelines or lose a key source of financing.
If loans sold to Fannie Mae go bad because of fraud or poor underwriting, lenders risk having to buy back those loans or compensate Fannie for its losses. Hence the intense focus on any changes in Fannie Mae rules. In the first quarter, lenders repurchased about $1.8 billion in loans, up from $1.1 billion a year earlier.
In announcing its new credit policy, Fannie Mae warned that if a borrower defaults, any debts that were not adequately disclosed up to 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 in Washington. "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."