The mortgage market meltdown in 2008 has dramatically affected the way loans are underwritten and the documentation required by lenders. The Dodd-Frank bill was enacted in 2009 as a knee-jerk response to address some of the practices that contributed to the collapse of the mortgage security market, demise of a number of prominent financial and insurance institutions, and the rash of foreclosures over the past 5 years. All the provisions of the Dodd-Frank have not been implemented; the bureaucrats are working on rolling out the remaining draconian regulations.

Almost all 30 year fixed mortgages with competitive rates are not funded permanently with the lending institution’s funds; instead, the lender quickly assigns/sells the mortgages they originate to large entities, like Fannie Mae and Freddie Mac. They and other purchasers of mortgages require the originating lenders to warrant that the loans meet their underwriting and documentation requirements. Also, they have created automated computer systems to determine if the borrower qualifies for a loan.

Loan underwriters have devolved into compliance clerks. Historically, loan underwriters were persons who evaluated the risk of a loan request and determined if risk was within the tolerance of what was allowed under the loan program. Today, they input the data into the computer and the software decides whether the loan is approved or not. Most of the time the computer gets it right; however in some cases, credit worthy applicants can’t get a loan. Common sense, logic, and judgment are no longer part of the loan approval process.

The next part of an “underwriters” job is to go through the supporting documentation to make sure it matches the information on the application and that all the documents required by the entity that will eventually purchase the loan are collected. Entities who purchase mortgages, like Fannie Mae, threaten originating lenders with the forced re-purchase of any loan that they later determine lacks sufficient documentation. This has put pressure on lenders to over-document loans in all cases. Historically, applicants who had a high equity stake in the property, exceptional credit, large cash reserves, and/or been on their job for many years would not be required to provide as much documentation and their file would not be scrutinized to the same level as a marginal applicants. Today, all applicants are treated as marginal applicants, with the same documentation requirements and level of scrutiny.

If you are applying for a loan and consider yourself a good credit risk, don’t take the ongoing requests for documentation and scrutiny personally; you are paying the price for the small percentage of lenders, appraisers, and borrowers who gamed the system in the past. You’ll be comforted to know that the executives of the brokerage houses,  Fannie Mae, Freddie Mac, and mortgage insurance companies (like AIG) who packaged and securitized toxic mortgages and were the major contributors to the mortgage market collapse, received their million dollar buyouts and are doing just fine.

If you have questions about real estate or financing, contact me and I will provide the information, advice, and perspective you need to make a wise decision.