This is the first in a series of commentary and helpful information regarding the current state of home mortgage financing. The industry has changed so dramatically in the last twenty-four months, I felt it would be helpful to explain in detail some of the changes that affect borrowers.
After the mortgage-back security debacle (MELTDOWN)-- in which subprime and stated income loans (that eventually went into default in large numbers) were packaged and sold in bulk to unsuspecting investors world-wide, sweeping changes have taken over the industry. These changes purport to be for the protection of the consumer.
A number of new laws have been enacted to change the way appraisals are performed, and the manner in which costs are incurred and disclosed to clients. In addition, mortgage originators are now required to register with a national database, and to be fingerprinted, vetted and tested.
INCOME DOCUMENTATION
There are no more “stated income” loans at this point in time-- although they may return to the marketplace at some point in the future. This is especially troublesome for those self-employed individuals who have habitually “expensed” much of their income in order to avoid taxation. Unfortunately they are not eligible for a new mortgage in most cases.
Underwriting guidelines governing loan-to-value, FICO scores, and debt-to-income ratios for all loans are much more conservative than in the recent past for obvious reasons. Unfortunately the pendulum seems to have swung a bit far in the conservative direction at present.
Virtually all lenders now require IRS transcripts of individual tax returns prior to underwriting approval. This ensures that income reported on the application and attending documentation is accurate in an attempt to avoid fraud.
As a result, it is standard practice now to collect full income documentation, to include two year’s federal tax returns with all schedules, W-2’s, 1099’s, and paystubs evidencing current employment. Also required are bank and asset/saving statements for at least one month, including all pages of the statements. On-line statements are not allowed unless they evidence the borrower name and address on them.
YES, it is back to “full documentation” in the loan world, just like the old days when I started in residential lending back in 1990.
Next time I will address HVCC, or the Home Valuation Code of Conduct, which governs the way appraisals are performed today. In my opinion this is the most detrimental change from the perspective of the client in any new mortgage transaction.
WHALE TAIL
Why the picture of the Whale's tail? Well, did you read about the woman who just completed a Stand-Up Paddle from Catalina to Dana Point Harbor? She had a whale swimming with her for over an hour during her 40 mile adventure!
I took my kayak out with Steve at Zuma Beach a few years ago, and just off Point Dume we came upon a mother whale with her baby, frolicking just off the point. It was an amazing and inspiring thing to see such large animals so close up. Very humbling.
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