""Fannie Mae"":http://www.fanniemae.com has issued a ""new bulletin to lenders"":https://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2010/sel1011.pdf underscoring the GSE's requirement that every mortgage loan delivered to Fannie Mae be underwritten to ensure the borrower has the willingness and ability to repay the debt.
[IMAGE] The company stated that lenders should have loan underwriting standards in place that recognize a variety of factors when evaluating a borrower's ability to repay a loan, including an assessment of the borrower's debts and all liabilities that may affect fulfillment of the mortgage payment obligation.
Additionally, the update requires lenders to determine that all debts incurred by the borrower, up to and concurrent with the closing of the subject mortgage, are disclosed on the final loan application and considered in the qualification evaluation.
To this end, Fannie Mae said it expects lenders to have procedures in place to facilitate borrower disclosure of changes in financial circumstances throughout the origination process.
This, however, does not mean lenders must pull a second credit report on the borrower prior to closing.
Fannie Mae said an ""unintended consequence"" of its undisclosed liabilities policy was the misinterpretation by some lenders that Fannie Mae was implementing a new requirement that the borrower be re-qualified up until closing.[COLUMN_BREAK]
""[M]any lenders believed this required a new credit report just before the closing of the loan. This was not Fannie Mae's intent, and as previously stated, the intent was and continues to be to reinforce lenders' existing representations and warranties,"" Fannie Mae said.
The GSE also outlined an expanded debt-to-income (DTI) ratio tolerance that the company says will lead to fewer loans having to be re-underwritten. Lenders will only be required to re-underwrite a loan after the initial underwriting decision has been made if the borrower discloses or the lender discovers changes that cause the DTI ratio to exceed 45 percent or to increase by 3 percentage points or more.
""This is an important update, because every mortgage loan delivered to Fannie Mae has to be underwritten to establish that the borrower is able to repay the debt,"" said Deborah Slade-Horsey, VP for single-family risk policy at Fannie Mae. ""Our primary objectives are to support borrowers' ability to sustain homeownership and to strike a reasonable balance between requirements that may reduce loan repurchases and requirements that might over-burden lenders' origination processes.""
The company stressed in the lender update that any action or inaction on the part of the borrower (including misrepresentation or fraud), even without the lender's knowledge, may constitute a breach of the selling warranty and result in the lender being forced to buy back the loan Ã¢â‚¬" making full disclosure of the borrower's total debt and liabilities critical throughout the origination process.
According to Fannie Mae's CEO Michael Williams, the GSE's stricter underwriting policies are paying off. He says Fannie is currently building its ""strongest book of business"":http://www.dsnews.com/articles/fannie-maes-ceo-lauds-new-realism-of-better-underwriting-2010-07-29 of the last decade.
Williams says the prudent lending that has taken hold in the aftermath of the housing bust is resulting in higher-quality, more sustainable mortgage loans that he expects to perform extremely well.