Trishul Vaghani, CEO at Bluestar Mortgage, Inc, writes about current practices in the mortgage lending:
I joined the mortgage industry in late 2009 during the aftermath of the financial crisis. At a time when banks were permanently closing their doors and Loan Officers were giving up their licenses, I decided to walk toward the storm, the financial storm.
There was so much fear of the unknown; No one really knew which direction the lending industry was going, especially for brokers. For me, it was the opportunity to learn the new guidelines with a fresh mindset, not spoiled by the lending practices from the “heydays”. It was an opportunity to pick up business that others were leaving behind.
When I started, a common phrase I heard was that lending has taken a “complete 180” from years prior. It was because prior to 2008 the only requirements to qualify for a loan was a name and a heartbeat (sometimes banks would even waive the name requirement). Now you can’t even deposit a dollar into your checking account without being asked to source where that dollar originated from, who gave it to you, how you earned it, provide a picture of it, and write a page long explanation with your signature at the bottom confirming that you didn’t open new debt to obtain that dollar. Oh, and whatever you do, please make sure no one runs your credit during the mortgage process. If you think interrogations by the FBI are bad, wait until an underwriter finds out that your had a recent credit inquiry. You’ll feel like a criminal on the defense stand pleading your innocence. Obviously, this is an exaggerated picture that I am painting but I’m sure it feels this way to some borrowers.
Unless you have been living under a rock for the past 10 years, you know exactly why the banks had to make this drastic change to the mortgage approval process. There was no way we could have sustained growth with the type of mortgage paper that was being approved. An overhaul to the lending process was well overdue. Don’t get me wrong, while I do feel that some of the conditions/documentation required by underwriters can get ridiculous, I understand where they are coming from and understand that they are pressured by investors (who purchase loans) to have each loan file properly documented.
The loan process goes way beyond just the origination side, after a loan is approved and closed, it is typically sold to another investor/lender who will eventually sell the loan to Fannie Mae or Freddie Mac (commonly referred to as The Agencies). The servicing part of the loan (the bank that actually collects payments) can be sold multiple times throughout the loan’s life. Fannie & Freddie typically own the loan but they have servicers who can be banks like Chase and Wells Fargo who collect payments. These servicers are paid a fee from The Agencies to collect payments and, well, service the loan. (I promise, there is a reason why I’m explaining all of this and the reason is not just to add words to this article). Loans are not purchased by investors 100% of the time, there are numerous instances where loans get rejected for purchase or banks are required to buy back loans that they have already sold. This can cause huge dents in the banks’ bottoms line and in some cases drive them out of business. In order to prevent this underwriters need to make sure that each and every file is properly documented to meet their investors demands.
Fannie & Freddie have set guidelines for all lending institutions to follow if they want to sell the mortgage to them, these guides are 1300+ pages and constantly changing. The issue is that a lot of the wording is vague and open to interpretation by the reader (lenders) and when this happens you can imagine that lenders will take the most conservative route. The most conservative route means to have as much documentation as possible to make sure there are no “cracks” in the file that could force a loan buyback. The scary truth is that Investors can make banks/lenders buyback loans for whatever reason because the the relationship agreement is heavily favored toward the investor, since they write it themselves. But all they can do is follow the rules that are set and when in a unsure situation, collect as much as possible to support the borrower approval. Despite popular belief, underwriters are doing their best to make sure the loan gets approved, but remember, they have to walk a fine line, since not having a properly documented file can hurt their company.
The next time you are in the process of obtaining a mortgage and are frustrated with the amount of documentation that is required, remember there is pressure on everyone involved to make sure they dot their I’s and cross their T’s, it’s just the new era we are in for mortgage lending. (Final note: the loans that have been originated from 2009 to present have been the best performing loans in history. Coincidence that I started my lending career in 2009? Hmm….)