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The Mortgage Loan Process

Many have complained that the process of getting a mortgage post crisis is very difficult. Here is what you should expect: 

Re-regulation of the mortgage industry has collectively been a treat for all of us, both as industry providers and borrowers. The regulation has created significant risk both in the form of potential litigation and potential loss of principle from the perception of unenforceable mortgages. The mortgage providers have responded with a letter of conduct that, beyond appearance, is downright punitive.

When you apply for a mortgage your application must be 100% complete and accurate. Your credit report will be pulled and matched against your application. Your employment and all of your asset accounts will be reconciled against one another. The lender will utilize secondary applications that will tell them if you have obtained additional debt between the point of application and closing.  Everything will be validated.

Additionally, there will not be any benefit of a doubt provided to you as a borrower. Your tax returns will be validated with a 4506 allowing the lender to receive your transcripts from the IRS. Your bank accounts will be reviewed line by line and any deposit of $50 or more will require source and seasoning. Lastly, don’t be surprised if you go to closing and the lender holds up funding to question your signatures. You may have signed the forms in front of a notary only to receive a Fedex with the same forms requiring your signature. The lender reserves the right to compare signatures and possibly not fund the loan.

The lenders have also created a colossal assortment of loan product underwriting overlays at their discretion. As an example, if the VA Loan Program allows for a veteran to obtain a loan with a 620 score and certain credit variances, the lender may require a 640 or a 660 score with much more stringent credit parameters. The end result is denial of the loan.

I am just touching on the surface with this topic. The question many of you may be asking is why. Is it just related to the crisis or is there something more to the equation? I would like to share my opinion with you that it is much more than a conservative stance post crisis.

Regulation Z, Federal Truth in Lending-HOEPA, borrower must demonstrate the ability to repay the loan. This is the deal breaker and the reason why there is so much intrepidation to lend in my opinion. “Who” is to determine that the lender scrutinized the loan sufficiently when it goes bad and the borrower ends up in default? It’s not a question that can be taken lightly because this could lead to a lender being ruled against and having to face excessive litigation expense or even the prospect of an unenforceable mortgage.

The lenders are not willing to take this risk so they pound the table with their demands and cherry pick those that are pristine for loans while the others fall to the wayside. The lenders discriminate loan by loan and property by property as they see fit.

Many of you may look at government and say this is ridiculous and the lenders should just revert back to pre-crisis attitudes and start lending with more lax guidelines. This sounds logical but I wouldn’t support it. I saw what the government did to GM senior bond holders during the crisis. The government came in and said “this is how it’s going to go down”, GM was recapitalized and that was the final word.

If you consider the precedent of heavy handed government involvement in private industry and the intense level of litigation against the lenders over the past couple years, I wouldn’t expect the mortgage experience to get any easier anytime soon.

To summarize, until equitable resolution is no longer in question and there is more clarity on the continuing rollout of more Dodd Frank Regs, I would expect the very conservative stance from the lending community to continue and many people will not be eligible for loans.  

Blogging from the front line.
George H. Omilan
NMLS# 873983
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