What’s Behind Today’s Underwriting Guidelines

One question frequently asked is why mortgage standards are so strict these days. The reason for the stringent underwriting standards imposed is because of the very tight standards all mortgage loans go through after the bank has underwritten, closed and funded the loan.

When a mortgage loan fails an audit by Fannie Mae or Freddie Mac, the major loan servicers to the banks, the loan can be sent back to the bank that originated the loan, and the institution can be forced to buy the mortgage back.

According to the industry publication, American Banker, Sun Trust Mortgage in the fourth quarter of 2011 had $636 million in repurchase demands and a $215 million repurchase option. Sun Trust is a $177 billion-asset, Atlanta-based bank. Sun Trust’s CEO Bill Rogers was said that the increase in buy-back demands from the government-sponsored enterprises (Fannie Mae and Freddie Mac) was frustrating and hard to predict. Another institution, Flagstar received $190 million in buy-back requests in the fourth quarter.

The only way to avoid mortgage buybacks is by delivering perfect loans. This is why underwriting standards are what they are. Until Fannie Mae and Freddie Mac lessen their post-closing audits, the standards will not and cannot be relaxed. A perfect loan five years ago would not necessarily be acceptable in 2012.

Expect the process for loan approval to be tedious and slow. Be proactive. Manage the bank accounts you will be using in the mortgage application. Try to avoid non-payroll deposits. If applicants do this ahead of time, they will experience less aggravation later in the process. If there are non-payroll deposits, work on that information and have it ready to share.

Some mortgages these days qualify for the president’s initiative, Making Homes Affordable (MHA) program. This enables some borrowers with loans backed by Fannie Mae and Freddie Mac to refinance their loans with no appraisal and no ratios. These are bank-to-bank transactions. You need to go back to the institution servicing your loan. MHA mortgages do not require the usual documentation and are relatively easy loans to get done.

If you need a purchase mortgage or a non-MHA refinance, you have to prepare yourself for the reality of today’s underwriting standards. ★

Bill Starrels is a mortgage loan professional who lives in Georgetown. He can be reached at 703-625-7355 or by email, bill.starrels@gmail.com

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