Mortgage Compliance And Changes In Mortgage Industry

This BLOG On Mortgage Compliance And Changes In Mortgage Industry Was UPDATED And PUBLISHED On March 25th, 2020

So, mortgage interest rates are increasing and have been the highest since 2008. Mortgage lending guidelines and mortgage compliance have tightened up to the point where prime borrowers are the norm. Mortgage default rates have dropped to record lows as the quality of borrowers has risen.

Then we have automation, which makes submitting loans easier and more efficient
The professionalism of realtors, attorneys, and mortgage professionals are all at better standards
This holds true especially since part-timer loan officers are out of the business

In this article, we will discuss and cover the Mortgage Compliance And Changes In Mortgage Industry.

Increased Mortgage Programs And Increased Mortgage Compliance

With more and more mortgage loan programs available and more simplified to understand, learning the lending guidelines associated with those programs should make competency that much more easy for a mortgage professional to say to a borrower:

If you have x ad y, then you get you Z
Finally, we have access to information that has made potential clients themselves more educated

This makes the ability of a loan professional to obtain the necessary documents that much easier.

Average National Credit Scores

The average credit score nationally is 681,

This would allow the average person who wanted to purchase eligible with most lenders wanting a 640 or above

So with the tides pointed in the right direction for volume to be back at 2005 levels, why is this not the case?

Issues With Mortgage Compliance

The main culprit is mortgage compliance.

Here are some points to consider:

First, the average mortgage loan gets touched by 3-4 more people
Before a mortgage loan used to have a loan officer, a processor, an underwriter, and an appraiser, with a closer/funder at the end

Now we have the following:

intake person or opener
loan officer assistant who handles a lot of the duties once performed, so he/she can focus on generating new business

If the loan officer does enough business, they may even have a junior loan officer to assist the process:

Then there is an intake person who will open the file once it is received by the lender
This individual will ensure the minimum necessary documents are in the file
Will have to properly register it

Documents Required To Process Loan

Since the mortgage meltdown and the real estate market crash, the amount of necessary documents has gone up, as have the required disclosures sent out tot he borrower:

This can add a day or two to the turn time
Every file reviewed will take that much longer to look at prior to submission to the underwriter
At this point, the intake individual will submit the file to the processor, who may order a 4506T
What is this you ask?
It is the order of the tax transcripts of a borrower on the loan
This form goes to the IRS
They will send out the last two years records of income reported to them by the client
This is to ensure the borrower’s ability to pay is certified
The info matches what he/she put on the 1003/application

Since the IRS has had massive cutbacks, this process, which used to take 1-3 days, can now take up to 3 weeks, further delaying the process.

Mortgage Underwriting Process And Mortgage Compliance

The next person who is involved is the gatekeeper of lending: the underwriter.

Gone are the days of common sense underwriting
Now a mortgage underwriter has to pull multiple fraud detection software scans

Looking at various items such as:

to see if the buyer and seller know each other
are they on title/vested on another home they did not disclose
or is the home they are buying multiple flips?

With each fraud detection, any little item deemed questionable can delay, suspend, or be cause for denial of the file:

The loan officer or realtor will then have to go back to the borrower and ask for necessary documents or explanation to make the underwriter feels better about the transaction’s legitimacy

Income Qualification And Debt To Income Ratios

Then the calculation of the income and looking at the assets is more tedious than ever before.

More and more people get paid bonuses and have unreimbursed expenses on their paycheck stubs
More work side jobs
This will all require extra documentation and support from the employer to make the file look stronger and to verify the information submitted
This only adds to the turn times of a file that may only be locked for 30-45 days
Then you have assets
Deposits in the form of cash from a wedding or a birthday are common
If that cash is more than $150 for some lenders, they want to know where that money is coming from
If that money is needed to help qualify the client for the loan, then you must be ready to validate and source where that money came from
If borrowers cannot source this money, then it might not be allowed to be used in the asset count
This presents an ever-growing rift in the realities of life some people get cash all the time from family or from side jobs and money owed and cannot source the money, hence making the process more tedious and time-consuming
Underwritten loans used to be contracted out to Mortgage insurance companies and could do 8-12 underwrites in a day
Now because of mortgage compliance, they are all done inhouse
The number of completed underwrites have been cut in half
If it is a retirement account, you have to verify where it is

Source a withdrawal paper trail, and if it is life insurance, get a paper saying it is not a loan against the insurance.

Mortgage Compliance On Appraisal And Appraisal Review Process

Then you have the appraisal itself.

With the advent of the AMC or Appraisal Management company, appraisers now are required to write so much more info in their addendum
They are doing this will getting paid less money at the same time
Less and less appraisers are doing more work
They are driving further distances and being required to do more legwork with no contact with the realtor or loan officer as stipulated by Fannie Mae/Freddie Mac
The reviewer, who is basically making 25-40% of the total fee charged to the borrower, for sitting at a desk to review someone else’s work, has to overlook and sign off on the value and comps used
This adds another day and another fee to the transaction, but does not compensate the person who is still taking the risk(appraiser)

More work again in the industry for less margin.

Quality Control And Clear To Close

Finally you have pre-audit fraud checks at the end of closing by different systems like MERS, fraud guard, Lexus Nexus, which are designed to make sure the borrower did not buy another house, add on new debt, re-verification that they are still employed.

These last second processes can catch something, because no one is perfect, and people need to move and lie their lives
Someone might take on a car loan at 0% when they should not because they need a new car and the terms are favorable

Forget the fact they now hurt their chances to qualify even after the loan is approved, and won’t know this will be caught on a re-credit check prior to closing.

Mortgage Compliance On Agency Guidelines Versus Lender Overlays

Overlays: What does this mean?

Well Fannie Mae and Freddie Mac has a set of rules and standards on lending that we all abide by when we(banks) lend on houses that they will insure and guarantee
Banks, for their own compliance(the subject of the article), feel the need to add or remove their own set of rules, and it is always on the side of caution
Fannie Mae says: you can do this, bank A: no we still want this in order to do that
This grey area of lending and interpretation rather than following it by the book makes lenders conservative on programs that would otherwise assist in taking inventory off the market

Fannie Mae chooses not to mandate the change, but rather allow for discretion than it is almost a guarantee that discretion will air on the side of caution.

Title In The Mortgage Process

Finally, as a title rep, we have seen the number of pages involved in closing almost double in ten years.

The average FHA number of pages for closing a refinance is between 120-150

That is a book’s worth of repetitive documents like 7 escrow agreements for taxes, 7-10 for notification they have an FHA mortgage and have to pay it back, and 7-10 HUD addendum stating they signed a HUD with the fees associated.

About The Author: Ron Granado

Like to offer a special thanks to Mr. Ron Granado of Plymouth Title Guaranty Corporation. Ron Granado is the author of this article and a guest writer for Gustan Cho Associates. Ron Granado always goes out of his way to help not only the public but also real estate professionals such as attorneys, real estate brokers, mortgage loan officers, and other title companies answer questions they may have. Ron Granado also takes valuable time off his schedule to write financial articles such as this blog on Mortgage Compliance to help professionals in the real estate and mortgage industries hear his opinions and the latest market news.

Ron Granado

Account Executive | Plymouth Title Guaranty Corp

1301 W. 22^nd Street | Ste 505 | Oak Brook, IL 60523

(800) 900-8569

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