- The Washington Times - Friday, May 29, 2009

It is time for a general mortgage update. For anyone who has refinanced or purchased a home since the drop in interest rates last November, my guess is that you had to jump through more hoops than you expected to get the loan closed.

My experienced processing staff is beyond frustrated. We have a hefty pipeline of excellent borrowers who are, at the government’s delight, taking advantage of today’s low fixed rates and refinancing. The lower rates result in lower borrowing costs, which will eventually pump money into this lousy economy.

However, it’s not easy. While the lax underwriting guidelines of the past were major contributions to the credit crunch that exists, the paperwork necessary to get a loan done today is over the top.

I spoke with a colleague who manages the underwriting department for a regional mortgage company. I asked her one question: “Why are perfect borrowers required to jump through so many hoops to get a simple refinance closed?”

She tells me that the “agencies are telling lenders that they will not fund closed loans unless certain requirements are met.”

By “agencies,” she means Fannie Mae and Freddie Mac, the two mega-mortgage companies that purchase loans from banks and turn them into mortgage-backed securities purchased by investors. Fannie Mae and Freddie Mac, in case you haven’t heard, were taken over by the feds.

While it is true that mortgage underwriting standards needed to be tightened, what is happening now is nothing short of curing dandruff through decapitation.

I have a client who decided to lock into a 15-year fixed-rate loan at 4.75 percent with no points or closing costs. His current 15-year rate is 5.125 percent. By refinancing, he drops his rate by 0.375 percent and saves about $50 per month. Additionally, he chose to take out $12,000 in cash to remodel a bathroom.

There are no closing costs or points. The applicant has a great salary, job stability and perfect credit. His loan is only about 50 percent of the property’s current appraised value.

Sounds like a lender’s dream loan, right? Wrong.

The lender came back with the following underwriting conditions:

The lender questioned whether the borrower was receiving a “net tangible benefit” to the refinance. Specifically, the lender wrote in an e-mail that a “savings of $50 on payment is less than 5 percent decrease. Need to decrease payment by a minimum $133.89 for a benefit.”

What? Taking $12,000 out, saving $50 a month and dropping the interest rate with no closing costs isn’t beneficial? And why must the payment drop by $133.89?

Despite the 50 percent loan-to-value, the lender wanted a letter of explanation as to why the client is taking $12,000 in cash.

The borrower’s home phone was not listed on the application, but his work number was disclosed. My client likes his privacy. According to the lender, Fannie Mae and Freddie Mac will not purchase a loan without a home phone number. Again, I scratch my head.

Although we have W2s, pay stubs and a documented verbal verification of employment, the lender tells me that Fannie Mae and Freddie Mac won’t fund the loan because the verbal verification occurred prior to five days before the loan closing. Therefore, they won’t close the loan.

Remember, that this applicant is borrowing $300,000 against a property worth $600,000. He has been working for the same company for the past 15 years. His credit score is an almost perfect 800.

Did I mention that he gave us bank statements that showed a net asset value of more than $500,000 in savings?

Read the conditions again. The credit crunch is still alive and well. I hope some lawmakers read this.

Ultimately, we got the loan closed, but is this what Congress intended when they enacted the various legislation designed to get credit flowing again? Whatever happened to common sense?

Lend money to folks who can demonstrate their ability to repay the loan and refrain from lending to folks who cannot. It is not rocket science.

Henry Savage is president of PMC Mortgage in Alexandria. Reach him by e-mail at [email protected]

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