I’ve been hearing a lot about how underwriting guidelines are loosening up in response to the government shutdown.
Nowadays lenders double-check and document every possible area where fraud occurred in the past. Two of these areas – verifying social security numbers through the Social Security Administration and your income via IRS tax transcripts – are effectively shut down, as the traditional methods of verifying that information are simply not available at the moment.
To understand this you have to know that lenders require you to sign two forms: the SSA 89 allows the lender to verify your social security number, and the 4506T allows the lender to verify what you reported to the IRS as your income and deductions. Fannie / Freddie require that those forms be executed – meaning that your information is actually verified – prior to closing the loan if your loan is to be sold to Fannie or Freddie.
They announced this week that they would waive the requirement.* The lender only needs to verify your information before the loan is sold to Fannie / Freddie, which usually happens 45 to 90 days after close of escrow. This allows lenders to close loans even though the government is shut down. That works, right?
No. The problem is that if a lender closes the loan and after closing it turns out the information doesn’t verify correctly, Fannie / Freddie won’t buy the loan – the lender is stuck with it.
So the lenders have to make a decision: do we close loans and risk taking a huge loss on them because we can’t sell them, or do we delay closing loans that are already in the pipeline until the government reopens?
Since delaying closing would undoubtedly kill a lot of deals in the pipeline that the lender has already invested in, destroy relationships with brokers (in the case of wholesale lenders) and seriously harm consumers, most lenders are choosing to close the loans they have in process and take their chances.
I have a VA purchase in process that I hope to close today. It’s an excellent example, because it’s a purchase transaction, the sellers have already moved out and the buyers have already ordered the moving trucks. If we don’t close, real people will be really hurt by the failure.
The point of telling you this is only to inform. Other than writing your Congressman, there’s nothing you can do, and my Congresswoman is already on the side of re-opening the government.
But if someone tells you that the shutdown isn’t creating any real problems, you can tell them that you know otherwise.
And if someone tells you that Fannie Mae and Freddie Mac have come up with a work-around, you can tell them “Yes, but…”
And if two months from now that government is still shut down, and the mortgage industry collapses because lenders have realized they have to stop taking the risks they’re taking, you can say that you knew this would happen.
My name is Casey Fleming. I originate mortgage loans in California and am based in Silicon Valley. I specialize in giving my clients a peek behind the curtain, and giving them enough information to make informed decisions for their family’s financial future.
NMLS: 344375 / BRE: 00889527
From housing economist Tom Lawler (via Calculated Risk Blog): Fannie Mae on Government Shutdown and Government Verifications
“In some instances, Fannie Mae requires validation through a government agency, such as the Internal Revenue Service (IRS) and the Social Security Administration (SSA) for certain documentation or information provided by the borrower. During the government shutdown, these requests may not be processed. Fannie Mae is implementing the following temporary policies with regard to these two agencies.
“IRS Transcripts: Fannie Mae requires lenders to have each borrower (regardless of income source) complete and sign a separate IRS Request for Transcript of Tax Return (Form 4506-T) at or before closing. Lenders are only required to execute the Form 4506-T prior to closing for loans originated and underwritten with the policies pertaining to borrowers with five to ten financed properties. This policy requires the lender to obtain the IRS copies of the tax returns or transcripts to validate the accuracy of the tax returns provided by the borrower prior to the loan closing.
“Because these requests may not be processed during the shutdown, Fannie Mae is temporarily revising this policy to enable lenders to obtain the transcripts and complete the validation after closing but prior to delivery of the loan. Loans originated and underwritten in accordance with the five to ten financed properties policy with tax returns that cannot be validated prior to delivery are not eligible for sale to Fannie Mae.
“Social Security Number Validation: When data integrity issues pertaining to the borrower’s Social Security number are identified, a lender may be required to validate the Social Security number with the SSA using SSA Form 89. Because these requests may not be processed during the shutdown, Fannie Mae is temporarily revising this policy to enable lenders to obtain the verification prior to the delivery of the loan. If the Social Security number cannot be validated with the SSA prior to delivery, the loan is not eligible for sale to Fannie Mae.”
Other temporary Seller and Servicing Policy changes related to the government shutdown can be found in Lender Letter LL-2013-08.