Thursday, June 3, 2010

New Fannie Mae Rules Will Kill Your Real Estate Deals if You Ignore Them!

For all conventional loan applications dated on or after June 1, 2010, Fannie Mae has instituted some new rules as part of their Loan Quality Initiative. They are not fooling around this time. Their goal is clear: to reduce loan fraud and the number of foreclosures. There are many new changes, but here is the main thing that WILL cause a deal to STOP!

Lenders must ensure that borrowers have not taken on any additional debt between the date of loan application and the date of closing. If a lender does not follow the new rules, Fannie Mae will refuse to buy the loan from them. To remain compliant, Fannie Mae suggests that lenders do the following:

• Refresh the borrower’s credit report just prior to closing in order to uncover additional debt or credit inquiries.
• If the borrower has new debt that was not included on the loan application, the additional debt must be considered in qualifying the borrower.
• Credit inquiries must be researched to determine whether the borrower has obtained additional debt that is not yet shown on the credit report.

It is no longer an acceptable practice to “suggest” to borrowers that they refrain from taking on additional debt before the closing. New debt will, at the very least, delay the closing. If the new debt pushes the borrowers outside of the qualifying debt-to-income ratio for the loan, then the deal will die.

None of this is bad. In fact, it’s very good. The financial mess we’re in at the moment was caused by Wall Street greed (inventing loan products that were intended to rip-off borrowers), by lender greed (selling the loans), by real estate agent greed (directing borrowers to lenders who would cheat to close a loan), by title company greed (ignoring the unethical business practices of lenders and agents in order to maintain their flow of business), by appraiser greed (falsifying appraisals), and by borrower greed (lying to get their dream house).

Although some are innocent, many are not. Now we all get to pay for the sins of the guilty.

The best way to handle a situation like this is to spend your energy on learning the rules and learning how to operate in the new environment. It is not going to go away. The only way to stop the bailouts and the regulation and the recession is to stop cheating. A free market society is a great thing until it gets out of control, and it is clearly out of control. The rules are now tightening, the crooks are being driven from the business (at a very slow pace), and the people who have accepted the new reality are thriving. The pie is definitely getting smaller, but for the people who understand that things are not going to magically return to sub-prime heaven, their piece of the pie has gotten bigger.

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