Credit monitoring won’t end with mortgage app

Stricter requirements jettisoned, but buyers will still need to list debts taken on during the ‘quiet period’ before closing

On second thought, never mind. Despite earlier reports to the contrary, it turns out that a mortgage lender will not have to pull a second full credit report hours before closing on a home purchase or refinancing.

In a clarification of a policy announced earlier this year, mortgage giant Fannie Mae now says that applicants will need to come clean about any debts they’ve incurred since they submitted their mortgage application — or debts they never disclosed during the application. But a formal pre-closing credit report will not be mandatory to confirm their creditworthiness.

Instead, loan officers can use other techniques to verify that people haven’t financed a new car, taken out a personal loan or even applied for new credit in any amount that might make it more difficult for them to afford monthly mortgage payments.

Among the techniques Fannie expects lenders to use on all applicants: commercial or in-house fraud-detection systems that have the capability of tracking applicants’ credit files from the day their loan request is approved to the moment of closing.

Though Fannie made no reference to specific services in its recent clarification letter to lenders, some commercially available programs claim to be able to monitor mortgage borrowers’ credit activities on a 24/7 basis, flagging such things as inquiries, new credit accounts, and previous accounts that did not show up on the credit report pulled at the time of initial application.

One of those services is marketed by national credit bureau Equifax and dubbed “Undisclosed Debt Monitoring.” Aimed at what Equifax calls the “quiet period” between application and closing — often anywhere from a month to three months — the system is “always on,” the company says in marketing pitches to mortgage lenders.

Home loan applicants failed to mention — or loan officers failed to detect — “up to $142 million in auto loan payments” during mortgage underwriting in first mortgage files reviewed by Equifax last year alone, according to the credit bureau. Those loan accounts had average balances of $361 a month — more than enough to disqualify many borrowers on maximum debt-to-income ratio standards imposed by Fannie Mae, Freddie Mac and major lenders.

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Why the sudden concern about new debts incurred after mortgage applications? It’s mainly because Fannie and others have picked up on a key type of consumer behavior pattern that has helped trigger big losses for the mortgage industry in recent years. They noticed some buyers and refinancers hold off on creating new credit accounts until they’ve cleared strict underwriting tests on the debt-to-income ratios and been approved for a loan.

Then they splurge. Additional debt loads can run into the tens of thousands of dollars, executives in the mortgage and credit industries say. Had those new accounts been present on their credit files at application, borrowers might have been turned down for the mortgage, or required to make a larger down payment or pay a higher interest rate.

Fannie’s new policy puts the burden of detecting these debts squarely on lenders’ or loan officers’ shoulders. Whether they pull additional credit reports — still an option allowed under the revised policy — or use some form of monitoring service, lenders must guarantee that the debt loads stated in any mortgage package submitted for purchase by Fannie Mae are scrupulously accurate as of the moment of final closing. If not, the lender will likely be forced to endure the most painful form of punishment in the financial industry: a forced “buyback” of the entire mortgage from Fannie Mae.

Billions of dollars in buybacks have been demanded by Fannie Mae and Freddie Mac this year alone — a fact that is likely to make lenders even more eager to conduct some type of refresher credit check or continuous monitoring of all new loan applicants.

What does this mean for those planning to finance a home purchase or refinance an existing mortgage into one with a lower interest rate? Tops on the list: Be aware that sophisticated new credit surveillance systems are being placed into operation in the mortgage industry.

Next, try not to inquire about, shop for or take on new credit obligations during the so-called quiet period between an application and the scheduled closing. Keep credit pictures simple until settling on the mortgage.

During the heady days of the housing boom, nobody was looking for debt add-ons before closings. Now they are scanning for them all the time.