With the coronavirus continuing to wreak havoc across the country, the nation’s two largest sources of mortgage funding are taking additional steps to address issues that currently exist within the lending process.
Fannie Mae and Freddie Mac announced Tuesday that they are tightening some lending standards while also beginning to offer several “loan processing flexibilities.”
Several of the changes announced by the GSEs address potential concerns surrounding proof of income and assets, two things that can, unfortunately, change rather quickly for some borrowers right now.
According to both of the GSEs, they are changing the age of document requirements for most income and asset documentation from four months to two months. What that means is all income and asset documentation must be dated no more than 60 days from the date of the mortgage note.
Previously, that window was 120 days.
In Fannie Mae’s announcement, it states that the change is being made “in order to ensure that the most up-to-date information is being considered to support the borrower’s ability to repay.”
Beyond that, the GSEs are also making changes to their income verification requirements for self-employed borrowers. Under the GSEs current policies, when a borrower is using self-employment income to qualify for a mortgage, the lender must verify the existence of the borrower’s business no more than 120 days prior to the note date.
But that time period is changing from 120 days to 10 days.
“Due to the impact the COVID-19 pandemic and the various social distancing measures implemented by different jurisdictions are having on many businesses across the country, Sellers must now take additional steps to confirm that the Borrower’s business is open and operating within 10 Business Days prior to the Note Date,” Freddie Mac said.
According to the GSEs, lenders will need to verify a borrower’s business is still open using the methods below, or other means:
- Evidence of current work (e.g., executed contracts or signed invoices that indicate the business is operating on the day the Seller verifies self-employment)
- Evidence of current business receipts within 10 Business Days of the Note Date (e.g., payment for services performed)
- The Seller certification the business is open and operating (e.g., the Seller confirmed through a phone call or other means)
- Business website demonstrating activity supporting current business operations (e.g., timely appointments for estimates or service can be scheduled)
The GSEs are also making changes to their policies on stocks, stock options and mutual funds.
Fannie Mae explains:
In light of current market volatility, we are making the following updates when the borrower is using stocks, stock options, or mutual funds for assets: When used for down payment or closing costs, evidence of the borrower’s actual receipt of funds realized from the sale or liquidation must be documented in all cases; when used for reserves, only 70% of the value of the asset must be considered, and liquidation is not required.
According to the GSEs, these “temporary credit underwriting requirements” are effective for mortgages with application dates on or after April 14, 2020, and remain in place for Mortgages with application dates on or before May 17, 2020; but lenders are “encouraged to apply these updates to existing loans in process.”
Meanwhile, the GSEs are making changes to ease lending standards in other areas. According to the Federal Housing Finance Agency, the flexibilities include:
- Allowing desktop appraisals on new construction loans
- Allowing flexibility on demonstrating construction has been completed (alternative to the Completion Report)
- Allowing flexibility for borrowers to provide documentation (rather than requiring an inspection) to allow renovation disbursements (draws)
- Expanding the use of power of attorney and remote online notarizations
“These loan processing flexibilities will expedite loan closings and help keep homebuyers, sellers, and appraisers safe during this national emergency,” FHFA Director Mark Calabria said.
The changes come just over a week after the GSEs announced they were easing their standards for property appraisals and verification of employment as part of a growing effort to ensure lending can continue under these extraordinary circumstances.
Now, the GSEs are making more changes. As referenced above, some of the most notable changes include “flexibilities” around appraisals of new construction.
Freddie Mac explains:
For new construction properties, where the appraisal was completed “subject to completion per plans and specifications,” including properties that were fully completed after the effective date of the appraisal, and an interior and exterior inspection appraisal cannot be completed, Freddie Mac will permit a desktop appraisal.