Anyone who has applied for a mortgage in the past few years can probably relate to this saying, as banks and lenders require what is excessive documentation by any stretch of the imagination. Many of my clients who have not been through the process recently can get frustrated and put off by this. Especially the ones that are so easily qualified they could pay the mortgage in cash outright if they wanted to.
So how did this happen and what’s the root cause?
As well all know, during 2004-2007, lending practices and requirements were much too loose and this led to billions of dollars lost by banks and investors when so many mortgages into default.
It is no surprise that the mortgage industry has since corrected itself and put many measures into place to make sure the new loans being created are of the highest quality possible.
And while I work hard to communicate and explain this reality, I cannot help but empathize as I have the same frustrations myself. There are many things we do to mitigate this and make the transaction as smooth as possible, however it is important for people to know and understand the “why behind the what.”
For Example, here are some examples of standard documentation items currently requested on nearly every single loan:
- Letters of explanation for past addresses from many years ago
- A blank last page of a bank statement
- Explanation and proof of source for deposits in bank accounts
These three do have specific reasons for importance that may not seem relevant at first. For example, the last page of a bank statement which is often blank, can only be confirmed as such, once it is seen. In other words, the lender doesn’t know that it’s blank until it sees that it’s blank. Some bank statements do provide important information on the last page of the statement.
The reason for this is two-fold, first of which being that the investors require all this documentation, and 2nd it is a way for lenders to verify information on the application, which is the cornerstone to underwriting and making practical, sound, decisions.
One of the biggest differences in lending from 2006 to now, is the amount of discretion an individual underwriter has. In 2006, they had much more discretion, and in turn it led to using this discretion to find ways to approve loans, many of which should not have been approved.
So, the industry, led by the investors and giants like Fannie Mae, has removed discretion and in turn placed more emphasis on guidelines and requiring documentation.
This ultimately means that a lender and underwriter must treat every loan the same, and document every loan the same. They cannot relax standards on the $200,000 loan for a million dollar home, just the same as you would expect them to be more cautious about a loan with only 5% down.
When investors are deciding how to invest in and purchase these mortgages, they rely heavily on large scale data and past performance of these loans. For example, if they look at a group of 1,000 loans and the handful that went into default, they may find certain patterns or possible clues that the loan was not credit worthy in the first place. This data ultimately gets trickled down into underwriting guidelines, and therefore documentation.
About the Author ~ Since 2003, Beau has been a mortgage professional and has successfully closed over $100 Million in mortgages. He is the Founder and Senior Mortgage Advisor at Transparent Mortgage and has worked for Luxury Mortgage, Bank of America and Impac Funding. Beau is truly committed to serving the needs of his clients and raising the industry standards for integrity and transparency.
Questions, Comments, or Personalized Rate Quote? Contact Beau today: 949.230.9358 or firstname.lastname@example.org