FRIDAY, JULY 16, 2010
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Economy & Business A13 For some borrowers, another credit check before closing
Lenders anxious over effects and timing of Fannie’s new safeguard
by Dina ElBoghdady People who applied for a mort-
gage as of June 1 might see their finances — specifically their debt — under renewed scrutiny days before they are scheduled to complete a home purchase. Fannie Mae, the giant govern- ment-run mortgage finance com- pany, rolled out a new policy that encourages lenders to retrieve a borrower’s “refreshed” credit re- port just before a loan closes. The goal is to check whether the borrower has taken on addi- tional debt or opened new lines of credit since applying — such as a second mortgage or an auto loan. Such new debt could un- dermine the ability to repay the mortgage.
But the rule is causing angst among lenders, who say the pol- icy creates logistical nightmares that could trip up home purchas- es at a critical time in the hous-
ing market’s struggle to recover. They say new debt, even if it’s a short-term obligation, could skew a borrower’s credit profile enough so that preapproved loans do not get funded. This week, Fannie said that it
is reviewing the policy based on feedback from lenders and that it will offer more guidance by the end of July. In an update on its Web site, the company said it did not intend to require additional credit reports, but only to em- phasize existing policies that re- quire lenders to perform due dil- igence on loans before selling them to Fannie. Deborah Slade-Horsey, a vice president at Fannie, said the company was merely making a suggestion to lenders. “Never was the intent that it is some- thing that you are required to do on 100 percent of the loans,” she said.
On Wednesday, Fannie re- moved from its online docu- ments any reference to refresh- ing credit reports.
Lenders concerned
Until Fannie settles the confu- sion, lenders are anxious about
the consequences. They say a credit report is a mere snapshot and can be especially misleading at closing time. In those final days, borrowers tend to use their credit cards or open new ac- counts to pay for movers, furni- ture and appliances. These charges can add to their debt temporarily, even if they plan to pay off the loans the following month.
“Credit changes all the time.
It’s not a static thing,” said David J. Bridges of McLean Mortgage. “People can’t shut down their lives for 60 days while they’re purchasing a home.” Lenders said that, in the past,
they pulled credit reports when prospective borrowers applied for a loan. Those reports are val- id for 90 days. Lenders would not update them unless they had rea- son, said Richard Green, a sales manager at Presidential Bank Mortgage in Bowie. For instance, if the original report showed that the borrower had applied for new credit cards, the lender would check to see if the credit was granted, Green said. “The lender was always sup- posed to turn over the stones
Goldman to change business practices goldman from A1
tiny fraction of its $13 billion in annual profits to resolve the claims, the settlement represents a black mark for the bank, which had insisted since the suit was filed three months ago that it had done nothing wrong. It comes on the same day that Congress sent legislation to the president to curb many Wall Street practices — including ones that have made Goldman a lot of money. Goldman was one of the few fi- nancial institutions to emerge from the economic crisis un- scathed — even richer — until it became the subject of criticism from regulators and Capitol Hill that it exploited government bail- outs and took part in deceptive business practices that exacer- bated the financial crisis. Still, by settling, Goldman is able to escape a protracted court case while it is trying to rebuild its public reputation. The com- pany has lost billions of dollars in market value since the filing of the fraud suit and continues to face a Justice Department probe and private lawsuits. Securities lawyers said the settlement was carefully worded to not affect those suits. Goldman also said the SEC plans no other charges in connection with its mortgage se- curities. “We believe that this settle- ment is the right outcome for our firm, our shareholders and our clients,” the bank said in a state- ment. For the SEC, a regulator trying to rebuild its own reputation af- ter numerous setbacks, “it’s a great victory,” said Jacob Frenkel, a former SEC lawyer now in pri- vate practice. “When the agency resolves such a high-profile case quickly and with a strong deter- rent message and result, it’s a win.” The crux of the case alleges
that Paulson & Co., a hedge fund, was looking for a way to bet on a drop in the housing market and that it asked Goldman to help create a financial product that would allow such a wager. Paul- son, led by hedge fund manager John Paulson, essentially bought insurance against the investment — much like taking out an insur- ance policy on a person who se- cretly has a potentially deadly disease. Then, Paulson helped assemble
that product by selecting individ- ual securities to include in it. These were mortgage-related se- curities that Paulson thought were likely to lose value. The SEC claims that the fund’s motiva- tions and role were concealed when Goldman marketed and sold the investment, known as Abacus 2007-AC1, to clients who hoped it would gain value. The investment ultimately lost
virtually all its value, costing in- vestors $1 billion. As part of the settlement, Gold- man said it “acknowledges that the marketing materials” for the transaction “contained incom- plete information.” “In particular, it was a mistake for the Goldman marketing ma- terials to state that the reference portfolio was ‘selected by’ ” an objective third-party company “without disclosing the role of Paulson & Co. Inc. in the portfolio selection process and that Paul- son’s economic interests were ad- verse” to investors, Goldman said. To settle the charges, Goldman
will pay $300 million to taxpay- ers and $250 million to two for- eign banks that invested in the
JACQUELYN MARTIN/ASSOCIATED PRESS
SEC enforcement director Robert Khuzami called the Goldman Sachs settlement a “very stark reminder” to financial companies.
subprime security that the SEC alleged was designed to fail. The changes to how the com-
pany does business are just as sig- nificant, lasting three years, secu- rities lawyers said. Goldman must review the role and respon- sibilities of company lawyers and compliance executives in the preparation of marketing materi- als for mortgage securities. Gold- man employees in the mortgage business must receive additional education and training. Those changes put more pres- sure on Goldman to dramatically increase the vetting that is done of disclosures that accompany products the bank sells to clients. Goldman has faced a range of ac- cusations that it has bet against its clients and concealed impor- tant information from them —
accusations the bank has denied. But under the settlement, Gold- man is likely to be far more cau- tious in ensuring that it is telling clients everything they might deem important. Judge Barbara S. Jones of the
U.S. District Court for the South- ern District of New York must ap- prove the settlement. Late last year, a judge sitting on the same bench rejected an SEC settlement with Bank of America, saying it was far too modest. Later that bank and the SEC settled for a much larger sum.
An SEC complaint against Fab-
rice Tourre, a Goldman vice presi- dent who arranged the deal, con- tinues. Based in London, he is on leave from Goldman while that case unfolds.
goldfarbz@washpost.com
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that were in front of him, but this goes beyond that,” he said. When Fannie Mae’s new policy
kicked in last month, larger lend- ers started to pull fresh credit re- ports three to five days before closing, sometimes creating a mad scramble at the most stress- ful time in the home-buying process, said Mike McNamara, regional vice president of United One Resources, which supplies credit reports to lenders. McNamara said that, for exam- ple, one lender pulled a new credit report the day before a home purchase was about to close and learned that the buyer had applied for a new credit card. That triggered an inquiry that left the borrower in limbo at the last minute, McNamara said. “Imagine if someone had five or six inquiries on their credit re- port and we have to contact ev- ery creditor,” he said. Such delays can be costly to borrowers, especially if they are buying foreclosures or taking part in short sales that allow dis- tressed homeowners to sell their properties for less than what they owe on the mortgage. “These types of purchase con-
tracts are very harsh in terms of late closings,” said Faramarz Moeen-Ziai of Bank of Com- merce in California. “In many cases, there’s a $100-a-day fee to our borrowers for any delay.”
Warning on new credit Eric Gates, a mortgage broker
at Apex Home Loans in Rock- ville, said people who locked in favorable interest rates might have to pay to extend the rate lock if their closing is delayed. They also might have to pay to store their belongings if they cannot move on time. “We keep telling people: ‘Don’t open new accounts. Don’t close existing accounts. Don’t do any- thing whatsoever that will alter your credit situation,’ ” Gates said. The initiative has riveted the lending community because of the critical role that Fannie plays in the mortgage market. It buys loans from lenders and sells them as mortgage-backed securi- ties to investors. It will not pur- chase loans that do not meet its rules, meaning lenders have to abide by Fannie’s guidelines or lose a key source of financing.
If loans sold to Fannie go bad because of fraud or poor under- writing, lenders risk having to buy back those loans or compen- sate Fannie for its losses. In the first quarter, lenders repur- chased about $1.8 billion in loans, up from $1.1 billion a year earlier. In announcing its new policy,
Fannie warned that if a borrower defaults, any debts that were not adequately disclosed up to the time of closing would subject the lender to a repurchase. The com- pany also said that if a lender pulls a credit report the day be- fore closing that is consistent with the original report, the lender will remain responsible for any new debt. “Imagine if a borrower is plan- ning to close on a house tomor- row and goes out to buy a car this afternoon,” said Brian Chappelle, a banking consultant. “That may not immediately show up on the credit report. But if that borrow- er defaults on the loan two years from now, the lender may have to repurchase that loan.”
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