Recently, Fannie Mae released its Fraud Findings Statistics report, which reviews loans for various types of misrepresentations, such as identity, credit history, Social Security Number, property value and other information that is critical to the origination process. The report found that since 2014, nearly 70 percent of misrepresentations were related to liabilities, or “undisclosed debt” that is originated during the time between the original credit file pull and the loan closing. So why are liabilities at an all-time high? I have two suspicions…
First, under the Federal Housing Finance Agency’s (FHFA) extended rep and warranty framework, Fannie Mae is reviewing loans earlier in the process for eligible rep and warranty deficiencies that may trigger repurchase requests. Prior to the extended framework, this review only covered a sample of loans delivered, and deeper reviews for the non-performing ones. With an increased scope of review and a goal of greater transparency to lenders, more issues are being uncovered than ever.
The second reason we’re seeing record-high misrepresentations is due to the return of the purchase market. The increasing originations open the door for another interesting, albeit common trend. As they prepare to move into a new home, homebuyers are tempted to and often borrow more. Some of the purchases are for more essential items (new furniture, washer and dryer, lawn mower), while others, such as a new car, are not. Regardless, the collective amount of new debt and number of trade lines can significantly impact the borrower’s debt-to-income (DTI) ratio with the potential of making them ineligible for the mortgage.
For lenders, the vast majority of borrowers are forthcoming about their debts during the initial mortgage application. Many borrowers simply don’t realize how new “undisclosed debt” impacts their ability to qualify for their mortgage. It’s an innocent oversight. During my tenure at Equifax, I’ve seen some pretty interesting studies on undisclosed liabilities (for both risky and “safe” loans) and the data is telling. For instance, one study found that consumers with higher credit scores take on more debt during the “quiet period” of underwriting. In another review of more than 35,000 loans, more than 11,000 new lines of credit were found to have been opened during the quiet period.
Misrepresentations occur across the lending spectrum, from purchases to refinances and are not predictable by traditional scoring models. Conventional wisdom might suggest that a higher credit score is indicative of low-risk borrower, but Equifax research has found in some studies that a high percentage new debt are on loans to consumers with credit scores 720 and higher.
The good news is that there are dynamic monitoring platforms that assist lenders in identifying these liabilities on a consistent basis. In addition to early detection, it is important to discuss the impact of new debt with borrowers, as well as obtain documentation that is necessary for loans on the secondary market and even change the terms of the loan. The end result is a reduction in buy-back risk and the ability to provide a higher level of service to borrowers. Now that the purchase market is gaining traction and originations are increasing, this will be a significant component of any successful lenders’ strategy.
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