The Paper Chase

Years ago, there was a lot of buzz about the future
of mortgage lending, and how we were going to see
the day when we would be doing paperless loan
files.

Ha!

Even when the loans were being created with
very little documentation, paper files still existed
but they were very skinny.

Now that the emphasis is on creating loans using
what we call full documentation, the files are huge.
We have to be careful in the office that the forklifts
moving files around don't bump into each other!

The files now need to document everything. This is
a list of the typical paperwork required by lenders.

Full Federal tax returns for at least two years.

If you have a corporation, two full years of the
Federal returns as well.

Bank statements for 3 months that include all
numbered pages (even if the pages are blank!)

Copies of drivers licenses, passports or social
security cards.

Retirement statements (don't forget all the
numbered pages).

Complete divorce settlement agreements.

Trust documents.

Proof that the earnest money check has cleared.

Paystubs for the last 30 days and W-2 forms
for the last two years.


In addition to the paperwork that the borrower
needs to provide, the disclosure requirements
are also paper-intensive:

The Good Faith Estimate that is required within
3 days of application for a particular property
used to be 1 page. Now it is 4 pages.

The Truth-In-Lending statement is still 2 pages,
also due within 3 days of application.

Now we have a form that the borrower needs to
sign acknowledging that they received the forms
and want to continue with the loan request.

If there are any significant changes to loan amount,
loan program, appraised value, or the terms moving
from float status to lock status, we need to send all
these disclosures again for each change to provide
up-to-date information to the borrower. This is
another 7-10 pages of paperwork for each updated
disclosure.

When the lender gets your loan file, guess what?
They have to issue similar disclosures from within
3 days from when they received the file. If they
make any significant changes, they have to issue
revised disclosures also.

The 5 page loan application form and preliminary
authorizations and representations total another
16 pages. These allow us to order the credit, inform
the client that they deserve a copy of the appraisal,
tell them who is responsible for dealing with fair
lending issues, etc.

Then we get to the offer to purchase which has
ballooned to about 20 pages with all of the real
estate contract provisions.

Escrow instructions and the preliminary title report
are also received and help pad the file.

In short, it has become an incredibly paper-intensive
proposition. And on top of that, much of the process
has become serial in nature. The file needs to go
through a step before it can move to the next step,
and so on.

With the increased scrutiny of every piece of paper,
it is taking a lot of time to get a loan through the
system. It is frustrating, because the underwriters
have become like CSI investigators, chasing down
every discrepancy until we can document it to their
satisfaction. And they are not easily satisfied.

The message I would like to leave you with is this:

Be prepared to produce a lot of paperwork to help
us prove your qualifications to the underwriter.

Be prepared to document and loose ends that are
part of our presentation to the lender.

Don't expect that things will move through quickly.
The underwriters are being judged on the quality
of their files, and for them that means that it is
thoroughly documented and that there is no oppor-
tunity for anyone to criticize their decision or the
paperwork that supports it. "Good enough" is not
a standard that they will accept.

I do my best to help you understand what to expect
and to quote time frames that are as accurate and
achievable as possible. Even then, I still get surprised
from time to time with the requests that the under-
writers make to feel comfortable with the file. But,
I will always try to communicate what is going on,
even though I can't control all elements of the process.

The 17-Day Test

In California, the standard real estate purchase
contract includes a paragraph that deals with the
buyer's requirement to remove their financing
contingency.

For the most part, the agents, seller, and buyer
are eager to get the transaction moving forward
and to feel comfortable that the transaction will
be successful.

As such, most of the purchase contracts that I
see accept the standard verbiage that calls for
the buyer to remove their financing contingency
within 17 days of acceptance of the contract.

This is 17 calendar days, and the intent is that
the buyer feels comfortable at this point to put
their deposit money at risk to be released to the
seller because they will no longer invoke the
claim that they cannot obtain financing to complete
the purchase.

In advising my borrowers, I don't feel that they
should put their money at risk until they have
written approval from the lender, with any
conditions clearly spelled out, and that the
appraisal has been completed and reviewed by
the lender.

The big problem is that in that 17 day period, we
are going to lose from 4-6 days for weekends and
maybe more if we have any holidays that are to
be observed.

This leaves us 10-13 working days to get the
application, all disclosures issued/reviewed/
returned, put together a complete credit package,
get the appraisal performed, submit the file to the
lender and have it go through the underwriting
process.

In the past, this was difficult but achievable. The
disclosure requirements and underwriting standards
were significantly less stringent at that time. This
is not to say that the way mortgages were done then
is better than now. Only that it was easier to move
a file through the system then.

In today's world, it takes longer than the 17 days to
provide some certainty to my borrower so that they
feel secure in removing their financing contingency.
It is still a worthy goal, but a sense of reality and
cooperation needs to be present so that expectations
are reasonable and that the transaction is not threat-
ened by missing a date that is called for in the contract.

All parties need to understand that things have
changed. As much as I would like the process to be
as fluid and loose as it once was, it is no longer the
case.

We, as lenders, are now required to provide more
stringent disclosures. Once the borrower receives
them, we have to wait 3 business days before pre-
suming that they find the proposed terms acceptable.
At that point, we can request payment for the
appraisal, and get it ordered. Once the loan is
locked, we have to provide new disclosures, and
the borrower has a new 3 days to review and
accept those terms. During the process, if there
are any changes that change the annual percentage
rate on the loan request by more than 1/8%, we
have to issue another new disclosure. The borrower
has another 3 days to find these terms acceptable.

You can see how the time line can get stretched out.
Of course, if the borrower finds all the disclosures
acceptable and return their acknowledgements
promptly, we don't have to wait the full three days
for all of these events.

But once the lender gets the submission package,
they are not glancing at it and rubber stamping
an approval. They are going through everything
with the proverbial fine-toothed comb.

The lenders want to make "perfect" loans. And
that means that all the paperwork has to be very
thorough. If a form is missing a signature, they
will want it corrected. If a figure in one part of the
file is inconsistent with another part of the file, it
will have to be reconciled and corrected. If escrow
information differs from title information, which may
differ from information in the borrower's file, it will
have to be corrected.

All of this is intended to inform you that you need
to be prepared for a more onerous process than
what you may be used to.

We can continue to have a goal of getting what the
borrower needs finished by the 17-day deadline.
But, if it does not happen, it does not mean that it
is necessarily anyone's fault, or that someone
"dropped the ball", or that someone is inattentive.

It merely means that there may just be too much
to be done in that time frame, and that all parties
can still work together to let the sellers and buyers
feel comfortable that their transaction has a good
chance for success.