Inspected Thoughts

Why did Fannie Mae and Freddie Mac end up under governmental control?

I believed that the two mortgage giants would weather this financial storm. As the gust of fears blew their stock prices down, and I worried over the amount of capital that they had decreasing, but I relied on the reports which indicated that they had the reserves to meet any of their needs. I had not expected the winds to batter sound houses, but as revelations of their accounting practices come to light, I find that the houses were not built so soundly.

The news today is that Mr. Lockhart will announce the new receivership status of these institutions. I had not heard of the new accounting irregularities; I thought that concerns expressed where based upon older practices, which were said to be corrected. Although it seems no accounting rules were broken, they were bent. The reserves were not there. The firms could not have met growing problems.

Although it seems many corporations complain about Sarbannes-Oxley, I think we might need even further standards to define what is appropriate if it can cause the consumer harm because of the action of such large firms. I thought that these two mortgage giants would have been more cautious, but this appears not to be the case. If investors cannot have confidence in their acquisitions, our market cannot move forward. As an investor, it bothers me that I cannot trust that my interests as an owner is not as important as the interest of the CEO. I feel that too many of us are looking at the short term results instead of long term gains.

In times of crisis, we easily accept measures which would prevent such issues from arising again, but we do not want to go to an extreme. Acceptable accounting standards seem reasonable to me. Letting people understand how financial figures are arrived at is the simplest start. If you tell me that you have $5, then I trust that you have that money. However, if you owe ten dollars to someone else, then you are in debt for $5. If that information is kept from me, there is no way for me to understand your financial situation. This is what occurred with Fannie and Freddie. They kept their debts hidden, so their money in hand was not really there. I realize that stating how a number was arrived at is easier said than done, but it really should not be so difficult, and it may cause firms to be more honest in their affairs.

By Rich Dansereau of Home America Mortgage and part of the Thornton Team

I am certainly fortunate that a well respected mortgage industry professional such as Rich agreed to do a guest blog. Rich is an active blogger who writes about many topics, but he is great at what he does. You can find out more about his writing and his service by going to the Thornton Team’s mortgage website. Unfortuantely for me they are not in Texas, but look at the bottom of the post to see where they do work. You should check them out.

One of the first steps you will be asked to do after choosing a lender is to complete the Uniform Residential Loan Application, also referred to in real estate parlance as the 1003. Most loan originators/officers will complete this on their computer with the information you provide while talking the phone, or direct you to a secure website where one can be completed. The 1003 is required for all mortgage loans and contains most of borrower’s important information. The information contained on the 1003 is initially unverified but can be changed as it is verified. Many companies will provide a pre-qualification letter based on this unverified information.

Most realtors prefer that a borrower be pre-approved prior to doing all the preparation work required to show potential homes to prospective buyers. In order to get pre-approved, which is a time sensitive commitment, based on verified information, that the lender is prepared to write a home loan, there are often underwriting conditions that must be cleared prior to final approval. These conditions will vary based on individual circumstances but there are several items that will invariably be requested for a full documetation loan (full documentation, a.k.a. full doc, loans will generally garner better pricing as they are less risky for the lender). Some of the most requested documents are:

• Two
  most recent detailed (show withholdings) paystubs - these will be
  compared with the income and employment information supplied at the
  time of application.

• Previous
  two years W-2 or tax returns (all pages - individual filings only)

• Other
  income documentation - pension award letter, social security award
  letter, disability award letter, etc.

• Two
  most recent month’s bank statements (checking and/or saving accounts
  - all pages) - these will be used to verify asset information,
  receipt of governmental and/or employer awards, and reserves (money
  on hand) supplied at the time of application.

• Other
  asset documentation given at the time of application to qualify for
  the loan - 401k statements, IRA statement, stock statements, mutual
  fund statements

• If
  you have declared bankruptcy, gotten divorced, lost a property due
  to foreclosure, or any other major event for which documentation is
  provided, these items will be necessary

Home America Mortgage holds licenses in Georgia, Alabama, Tennessee, Florida, South Carolina, Missouri and Colorado.