Beginning December 14 it will be a little more difficult for self-employed borrowers to secure a Fannie Mae-backed mortgage loan.
As of mid-month, the GSE will require self-employed loan applicants to provide their most recent three months of business bank statements, which will need to back up submitted profit and loss statements. Fannie Mae previously required just two months' worth of statements. And, some predict that Fannie and other lenders' tightening credit requirements could further frustrate self-employed homeowning hopefuls.
The vulnerability of small businesses in the time of the COVID-19 health crisis has industry pundits pondering the implications of increasing borrowing restrictions on the self-employed.
Jeff Lazerson, a mortgage broker writing for mortgagegrader.com—and a contributor to The Sun—writes in his column that "tying three recent bank statements to the entire year-to-date P & L can easily become a nightmare for borrowers and underwriters."
"If you own 25% or more of any business entity, corporation, LLC and the like, you are self-employed, even if you are a W-2 employee of your corporation," Lazerson explained. "Or if you have Schedule C income on your 1040 tax returns (independent contractors, for example), you also are self-employed."
Tim Rood, Head of Industry Relations for SitusAMC and an expert in the subject matter at issue, said he finds it difficult to blame any lender or guarantor for requesting an extra bank statement "to determine the capacity and creditworthiness of a self-employed borrower in the face of literally hundreds of thousands of business closures during COVID."
He adds that "Fannie Mae and Freddie Mac are arguably the best credit risk managers in the business and they see unambiguous stress in the self-employed market and are taking modest precautions."
"The bigger challenge for self-employed borrowers," he said, "is that the extraordinary demand for mortgages has exhausted the capacity in the lending industry so any loan that requires any extra effort or stresses the judgment of an underwriter—like self-employed borrowers—is put on the back burner until there’s more capacity in the system."
And then there is the issue of tightening credit requirements.
"Fannie guidance allows underwriters to dig deeper for things like updated business plans, cash flow analyses, and month-to-month trending analyses to help rule the business owner in," wrote The Sun columnist Jeff Lazerson. "Discretion and doubt can also make lenders just say no. Lenders have a clear memory of being second-guessed in days gone past and required to buy back what lenders believed to be responsibly underwritten mortgages."
And to make matters trickier for these borrowers, the extra time and underwriting costs that accompany the above have motivated Fannie and other lenders to raise FICO credit requirements.
"Some lenders added self-employment charges in the form of points," Lazerson noted, underscoring his point. "One lender is requiring a 780 middle FICO score along with a warning of a much longer underwriter line. Another lender won’t take you in if you are not an existing self-employed client."
For the self-employed, borrowing has long had its challenges. As Rood puts it, they've "been getting the Heisman from originators every since Dodd-Frank was passed and the Qualified Mortgage rule was implemented. There was simply too much ambiguity and risk with originating mortgages for self-employed borrowers for lenders to take the business risk."
He said an amended QM rule slated to go into effect within the next year "should eliminate many of the regulatory risks from underwriting self-employed borrowers."
Lazerson's column goes on to analyze the questions brought up by all of this: What about Fair Lending? Can lenders stick self-employed borrowers with tighter underwriting standards or pricing adjustments? What about other forms of discrimination like disparate impact? Why not give marginal, self-employed borrowers a break? (And you can read his assessment here.)
He concludes, "COVID is nobody’s fault. Self-employed borrowers are a huge economic cog. They deserve a hand, not a shove. Fannie should put the welcome mat out for marginally qualified borrowers during this pandemic."