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To document the loans, at the very least, you must show these documents from your clients' previous loan:
Copy of prior approval showing borrowers had a full-doc loan: If borrowers had a stated-income loan, you must be able to prove that they could have qualified for full-doc through income documentation. You also must prove that they did not misstate their income or employment.
Copy of appraisal from the time of the original loan: Make sure to review the appraisal for accuracy and to ensure it isn't flimsy or pushed. It must be solid.
The credit report and assets from that time are less important. You want to prove that at that day and time, the borrowers were making a sound purchase with properly documented income and a sound appraisal. You must prove that there was no way to think that, barring what has happened to the market, they couldn't have refinanced the property.
An issue that will not hold up, however, is if your borrower had multiple refinances or purchased multiple properties in the past five years. There also must not be overbids on the property or bidding solely with banks' money. The refinances would show that the borrower was taking advantage of every dollar of the equity in the property, which is considered financially irresponsible.
Lenders -- and especially the GSEs -- likely will start looking more deeply at these issues, as they may need to adjust their guidelines regarding financial mismanagement.
Know what makes sense
In addition to helping borrowers who had foreclosures, it takes us -- the mortgage professionals -- to push forward the "make sense" ideas that come out of the government and to express our own ideas to help all borrowing segments.
One potential positive is that lenders are looking more seriously at using credit-grading in varying forms instead of credit-scoring. This could help them make better risk decisions when creating or adjusting guidelines because they'll look at more than just a number.
If we follow sound lending practices -- whether with foreclosed-upon borrowers, borrowers who have not-so-stellar credit or even borrowers with great credit -- and we put our clients into loans and homes they can afford, then we can best help our clients and help the market recover.
is owner of DES Financial Services in San Jose, Calif., and a 22-year veteran of the mortgage industry. He has held positions as a regional operations manager and corporate-underwriting manager at some of the top wholesale institutions in the industry. E-mail him at email@example.com.
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