Mortgage Approval – Changes Since The Financial Meltdown of 2008


Small House in Aldeburgh, England

Most, if not all, persons seeking to buy a home are finding the mortgage approval process to be quite frustrating, due to the volume of documentation required by lenders and the length of time before a final approval is received. Yesterday I attended a seminar designed to explain why the mortgage approval process has changed so dramatically since the beginning of the financial crisis.

The Mortgage Approval Process before the Start of the Financial Crisis in 2008:

Prior to the start of the financial crisis, a borrower had a broad choice of mortgage options, besides the standard fixed rate 15 or 30 year and variable rate mortgages. Just to name a few, there were “interest only,” custom variable rate and even “no doc” mortgage products. Credit scores in the low 600’s were fine and loan applications were quickly processed and approved usually within 15 -30 days.

Today’s Mortgage Approval Process

As a result of the financial collapse in 2008, the loan approval process has become much more complicated and typically involves more paperwork and time to get that final approval from the lender. Listed below are the primary reasons for this change.

1. Since Fannie Mae and Freddie Mac were the primary buyers of the loans originated by lenders before and after 2008, their inventory of mortgages includes tens of thousands of mortgages that were not being paid on time. Since they want to rid themselves of these mortgages, they are requiring the originating banks to buy back these loans, whenever any defect (e.g., omitted or erroneous info, etc.) is found in the original mortgage documentation. These forced buy-backs have caused a significant drain on the bank’s human and financial resources. In an effort to minimize these buy-backs, the banks have greatly increased their scrutiny of every mortgage’s documentation. For example, one large bank has instituted a new, final loan review involving a checklist of about 65 items. This increased scrutiny, by virtually every lender, has resulted in final approvals taking 30-45 days or longer. However, if you have a high credit score (>700), and meet certain other criteria (e.g., stable income & employment, 20% down payment, strong debt ratios, etc), you will avoid much of the additional paperwork and approval delays.  

2. Most lenders have additional loan documentation requirements, or “overlays,” for FHA type mortgages. This additional documentation is designed to ensure the lender understands the financial position of the borrower and thereby better quantify the risk involved in underwriting the mortgage. This additional paperwork, in combination with the increased scrutiny noted above, lengthens the loan approval time.

3. The financial meltdown was accompanied by an economic collapse with millions losing their jobs. This situation resulted in a significant decline in the demand for mortgages, which caused lenders to reduce their staffs of mortgage loan originators and underwriters. Many mortgage brokers simply closed their doors.  The banks shifted their focus to their growing portfolio of non-performing loans (e.g., short sales and foreclosures.) Now that the economy is beginning to pick up steam, the demand for new mortgage loans is increasing, while mortgages continue to be refinanced at a high rate. Lenders are now scrambling to hire additional experienced loan originators and underwriters. This shortage of trained personnel is another major cause of slow approval process.

4.  Loan originators are rated according to the quality of the loan documentation packages they submit to their underwriters. Originators who frequently submit incomplete packages find themselves demoted or looking for another job. If you want to help yourself and your loan officer, make certain all of the information requested is submitted at the required time. Borrowers who don’t meet the deadlines set by their originator/loan officer can expect a longer approval process than they may expect. Work as a team with your originator and everyone will benefit.

5. Another result of the financial meltdown is lenders are no longer able to have any direct contact with appraisers. While lenders used to be able to cajole and prod the appraiser to expedite an appraisal, this is now verboten. As a result, appraisers are free to work at their own pace, which is an additional cause for slower loan approvals. (It’s likely that the economic collapse also reduced the number of appraisers, just as it impacted the number of originators.)

Update as of December 2016. The large banks (e.g., Chase, Wells Fargo, Citi, etc.) remain very reluctant to underwrite mortgages for anyone with a credit score under 700. This change in banking behavior reflects the behavior of our federal government which has fined them, largely unfairly, in excess of $250 billion. In addition, the Dodd-Frank legislation has saddled them with the need to hire thousands of lawyers and in-house auditors to both interpret and enforce these new, largely unnecessary, rules. These “too-big-to-fail” banks are focused on underwriting mortgages for those professionals with credit scores above 700, with an emphasis on jumbo loans. Once the new president takes over, the situation should greatly improve, as many of these regulations will be modified or trashed.

Update as of March 2018. As promised, president Trump has eliminated some rules that stymied banks from approving some mortgage loans. More changes to Dodd-Frank are in the works. Lenders are much more open to making loans to borrowers with credit scores in the 600’s. However, borrowers are now confronted with higher mortgage rates. For example, the current rate on a 30 year conforming (i.e., 20% down) loan is now close to 4.5%, whereas a year ago it was closer to 3.5%. Rates are projected to increase, as the federal reserve bank has announced three possible increases in the prime rate during 2018. These expected increases are designed to prevent inflation from getting too strong. Note: you may find the cheapest rates are offer by mortgage brokers and not your local large bank. Also, federal credit unions are often the least expensive banking option. 

Please add a comment below and share your experience with a recent mortgage application.

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