Ask the Expert Zero Defects: Richard Cirelli


Zero defects is the new buzz term you need to be aware of in the mortgage industry.


If you thought that lenders have been over-conditioning for more documentation than necessary, I fear that it’s about to get worse.
Fannie Mae and Freddie Mac, the two government sponsored enterprises (GSE’s) that buy conforming loans up to $625,500 from all lenders and that set the underwriting guidelines that lenders must follow, are creating quality control programs designed to flag deficient loans immediately after the loan is closed and purchased from the originating lender. If it is determined that the loan doesn’t meet the guidelines or that the documentation is insufficient, the agencies will require the originating lender to immediately buy back the loan.
“Our expectation is ‘zero defects’,” a vice president of loan quality at Fannie Mae recently said at an industry conference. The GSEs will start validating 100% of the loans they purchase and will do so within 120 days of purchase. In the past they only reviewed a small sample and it was usually not done until and unless the loan was in default. Fannie Mae has added 500 employees to monitor loan for this purpose and Freddie Mac has added about 150.

The Impact:

So, if the agencies are going to create additional fear in the lenders that they are buying their loans from, what can we expect? In my opinion:
·         More scrutiny and therefore more documentation by lenders.
·         Higher loan costs due to lenders needing to hire more employees to monitor the process.
·         Longer processing times.
·         Fewer borrowers able to qualify or that will get too frustrated to endure the process.
The key to having a mortgage loan processed smoothly without documentation hassles begins with choosing the right mortgage professional. An experienced loan officer should scrutinize the loan application on day one and not wait for an underwriter to catch deficiencies later in the process. And, buyers should get pre-approved in advance of making an offer in order to eliminate any hassles later on. It’s really not hard to get approved and funded if you are dealing with the right mortgage professional.

 Phone: (949) 494-4701
Fax:       (949) 494-6703
License: NMLS: 288939 / 288267