Last week I received a call from a frustrated condo buyer who was turned down by his bank. He had applied with one of the “Big Four” thinking it was cheaper and easier.
While his income and assets were fine, the bank put in a condition for the approval that asked for the last two years budget from the condominium association. The association refused to provide them and the loan was denied. Why would they ask for that? It’s called risk layering.
Most banks, including mine, sell their loans below $424,100 to Fannie Mae or Freddie Mac. In some areas there are higher loan limits. The bank lends the money knowing that Fannie or Freddie has already promised to purchase it and produces written approval with the conditions they want within minutes of input to them – they are known as AUS findings. Give them their posted conditions (two months bank statements, w-2’s etc) and it’s a “saleable” loan. In some cases they will even waive the appraisal !
What’s the catch? If something goes wrong with the loan within six months of selling it, Fannie or Freddie will audit it and there is a chance the bank would have to buy it back.
So, although Fannie or Freddie are not asking for conditions, some banks add more, at times bizarre conditions to the approval and insiders call it “risk layering.”
Think of it this way. If you had the capacity to lend to 5000 borrowers a month and 8000 were applying, you could afford to be choosy about your approvals. If the borrower gets frustrated and threatens to leave, there are 7999 people right behind them waiting in line. You have no leverage.
At Total Mortgage we only ask for the “findings” that Fannie or Freddie requested – we don’t risk layer as we think our underwriters and team provide solid loans and our risk of buybacks does not warrant the incredible agony risk layering produces.
So, if your bank is asking for the lease on the rental you are moving out of, or questions that seem to be irrational, it might be risk layering – beware !
