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85 85 INVESTMENT GOVERNMENT PROPERTY PRESERVATION INDUSTRY UPDATES Journal Follow Us At: @DSNewsDaily NEW CHALLENGES FOR SELF-EMPLOYED BORROWERS Beginning December 14, it became 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 sub- mitted profit and loss statements. Fannie Mae previously required just two months' worth of statements. Some predict that lenders' tighten- ing credit requirements could further frustrate self-employed homeowning hopefuls. e 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 e Sun—writes in his column that "tying three recent bank statements to the entire year-to-date P&L can easily become a night- mare 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 employ- ee 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-19." 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." "e 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-em- ployed borrowers—is put on the back burner until there's more capacity in the system." en there is the issue of tightening credit requirements. "Fannie Mae 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," e Sun columnist Jeff Lazerson wrote. "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 underwrit- ten mortgages." To make matters trickier for these borrow- ers, the extra time and underwriting costs that accompany the above have motivated Fannie Mae 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 ever since Dodd-Frank was passed and the Qualified Mortgage rule was implemented. ere 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 under- writing standards or pricing adjustments? What about other forms of discrimination like disparate impact? Why not give marginal, self-employed borrowers a break? He concludes, "COVID-19 is nobody's fault. Self-employed borrowers are a huge economic cog. ey deserve a hand, not a shove. Fannie should put the welcome mat out for marginally qualified borrowers during this pandemic."