Full Doc, Full Doc, Full Doc: An Insider’s Comment on what mortgage professionals SHOULD do every time.

There’s a world burning out there: the mortgage world populated with less-than-scrupulous loan originators, flimsy mortgage products designed to provide high rate of return for Wall Street investors while putting homeowners at risk of foreclosure, and an overall culture of “get rich quick” on the backs of hard working folks just trying to achieve the American Dream of Homeownership.

Most of the crash and burn going on right now is centered in the Sub-Prime mortgage industry. I don’t know how many Sub-Prime mortgage companies have disappeared in the past six or seven weeks, but I’d guess it’s a record number.

I won’t recap what a quick google can come up with: the myriad news stories of the Sub-Prime debacle, foreclosures on the rise, with trillions of dollars in homeowners equity and Wall Street investors’ money at stake.

What I will comment on is the old-fashioned sensibilities of mortgage loan originations that fell out of fashion these past several years.

Used to be when you wanted mortgage loan, you came into the bank (or mortgage bank), sat with a Loan Officer, and you were asked a whole bunch of seemingly silly questions about how much money you earn every year, how much money you have saved up to buy a home, where that money has been for the past three months, how much rent you pay, and how much of a mortgage payment you think you can afford.

Then the Loan Officer runs a credit report, fills out a mortgage loan application (the ubiquitous FNMA form 1003). Next, someone in the bank gets an appraisal to determine the value of the house, then verifies your job and your salary and your bank balances.

When all this information is collected or “processed” that someone then submits your loan application package to the bank Underwriter for review and approval.

What’s been missing from this seemingly simple (yet, actually quite complicated) process the past few years has been that upfront interaction with the Loan Officer and the requirement that borrowers provide documentation to prove their qualifications for the mortgage loan.

Anyone speaking to a mortgage “professional” (and I use that term loosely!) in recent memory was subjected to a barely intelligible sales pitch about “low interest rates” and “equity-building” and 2.75% interest rates (or lower!). Then the mortgage person would run a credit report and tell the prospective borrower, “You’re approved!”

No questions were asked about income, assets, or affordability. No documents were requested beyond a photo ID. No explanations were offered about how this low interest rate was really just a “teaser” rate that would eventually adjust dramatically upwards, launching a monthly mortgage payment into outer space. And, oh, by the way, that payment you’re making every month doesn’t pay back the principal on the loan, only the interest. Oh, and, by the by, that interest that you’re paying isn’t ALL the interest, only a portion of it because you’re going to wind up owing more money in the end than you borrowed to begin with.

No, those conversations were clouded over with rapid chitter chatter about lower monthly payments.

Sure, there were federally mandated disclosure forms for the borrower to read, mailed within three days of the loan application as required by law, but seriously, did anyone really read those documents? Worse, there were few truly professional loan officers around to sit down at your dining room table (or the closing table, because the loan officers never attend the closings) and explain the terms of the loan in simple terms that any normal person could understand.

That explanation would have terrified most homebuyers/homeowners.

But, really and truly worst of all, these mortgage professionals never took the time to truly qualify the borrowers for the loans. It was all a matter of, “Hey, your credit is good enough (even when it was BAD), you’ve got the loan.”

Had the time been taken to explore the possibilities of Full Documentation loans, maybe the crash and burn would just be a bump and spark, instead.

I have always taken the time to qualify my client for the good old-fashioned, plain vanilla 30year fixed rate Full Documentation mortgage loan. Full Doc for short.

During this time, when I would speak with or meet a prospective new client, I found people actually getting short of patience with me because I was taking the time to ask all those silly qualifying questions.

Full Doc is all about qualifying. You must prove your income with your paystubs and W-2 forms (if you’re salaried) or your tax returns (if you’re self-employed). You must earn enough money every year to qualify for the mortgage loan you’re requesting. Then you must prove you have the money in the bank to buy this home; or in the case of a refinance, some “reserve” money for two or three months mortgage payments in case, heaven forbid, you lose your job.

Not only is Full Doc about qualifying the borrower for the loan, about giving the borrower a loan she truly can afford, it’s also about getting the best interest rate.

Used to be the lowest interest rates were offered to Full Doc borrowers with large downpayments or lots of equity in refinance situations.

The rule of thumb was pretty simple to explain and comprehend: the higher the risk to the bank, the higher your interest rate will be.

If you’re putting very little or even NO money down on a home purchase, there’s substantially more risk for the bank. You’re going to pay a higher rate.

If your credit is blemished, poor or downright bad, you’re going to pay a higher interest rate.

If you have income issues (because you’re self-employed and deduct lots of expenses against income) and need one of those “No Income Verification” type loans, yup, that high risk leads to a high interest rate.

Then the Sub-Prime market grew in leaps and bounds and these low “teaser” rates were put forth for traditionally risky borrowers’ loans

In the end, it was all a house of cards. Now it’s come tumbling down.

And old-timers like me, we’re qualifying our borrowers the old-fashioned way: Full Doc, Full Doc, Full Doc. Yes, this requires that a Loan Officer actually is familiar with current Underwriting guidelines, and that means taking the time to sit down and read. Then you must transfer that knowledge to each of the very unique situations presented with new prospective borrowers.

If you’re really good, you find a way to help your client achieve the financing goals they desire—whether that’s buying a home or refinancing one—at reasonable rates, with terms that won’t jeopardize the borrower’s equity, credit, or financial stability. Yes, this Full Doc process takes some elbow grease, and, with the recent tightening of lending standards, some getting used to for those mortgage people predisposed to the “wild and woolly” method of qualifying.

Full Doc is the best way to go for most borrowers. Sure, the “exotic” loan programs will still fulfill a need in the market, but there shouldn’t be inexperienced, greedy loan originators pushing people into loans they’re not qualified for. Hopefully the meltdown is driving those types of “professionals” out of the business.

In the end, the experienced mortgage person, a true professional, will take the time to learn the guidelines and then qualify borrowers for loans called Full Doc.