Fannie Mae and Freddie Mac don’t require lenders to produce a 4506-T form that has been processed by the Internal Revenue Service before closing a loan.
But lenders are taking a risk if they don’t get a transcript from the IRS that verifies the borrower’s Social Security number and income, according to Mortgage Bankers Association officials.
The IRS has stopped processing 4506-T requests due to the federal government shutdown.
“We only require IRS Form 4506-T to be signed by the borrower prior to closing,” according to a Freddie official. He clarified that the 4506 doesn’t have to be processed by the IRS.
But lenders are worried about the buyback risk if they can’t get the IRS to verify the borrower’s income.
If the loan defaults or a GSE does a quality control review and finds the borrower’s income was misstated, “I might end up buying that loan back,” said MBA senior vice president Pete Mills.
It is common practice among lenders to verify the borrower’s income and Social Security number through the IRS. The industry considers it a “best practice” to protect themselves for repurchase risk.
But the GSEs are not providing lenders with representation and warranty relief during the shutdown, Mills said.
“In the short term, I think folks will tread water and put off closings for a couple of days if the borrower is not going to lose their rate lock,” he said.
Lenders might close a few loans without a 4506-T transcript from the IRS. “If the shutdown goes on for a week or longer, that decision gets harder to make as you take more risk for every loan you close,” the MBA executive said.
The mortgage industry knew that a government shutdown was possible, according to David Zugheri, executive vice president at Envoy Mortgage in Houston.
“We pulled a boat load of 4506-Ts leading up to the furlough,” he said. Zugheri expects to weather this week OK. “The point at which we get impacted will be next week.”