Public companies aren't the only ones that have to be concerned about quiet periods. So do mortgage borrowers.
In the world of finance, "quiet period" refers to the few weeks immediately before companies report their earnings when they are not allowed to say anything. In the mortgage world, it's the time after borrowers are approved for financing but before they close on their loans.
During that period, borrowers shouldn't do anything that might damage their credit scores or change their debt-to-income (DTI) ratios. Loan officers warn borrowers to "lay low" for a few weeks and not do anything dumb. But even so, according to a recent report from Equifax, almost one in five borrowers opens at least one new "trade line" during the quiet period.
Many borrowers don't understand that opening new credit accounts can severely impair their chances of closing. After all, lives go on. Borrowers still have to use credit cards to buy gas, clothing for the kids and maybe even an occasional meal out.
Traditional underwriting guidelines and ratios take into account everyday living with existing credit lines. But they do not consider new accounts or major purchases of such big-ticket items as automobiles, furniture or even boats. Sometimes folks even try to take out other mortgages.
Lenders look at this as undisclosed debt. And since it can push credit scores and debt-to-income ratios to levels well beyond what lenders now find acceptable, most lenders monitor borrowers by pulling a new credit report immediately before closing.
Lenders have never reported their quiet time findings. But Equifax analyzed two extensive database samples -- one of 110,000 anonymous mortgage applicants, and another of 105,000 mortgage borrowers from a major residential lender. What it found was not only surprising, the credit information repository says in its white paper, but also "disturbing."
It turns out that a significant number of borrowers do stupid things. It's no wonder that in German, the word for "quiet period" is usually translated as "silly season."
Equifax found that one in every eight borrowers obtains new credit during the weeks it takes to close their home loans. While "most trade lines are not worrisome because most borrowers do not use the available credit," the company says, 20 percent of mortgage applicants who acquire new credit incur immediate installment obligations.
The analysis also revealed that the average monthly payment of a single new, undisclosed debt was $251. In one-third of the instances where one new credit account was opened, the borrower's DTI ratio increased by at least 3 percentage points, the amount that lenders consider the line in the sand.
The DTI ratios of 60 percent of the borrowers who opened two new accounts rose by 3 percentage points or more. And the ratios of nearly 80 percent of borrowers rose 3 percentage points or more when they opened three trade lines.
Say you buy a new television set. That's not unusual, but if you buy it on time, according to Equifax, your typical new monthly recurring debt would be $26, and you'd need $867 in "new" income to keep from exceeding the DTI tolerance.
If you also open a new credit account to buy furniture, your average payment might be $100, for which you'd need $3,333 in new income to absorb the new payment without setting off an alarm with the mortgage company. If you also purchase that hot new convertible you've always wanted, your payment would run $447 on average, and you'd need $14,900 more in income to keep from going beyond the DTI benchmark.
Buy those three things -- a new TV, furniture and a car -- and you'd need $19,100 in extra income to remain within acceptable underwriting rules. Not many borrowers can do that.
It's no wonder that lenders now monitor the quiet period. Investors -- the entities that purchase mortgages from primary lenders -- and banking regulators are watching, too.
For example, Fannie Mae now requires the lenders from which it buys loans to verify that borrowers have not incurred new debts and liabilities, review their DTI ratios and requalify those who obtained additional credit before closing. If the DTI ratio rises by 3 percentage points or more, lenders are required to completely re-underwrite the file.
If lenders fail to take these steps and borrowers default, lenders will be required to repurchase the loans. That's the last thing lenders want, so they are being extremely careful.
Again, most pull a last-minute credit report -- aka a "pre-close report," "compare report" or "look-back report" -- to make sure nothing has changed. As an alternative, Equifax is offering a new service -- the reason for the white paper -- that continuously monitors credit inquiries, as well as new accounts and monthly payments as they occur during the closing process.
Lenders who use the ongoing service can receive daily alerts, often in plenty of time to meet with the borrower and change the terms of the loan, gather additional documentation to satisfy underwriters or craft "another resolution."
According to Equifax, the average borrower who opens a new credit account does so 28 days before closing on his mortgage. That gives the lender and borrower four weeks to put their heads together and figure something out.
The choice is easy, says Greg Holmes of Credit Plus, a credit reporting agency that offers the Equifax tool to lenders: "Lenders can either address undisclosed debt in a timely fashion or go through a fire drill 72 hours prior to closing."