Open question to lenders and their underwriters - Why are you so dumb???

Quote from @Linda Weygant:

Quote from @Chris Seveney:

Quote from @Linda Weygant:

I'm a CPA, serving real estate investors.

This time of year, clients who are on extension will request proof that they are on extension for their mortgage broker.  Because I live in the 21st century, I EFile the extension for my clients and my software receives a confirmation back from the IRS and/or state that there is now a valid extension on file.  The proof exists in bits and bytes in my software, but my software can generate a letter that looks like this:

All of the smart people I know would look at that and say "Yep, that's proof of an extension being filed all right.  Even gives me the confirmation number.  Cool!"  HOWEVER, the bright folks in the lending industry say "No - I want the form!".  I do get it.  Back in the dawn of time, about 15 years ago before EFiling was so prevalent, it used to be that you'd print out a form 4868 and mail it to the IRS to request your extension.  The IRS would stamp it as "approved" and mail it back to you and that was your proof that you had a valid extension.

Somehow... SOMEHOW... in this day and age, this is what you guys still want???  Why??  I mean, my software can still generate that form and print it out.  But if I do so, it doesn't mean that it was sent to the IRS and it certainly doesn't mean that it was accepted/acknowledged.  The IRS no longer stamps the paper copy and sends it back.

In fact, the client could just go online and complete the form using Adobe and give it to you and it would be proof of exactly nothing.

So tell me..  Please, because I'm dying to know.  Why are you like this?

I believe its a CYA thing for the institutional lenders who are buying these loans and its there requirement. 

 OK.  But WHY is it their requirement?

Because you are dealing with the federal government. The vast majority of loans are Conventional (Fannie/Freddie), FHA, VA, or USDA, and are directly or indirectly subsidized by the federal government. All of the guidelines for these entities are publicly available and are written by the staff of appointees of the agencies that administer them - the FHFA, HUD, VA, etc. All federal bureaucracies.

Most lenders sell their paper to one of these entities, and the guidelines are either A) very specific about the forms that are required and the substitutes that are allowed and not allowed, or B) nearly deliberately vague to the point where the seller (i.e. lender) has to guess at what's required. Sound familiar?

If lender's dont check all the boxes and provide the correct forms when required, they get hit with buybacks, meaning they have to buy the loan back from the aggregator/entity/agency. This is insanely expensive for lenders and, if buybacks get out of control, can literally wipe out the equity capital of a lender, causing insolvency. 

If you think a lender is going to risk a $40k or $50k loss because you want provide a different form than what the govt bureaucracy is known to accept, youve got another thing coming. From a solvency standpoint, it's much better to tell the borrower to kick rocks than to roll dice on an untested and/or unproven document. Im not saying this makes sense - Im saying that in the lenders are not incentivized to use common sense - theyre incentivized to use the forms that are proven not to cause losses. In other words, the CRO or UW manager/leader is saying "this other form is probably good enough, but I know for sure that 4868 works and I'm not willing to gamble tens of thousands to test this other document."

Some lenders go over the top with zealous adherence to guidelines and not straying from the known path because they recently got hit with a string of buybacks. For example, an underwriter or risk officer goes out on a limb doing something that seems to be common sense (like accepting a different form from a CPA than one that has always worked), only for the loan to come back to the lender 60-90 days later as a defective asset. Then a memo comes down from management saying the next person who does something like this will be shot on sight because the lender just lost $50k to make someone's life easier by allowing a different form. 

For instance, in 2023, FNMA released selling guide announcements that alternative documentation for a 4868 could be accepted. In cases like this, what they will accept as a  sufficient alternative is anyone's guess until you've tried something and either it worked or you got burned. No one wants to play the "test and find out" game, they want to play the "I know this form works and I dont get paid any extra to bear the risk of trying this other form" game so they dont take losses.