Your Mortgage : Fannie Mae Tightens ‘Low Doc’ Mortgage Rules : Borrowing: New regulations make it easier to crack down on persons misrepresenting their credit worthiness.

Many lenders have put tough new restrictions on “low-documentation” loans, those popular mortgages that allow borrowers to finance their purchases without having to fill out all the paper work that’s involved in getting a standard loan.

Until recently, low-documentation mortgages--often called “low-doc” or “no doc” loans--were extremely popular with repeat buyers who had built up lots of equity in their previous home.

By making a large down payment on their new house--usually at least 25% or more--these borrowers were able to eliminate most of the paper work involved in getting a loan and also were able to get their money within a matter of weeks or even days.

The low-doc loans have also been popular with self-employed people, such as doctors and small merchants. By making a big down payment, these borrowers were able to avoid having to produce past tax returns and other documents that might not show all of their income or jive with what they told their loan officer.

Now, some changes made by the Federal National Mortgage Assn. have made the loans tougher to get and also makes it easier to crack down on borrowers who misrepresent their credit worthiness.

Under the stringent new guidelines, borrowers using Fannie Mae’s most popular low-doc program must sign a certificate stating that they haven’t lied about their earnings, assets, employment, debts or the source of their down payment.

Importantly, the certificate also gives lenders the power to verify that everything the borrower puts on the application is true--and points out that deliberate falsification is a federal crime “punishable by fine or imprisonment or both.”

“With these new rules, you’d be a fool if you lied on your loan application,” said Paddy Dooley, executive vice president of Brentwood-based mortgage banker Camden Financial Services.

Fannie Mae’s new guidelines are important because they’re automatically adopted by thousands of independent financial institutions across the country.

Even though the new rules technically apply only to loans for $187,450 or less, some lenders who make low-doc loans for more than that amount are also applying the stricter standards.

Fannie Mae’s chief competitor--the Federal Home Loan Mortgage Corp., nicknamed “Freddie Mac”--also has put some of it own, less-comprehensive guidelines into effect.

Although no industrywide statistics are available, it has been estimated that low-documentation loans accounted for more than 30% of all mortgage-making activity last year.

That figure may be even higher in California and other parts of the West, where many of today’s repeat buyers can afford to make big down payments because they made so much money from the sale of their previous home.

Dooley at Camden Financial estimates that as many as 60% of the over-$187,450 loans her institution has made over the past few years have been low-doc or no-doc loans.

Fannie Mae instituted the changes after its own investigators checked out some of the low-doc loans that have been made by independent lenders over the past couple of years.

Some loans were made to borrowers who had declared bankruptcy just a few years earlier. Other borrowers got their down payment from accounts that had a long history of bounced checks.

Still others simply lied about their earnings and assets on their original loan application.

The investigation “helped us find out two things,” said Robert J. Engelstad, a Fannie Mae senior vice president.

“First, we found that some lenders weren’t being as careful as they should be when it came to checking out their borrowers. And second, we saw that there was some borrower misrepresentation going on.”

To minimize its risks, Engelstad said, Fannie Mae will require borrowers under its most popular low-doc program to make a minimum down payment of 30%. If part of that 30% down payment is a gift, the borrower will be ineligible.

“If you’re going to go for a low-doc loan, be prepared to show where your down payment is coming from,” said Mary Jane Arthur, a senior vice president with GMAC Mortgage Corp.

“Bank statements for three consecutive months will probably do the job, or so would a ‘closing statement’ that shows your profits from the sale of your previous home.”

Although the new restrictions are making it a bit tougher for borrowers to get low-doc loans, Dooley at Camden Financial says they’re good for both lenders and borrowers alike.

“It doesn’t do anybody any good to get a loan that they won’t be able to repay,” she said.