Written By: Stacey Sprain, Op-Ed Writer

In today’s world of FHA underwriting, I think it can be said that we cannot assume that an automated underwriting establishes a positive credit risk. AUS approvals are really unreliable in today’s marketplace. Quite frankly, I consider them pretty much worthless. Manual underwriting is a much more sensible approach to analyzing credit risks and rendering loan decisions and the more documentation included in the loan file, the better the chance of catching any risk factors that might have otherwise escaped an automated underwriting system. Often we seem to forget that an AUS simply does not have the capabilities to analyze credit risks in the same manner that an actual underwriting body does.

The bottom line is that overall, credit risk factors haven’t changed. The same credit risks exist today that have existed for many years. It’s just that until the real estate markets tumbled, many of the risk factors were ignored or were simply considered with much less validity than they are today. The automated underwriting systems are still trying to catch up.

Below I have identified a number of standard credit risk factors along with helpful instruction on how to go about analyzing each individual risk mentioned. A standard rule of thumb is that each risk factor should be offset by a recognized compensating factor. I have included a listing of HUD-recognized compensating factors below as well.

CREDIT RISK FACTORS AND SUGGESTED ANALYSIS

Credit Risk Factor - Housing expense ratio is greater than 31%

Suggested Analysis
Even if AUS doesn’t require, it’s wise to obtain a VOR to verify the current housing expense and payment history. The borrower’s housing expense payment history to date is an important factor for analyzing whether or not a housing ratio greater than 31% is a huge concern or not.

Does the borrower have a history of paying a housing expense at the same or near the same amount as the proposed housing expense?

Does the borrower have reserves that demonstrate the borrower can sensibly dedicate a greater portion of earnings to the housing expense while still being able to save money in case of hardship or emergency?

If there is a substantial increase to proposed versus current housing expense, it’s wise to obtain an explanation letter from the borrower explaining how the borrower intends to accommodate the major increase to housing expense. These are often referred to as “budget letters.” An important note- Make sure the explanation letter is signed and dated by the borrower so that you can feel reasonably comfortable that the letter DID come from the borrower and not from a loan officer or processor who simply want to get the condition cleared.

If the housing expense ratio is higher than standard, what about the total debt-to-income ratio? Is that ratio over the standard 43% guideline as well?

Is there a compensating factor to offset the risk associated with this identified risk factor?

Credit Risk Factor - Debt-to-Income Ratio is greater than 43%

Suggested Analysis
It’s important in these situations to analyze a number of factors in order to determine how high of a risk factor the above standard DTI really is for the loan.

1. Does the borrower have a history of successfully carrying this much debt and housing expense or does the proposed housing expense reflect a substantial increase in comparison to the current housing expense? If there is a substantial increase proposed, it’s wise to obtain an explanation letter from the borrower explaining how the borrower intends to accommodate the major increase to housing expense. These are often referred to as “budget letters.” An important note- Make sure the explanation letter is signed and dated by the borrower so that you can feel reasonably comfortable that the letter DID come from the borrower and not from a loan officer or processor who simply want to get the condition cleared.

2. Review the borrower’s credit report, Do the fico scores and reported tradelines reflect responsible use of credit or is an abuse or overuse of credit reflected? Are payment histories reflected satisfactorily? Does the borrower have any newly opened debts with very short reporting periods to date which add to the concern for long-term debt management?

3. Are there late payments, unpaid collections, charge offs, judgments or tax liens reflected in the most recent 24 month period? If so, the concern for a higher-than-standard debt-to-income ratio becomes greater. Does the borrower’s history reflect that these derogatories were all reported during the same period or are they reported sporadically? Even if AUS does not address the derogatories, it is wise to seek an explanation letter in these cases. It may be the only way to lend the most accurate possible analysis to the overall credit risk when the DTI ratio exceeds the standard 43%.

4. Review the borrower’s employment and earnings history. Are earnings stable or steadily increasing? Does the borrower have secure employment? Is there potential for increased earnings or pay increases in the near future? Are there any gaps reflected between job changes? Are all job changes for related fields? If stability of employment or earnings is in question, the risk of DTI is much greater than when employment and earnings are clearly stable.

5. For borderline cases where ratios are near 50% and often over, it’s sometimes helpful to figure out exactly what the borrower’s residual income is, the way that VA lending requires. This gives a more accurate indication of exactly how high the risk really is. Use net income and subtract expenses such as the proposed housing expense, all debts in repayment, estimated daycare expense, HOA dues, .14 per square foot of subject property for utilities, any child support or alimony payments and any other long term expenses. What is left for disposable income? Does the remaining income make sense for the family size? Is there enough remaining to accommodate the risk of higher than standard DTI?

Remember- AUS cannot read everything. It’s often helpful to look outside of the AUS findings to identify credit risks that the AUS system simply cannot identify or rectify.

Is there a compensating factor to offset the risk associated with this identified risk factor?

Credit Risk Factor - Borrower is receiving a gift or grant for downpayment and seller is crediting toward all closing costs and prepaids; thus the borrower is not contributing any of own funds to the transaction

Suggested Analysis
Just because the borrower doesn’t need any funds doesn’t mean assets shouldn’t be verified. Again, this is where AUS doesn’t do a good job of analyzing the real risks.

It’s wise to require verification of the borrower’s assets in the form of account statements for a number of reasons.

1. It will allow you to determine whether or not the borrower has the means to contribute the downpayment or costs himself/herself but has simply taken advantage of what current market can offer for deal structuring or if the transaction wouldn’t work without the contributions of other parties.

2. Account statements are a window into the borrower’s spending habits. If there are multiple risk factors within a single loan file and you can tell that a borrower has no regard for spending habits or financial responsibility by review of bank statements, the risk layering becomes of greater concern. Verified assets and reserve funds go a long way to offset a majority of common risk factors within the loan file.

Bottom line, if the borrower gets in trouble, do the assets reflect a likelihood that the borrower can continue to make timely housing payments for at least a month or two under such circumstances. Is there a compensating factor to offset the risk associated with this identified risk factor?

Credit Risk Factor - Lack of Verified Reserves

Suggested Analysis
Review of the borrower’s credit report and current housing versus proposed housing expense are vital when no verified reserves are present.

• Review the borrower’s credit report. Do the fico scores and reported tradelines reflect responsible use of credit or is an abuse or overuse of credit reflected? Are payment histories reflected satisfactorily? Does the borrower have any newly opened debts with very short reporting periods to date which add to the concern for long-term debt management?

• Is the proposed housing expense in the same range as the current housing expense or is there a substantial increase proposed? If there is a substantial increase reflected, regardless of AUS findings, it’s wise to obtain an explanation letter from the borrower explaining the intent to accommodate the major increase to housing expense. These are often referred to as “budget letters.” An important note- Make sure the explanation letter is signed and dated by the borrower so that you can feel reasonably comfortable that the letter DID come from the borrower and not from a loan officer or processor who simply want to get the condition cleared.

• Based on the borrower’s housing expense history and credit, does it make sense that the borrower can reasonably accommodate the proposed housing expense while lacking the ability to save money?

• Are there other compensating factors that offset such risk when a lack of reserves is present?

Credit Risk Factor - Credit reflects unpaid collections, charge-offs, miscellaneous late payments, housing late payments

Suggested Analysis
What’s most important here is the explanation, the time span and the frequency of the derogatory account information.

• Analyze the credit report information. Did all of the derogatories occur in what appears to be an isolated period? Does the report reflect good credit before and after the period of derogatory reportings? If any of the derogatory account reporting occurred in the most recent 24 month period, it’s wise to request a letter from the borrower explaining the reason for the derogatory reportings. The explanation should make sense based on all other file information and it should be completely clear that the borrower has since recovered financially from the situation(s). Derogatory reportings within the most recent 12 month period should have been for reasons beyond the borrower’s control and must be looked at in much more critical manner than older reportings.

• Does the credit report reflect sporadic derogatory account reporting that is not isolated to one particular time period? Does it appear that the borrower’s repayment patterns reflect consistent disregard for financial obligations and potential mis-management of monies? Based on other factors of the file, does the credit report information reflect a high risk borrower who may not be worthy of the mortgage approval?

Again, it is crucial that AUS not be relied upon as the sole source

Credit Risk Factor - Credit reflects consumer credit counseling, prior bankruptcy or foreclosure

Suggested Analysis
What’s most important here is the length of time transpired and the reason:
• the borrower sought the help of credit counseling
• the borrower felt the best option was to file for bankruptcy
• the borrower’s prior home went into foreclosure.

It’s important to recognize what are considered acceptable explanations and what is considered lack of financial responsibility and debt management.

• How much time has transpired since the filing or discharge?
• If a repayment plan was required, were all payments made according to the agreement?
• How was the borrower’s credit history before and after the filing and discharge?
• How is the borrower’s credit history within the past 12-24 months?
• Does it appear that the borrower has re-stabilized financially since the filing or discharge?
• Was the reason something that is very unlikely to occur again in the future?
• Are there other risk factors such as lack of reserves? High ratios? Minimal or no downpayment? These added factors contribute to higher than average credit risks that need to be seriously evaluated for the borrower’s current creditworthiness.
• Are there compensating factors to offset these credit risk concerns?

Credit Risk Factor - Borrower is self-employed

Suggested Analysis
There are a number of questions that must be asked and evaluated when reviewing self-employment:

1. Regardless of AUS documentation requirements, has the borrower been employed or been receiving stable income for the past two years as can be substantiated by no less than two years IRS tax returns and transcripts?

2. Is it reasonable to expect, based on analysis of the employment and income documentation for the past two years, that the income being used for qualifying is expected to continue at or about the same level for the three years following our closing date to justify that our borrower is capable of making timely mortgage payments?

3. Does a review of documentation establish a positive business trend for the self-employment noted?

Additional risk concerns are present whenever the borrower has been self-employed for less than two full years and when two years of tax returns and transcripts are not available for analysis. In addition, declining income trends should also be carefully considered. Most conservative calculations should be used for qualifying income.

Self-employment alone may not be a high risk factor as long as the borrower demonstrates a well-established history in the field and consistent earnings trends with predicted long-term business stability.

HUD RECOGNIZED COMPENSATING FACTORS

Housing Expense Payments

The borrower has successfully demonstrated the ability to pay housing expenses greater than or equal to the proposed monthly housing expenses for the new mortgage over the past 12-24 months.

Downpayment

The borrower makes a large down payment of 10 percent or higher toward the purchase of the property

Accumulated Savings

The borrower has demonstrated

• an ability to accumulate savings, and
• a conservative attitude toward using credit.

Previous Credit History

A borrower's previous credit history shows that he/she has the ability to devote a greater portion of income to housing expenses.

Borrower has additional source(s) of compensating or income not used in qualifying

The borrower receives documented compensation or income that is not reflected in effective income, but directly affects his/her ability to pay the mortgage.

This type of income includes food stamps, and similar public benefits.

There is minimal proposed housing expense increase in comparison to current housing expense

There is only a minimal increase in the borrower's housing expense.

Substantial Cash Reserves

The borrower has substantial documented cash reserves (at least three months worth) after closing. The lender must judge if the substantial cash reserve asset is liquid or readily convertible to cash, and can be done so absent retirement or job termination, when determining if the asset can be included as cash reserves, or cash to close.

Funds and/or "assets" that are not to be considered as cash reserves include

• equity in other properties, and
• proceeds from a cash-out refinance.

Lenders may use a portion of a borrower's retirement account, subject to the conditions stated below. To account for withdrawal penalties and taxes, only 60% of the vested amount of the account may be used. The lender must document the existence of the account with the most recent depository or brokerage account statement. In addition, evidence must be provided that the retirement account allows for withdrawals for conditions other than in connection with the borrower's employment termination, retirement, or death. If withdrawals can only be made under these circumstances, the retirement account may not be included as cash reserves. If any of these funds are also to be used for loan settlement, that amount must be subtracted from the amount included as cash reserves. Similarly, any gift funds that remain in the borrower's account following loan closing, subject to proper documentation, may be considered as cash.

About The Author

Stacey Sprain - As an op-ed writer, Ms. Stacey Sprain is currently a NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). With over 15+ years of mortgage banking experience, Stacey is also a Quality Control Manager for a major mortgage lending institution.

Jan 11, 2013

Understanding HUD REO- Part One: Overview of the REO Process

Written By: Stacey Sprain

As an FHA originator, processor or underwriter, it’s likely that in the ongoing foreclosure market you’ll run across a HUD REO loan at some point. The purpose of this multi-part article is to provide you with some useful information to help in your endeavors.

Nov 30, 2012

Recent Agency Announcements of Importance

11/29/2012- Fannie Mae Lender Letter 2012-11 Confirmation of Conventional Loan Limits for 2013
The Federal Housing Finance Agency (FHFA) has issued the maximum loan limits that will apply for conventional loans to in 2013. All loan limits for 2013 remain unchanged from 2012.

Oct 5, 2012

Deciphering the Recent FHA Condominium Changes Announced in Mortgagee Letter 2012-18

If only HUD would give me a job so I could revise their way of updating existing policies it would sure make a lot of our lives a whole lot easier so we could all work more efficiently! I don’t know about all of you but I sure get frustrated trying to sort through things like Mortgagee Letter 2012-18 while trying to compare it to the materials that were issued with Mortgagee Letter 2011-22.

Sep 21, 2012

DU 9.0 Brings Significant Updates for Conventional Automated Underwriting- Part 2

The following is part 2 of a multi-part article covering the upcoming changes that will be applied in DU over the weekend of October 20th when Fannie Mae completed an update. One correction to last week’s article: In the beginning paragraphs I incorrectly referenced DU version 8.3 instead of the correct version DU 8.2.

Sep 14, 2012

DU 9.0 Brings Significant Updates for Conventional Automated Underwriting- Part 1

For those of you who may not yet be aware, DU is planning a major update for the weekend of October 20th which will bring forth some significant changes. Because of the amount of changes, this is being presented in 2 parts. The following is part 1 of a 2 part series covering the various updates.

Aug 3, 2012

FHA Self-Employed Borrower FAQs

As with any lending product, self-employment is always a topic that involves a lot of questions and uncertainty. The following FAQs represent a lot of the most common questions that FHA receives about self-employed borrowers and how to calculate self-employment income.

Jul 20, 2012

FHA Appraisal & Valuation Part 2- Inspections & Certification FAQs

This is part 2 of a multi-part series that provides helpful questions and answers about FHA appraisals, properties and valuations. I recently ran across this list as I was actually searching for something on a completely different topic. I found these FAQs so helpful and informative I felt the need to pass them on in hopes they will be useful to you as well!

Jun 22, 2012

Ability to Repay Requirements for Streamline Refinances

Much has been published lately about FHA streamline refinances particularly because of the recent drop to MIP rates for certain FHA to FHA streamline refinances but there’s one important topic I haven’t seen much if any press about and it’s an important one when we’re talking streamline refinances- important in particular for non-credit qualifying streamline refinances.

Jun 8, 2012

FHA Streamline Refinance- FAQs

Next Monday, June 11th marks the first day of FHA’s significant MIP/MI rate decrease for certain FHA streamline refinance transactions. The following FAQs are presented in order to provide you with the information you need to make the best of this extraordinary marketing opportunity for existing FHA borrowers.

May 25, 2012

DU Updates for Government Loans- Expected Weekend of July 21, 2012

DU for government loans is updating during the weekend of July 21st to accommodate a number of messaging changes on topics such as bankruptcy and foreclosure for VA lending, 3-4 unit property reserve calculations for FHA lending. A summary of the changes follows below.

Apr 27, 2012

FHA Streamline Refinances- About to Make a Big Comeback

With FHA announcing streamline refinance opportunities with record low MIP for borrowers whose current FHA loan was endorsed prior to June 1, 2009, we can expect to see a big pickup on FHA streamline refinance loans after the June 11th reduced MIP effective date.

Mar 30, 2012

Questions from FHA’s Recent Mortgagee Letters

If you’re like me, you like to take FHA Mortgagee Letters and dissect them when they are released, put the content info format that makes most sense to you and completely re-create or break down the information that’s given. I often like to look at the information as if I am reading it from the point-of-view of someone who may not have many years of mortgage expertise so that I can take the info provided by FHA and re-present it in ways that prove the most helpful to those who rely on the information in day to day lending.

Mar 16, 2012

FHA Announces Important Guideline Changes

Mortgagee Letter 2012-3 announces several key guideline changes on topics of self-employment, disputed credit, outstanding collections and identity of interest definitions. These changes are good from the perspective that they offer much clearer underwriting requirements on several key topics so not as much is left to interpretation or opinion.

Mar 2, 2012

Changes to FHA Mortgage Insurance April and June 1st

HUD formally announced upcoming changes to the FHA mortgage insurance structure in an email that went out to single family email subscribers on February 27th. A Mortgagee Letter is expected in the near future which will communicate final full details of the upcoming changes to the FHA mortgage insurance structure.

Feb 17, 2012

Gift Funds for Conventional Lending

Confusion is common when it comes to gift documentation requirements between conventional and government loan types. Below I’ve summarized donor, gift letter and documentation requirements for each conventional lending.

Feb 3, 2012

Important Info for Lenders re: IRS Transcripts and 2012 Concerns for Identity Theft

Though all of today’s technological improvements allow lenders a better opportunity to validate loan application information for loan applicants, such advances have also increased the risk for identity theft with so much personal data moving through so many extra portals and moving through so many extra pairs of hands.

Dec 16, 2011

Little Things that Make a BIG Difference in Underwriting

There’s nothing an underwriter hates more than a sloppy, incomplete file that a processor is insisting be rushed through the system. Processors that make a habit of submitting poorly processed files often blow their reputation with underwriters who deserve quality loan files to review so that they can do the best possible job of analyzing the borrower’s credit profile to quickly determine whether or not they are worthy of repaying the loan for which they have applied.

Dec 2, 2011

The Importance of a Thorough 1003- Part Two of Three Part Series

It all starts with the loan application and quite frankly, if the 1003 isn’t thorough and accurate from the get-go, it can stop your file dead in its tracks once it hits underwriting. From an underwriting standpoint, nothing is as important as a complete and accurate loan application because the 1003 is the window to the file; it’s the “book” that tells the story.

Nov 18, 2011

The Importance of a Thorough 1003- Part One of Three Part Series

Nov 4, 2011

Something Positive from the Allied Mortgage Debacle

Something happened this week and it was big enough that I’m sure you’ve heard or read about it unless you’ve been camping out under a rock. Let me say this- Allied Home Mortgage. So you’ve heard?

Sep 9, 2011

Rural Housing Guarantee & Annual Fee Requirements Effective 10/01/2011

As you’re likely aware, USDA Guaranteed Rural Housing is changing guarantee fees from 3.5% to 2.0% for purchase transactions and implementing a new annual fee of .3% effective for all GRH loans that are not committed before October 1, 2011. This news was originally announced in RD AN 4551 which was issued February, 3rd.

Aug 26, 2011

Major Changes in Rapid Succession for Next 45 Days!

Buckle your seat belts everyone because the next 45 days are going to be bustling with a lot of major agency program changes that are very important for all of us to keep track of and plan ahead for. Because so much is happening so quickly and in such rapid succession, I myself had to start maintaining a chart just to stay on top of it all. I’ve found this to be very helpful so I hope it helps you too!

Aug 12, 2011

Part 5-Final FHA Updates to Condominium Approval Qualification Requirements and Process

Mortgagee Letter 2011-22 dated 6/30/2011 clarifies, expands, consolidates, and updates existing condominium approval guidance while also replacing Mortgagee Letters 2009-46b, 2009-46a and 2011-03. Included with the new Mortgagee Letter are an attached Condominium Approval Implementation Schedule and 95 page Condominium Project Approval & Processing Guide.

Aug 2, 2011

Jun 17, 2011

10 Reasons Why it’s Still Great to be in the Mortgage Business

For those of us who have been in the mortgage business through all of the various booms both positive and negative, one thing’s for certain: None of us have ever seen anything like the past few years of change in the industry.

Jun 13, 2011

Ethics when Consumer Credit is Involved

Appraiser regulations keep evolving, RESPA keeps reinventing itself, loan officer compensation is bringing forth major changes, FACTA has added what I consider to be ridiculous new disclosure requirements nobody really seems to fully grasp, licensing requirements continue expanding and evolving, credit rules continue to tighten, … when does it all end?

May 27, 2011

Reading and Answering Consumer Questions about Mortgages

I ran across a blog while I was I was doing some research on a regulatory interpretation this evening and it really got me fired up. It never ceases to amaze me how badly some of the people in our industry answer questions for people who wouldn’t be asking if they truly knew anything about mortgages.

May 9, 2011

HUD Issues Formal Guidance for Disputed Credit Tradelines

If you blinked you might have missed it but HUD recently communicated guidance to lenders on how to evaluate disputed credit accounts for FHA loans. The information was included in an outgoing announcement from Jerrold Mayer to the HUD email subscription list. The following guidance was not in the form of a Mortgagee Letter as one might expect:

Apr 29, 2011

Finally Some Long Overdue DU Updates for VA Lending

It’s been quite awhile since Desktop Underwriter was updated to coincide with VA program trends and changes but on the weekend of June 18th, a substantial list of updates will be added to create more comprehensive and effective messaging associated with DU for VA loans.

Apr 8, 2011

Evaluating Higher than Standard Housing and Debt Ratios

One thing I continue to remind folks of in today’s world of credit risk is that an AUS approval isn’t always a sure thing. We still have an obligation to manually evaluate the layering of various credit risks in our loan files if we intend to consciously keep our overall risk and defaults to a minimum.

Feb 20, 2015

Super Storm Sandy Problems are Still Ongoing

Written By: Glenn Michaels, Opinion Editorial Contributor

Super Storm Sandy also known as Hurricane Sandy hit the Northeastern United States on October 29, 2012. After the storm hit and the damage was done, all of the news media and politicians came out in mass to report on the storm and what has happened since.

Feb 6, 2015

FHA Revitalization Area Sales Program

Written By: Glenn Michaels

Revitalization Areas are HUD designated geographic areas authorized by Congress under provisions of the National Housing Act. Revitalization Areas are intended to promote “the revitalization, through expanded homeownership opportunities, of revitalization areas.”

Jan 23, 2015

Manual Loans vs. AUS Underwriting

Today, virtually every FHA loan is put through an AUS underwriting system with TOTAL Scorecard for an automated underwriting decision.

Jan 9, 2015

Is the Wild West of Mortgage Lending Coming Back?

Anyone that has been in the mortgage industry for a long while remembers the “wild west” of mortgage lending. During this time we had all kinds of exotic mortgage programs. Literally, if a prospective borrower had a body pulse he was able to purchase a home.

Dec 19, 2014

Common Mortgage Programs That Do Not Require 20% Down

As I talk to more and more people it is amazing how much erroneous information is out whereby borrowers must put 20% down in order to buy a home. These people must have read all of the news articles referring to the QM (Qualifying Mortgage) and other press releases referring to the difficulty in obtaining mortgage financing.

Dec 5, 2014

Back to Work – Extenuating Cirumstances

When reviewing a credit report for a mortgage loan where you find derogatory credit on the credit report always find out what contributed to the derogatory credit. Loan applicants that can provide evidence that the derogatory credit was due to loss of employment or other extenuating circumstances as defined in Mortgagee Letter 2013 – 26 can obtain mortgage financing sooner than later than other applicants with the same derogatory credit.

Nov 7, 2014

Underwriters Beware

In 2013 the United States Department of Housing and Urban Development (HUD) put forth several mortgagee letters how to treat borrowers that were out of work and now back to work.

Oct 24, 2014

Coastal Barrier Resources Act (CBRA)

This past week there were two (2) hurricanes, one that missed the east coast of the United States and one that hit the State of Hawaii. The Atlantic Ocean’s island of Bermuda was hit with a category III hurricane however this storm turned north and east and did not hit the United States.

Oct 10, 2014

It’s Out!

The new underwriting bible for FHA has now come out. It has been a long time in the making.
The new underwriting bible is dated September 30, 2014 and effective June 15, 2015.

Sep 26, 2014

Is Credit Scoring Important?

When I first began underwriting in 1972 there was no such thing as credit scores. Underwriters used their best judgment when reviewing a credit report and after evaluating the history of the credit they made a decision whether or not to grant credit.

Sep 12, 2014

Demystifying Planned Unit Developments (PUDS)

Everyone knows what a condominium is, but for some reason not everyone knows what a Planned Unit Development is. In this article I will attempt to demystify what is Planned Unit Development (PUD).

Sep 2, 2014

Is there a “HAWK” in your future?

“HAWK”, that stands for Homeowners Armed with Knowledge is a new pilot program that begins October 1, 2014. Borrowers that complete the HAWK program are slated to save on their upfront and annual Mortgage Insurance Premiums (MIP).

Aug 15, 2014

It’s a full moon, does your area flood?

Living on Long Island, New York, which begins geographically in Queens, New York and then to Nassau and Suffolk Counties are prone to flooding due to a full moon. This flooding could be worse if we have a rain storm, wind storm or tropical storm. The National Weather Service has warned most of the East Coast of the United States that they may flood due to the full moon.

Aug 1, 2014

HECMS for Purchases

Many senior citizens meaning anyone 62 years young and older want to down size from their current living arrangement. In most cases their children have married and left the home and they no longer desire the dwelling that they presently own.

Jun 20, 2014

The 203(h) Home Mortgage Insurance for Disaster Victims Program

Whenever there is disaster somewhere in the United States and the President of the United States declares that area a "Federal Disaster Area”, FHA’s 203(h) program is available to all residents in the areas declared by the President as a federal disaster area.

May 23, 2014

Using the Monthly Interest Rate Factor

Over the years I have been asked by borrowers, loans officers and others how to calculate the amortization of a mortgage. The calculation on a monthly basis is not difficult utilizing a conventional mortgage as long as you know certain variables.

May 9, 2014

Obtaining a HUD Community Block Grant is loaded with paperwork.

As a New York State resident that had about $40,000.00 Super Storm Sandy damage you would think obtaining some of the HUD Community Block Grant Money would be easy. New York as well as other states that had significant damage caused by Super Storm Sandy received billions of dollars from The United State Department of Housing and Urban Development as a Community Block Grant.

Apr 27, 2014

Do Not Ignore that Fraud Alert

Every day more of us are becoming victims of fraud and of Identity Theft. I was once a victim of Identity Theft, the person who did the crime in my case served two and a half years in prison. I know most people who do this crime I seldom caught.

Apr 10, 2014

The Ability to Repay (ATR) for Non – QM Loans

All mortgage loans whether they fit under the Qualified Mortgage (QM) or fit under the Non – Qualified Mortgage now must fit under the so called “umbrella’ called Ability to Repay (ATR).

Mar 22, 2014

Changes coming to FHA

The Federal Register dated December 11, 2013 contained proposed changes to underwriting. The changes really clarify how everyone is to approach FHA loans that mare manually underwritten. The FHA now has seven scenarios where the mortgage loan must be manually underwritten. In the near future a Mortgagee Letter will be written to further clarify this.

Mar 8, 2014

HUD Releases Qualified Mortgage Definition

As of January 10, 2014 the Qualified Mortgage (QM) rules become effective and HUD is no different. They too must have QM loans. On December 11, 2013 HUD released their definition of a QM mortgage. All FHA case numbers issued on or after January 10, 2014 will be issued with the understanding that the borrower(s) will fit under the QM rules and regulations.

Feb 22, 2014

Annual Percentage Rate

Most borrowers and lenders have heard of the acronym APR but most do not know what goes into the calculated APR. So many folks understand that the APR is a cost but most do not know enough about the acronym called APR.

Feb 7, 2014

Mortgage Fraud – How to Avoid Mortgage Fraud

If you lie on your mortgage application it’s mortgage fraud. Even though some lies and omissions constitute mortgage fraud. Many borrower’s hedge a little there, often because they did not know any better or worse. Sometimes borrowers are counseled by their mortgage loan officer and/or real estate broker to sell and close on that house.

Jan 10, 2014

Getting a mortgage for the Self – employed!

In the forty (40) years that I have been in the mortgage industry the self – employed borrower has always been the borrower with the most difficulty in obtaining mortgage financing.

Dec 27, 2013

Will Government Mortgage Financing Grow in Popularity?

The conventional mortgage market is changing as of November 16, 2013. Federal National Mortgage Association also known as Fannie Mae has announced that as of November 16, 2013 they will no longer purchase any mortgage with a loan to value higher than 95%.

Dec 24, 2013

Are there any Refinances left?

Over the last few years while rates were historically low, virtually everyone that could refinance their mortgage, did refinance. Now some of the major center banks have announced layoffs due to minimal refinance activity.

Nov 2, 2012

FAQ: Natural Disaster Protocols

Written By: Bonnie Wilt-Hild

What measures should lenders take prior to loan closing or endorsement when a property is located within a FEMA designated disaster area?

Aug 17, 2012

Regulating Consumer Credit Companies

I think anyone currently working in the mortgage lending industry will agree that at this particular time in history, we as lenders are more regulated than we have ever been. Further, under Dodd-Frank, more regulations are forth coming that will again determine how we disclose, what we disclose, when we disclose and in the not so far off future, how much a loan officer can actually charge for the origination service.

Credit Scores

When I hear those words, they immediately evoke images of a world in which mortgage underwriting decisions are determined by AUS systems that have no capacity to either employ common sense underwriting principals or fairly or adequately assess overall risk.

Jun 1, 2012

Selling Manual Underwrites on the Secondary Market

Like myself, I am sure many underwriters in this fine nation of ours spend a fair amount of their time on conference calls or web based training with new investors that their employers have recently became associated.

Apr 6, 2012

Business Practices and Borrower Rights

I am going to share a story of very recent origin which involves someone quite close to me and unfortunately is entirely true. I am hoping that by sharing this, it will bring light to some of the seedier business practices occurring today while also making people aware that there is recourse against lenders who consistently leave behind ethical practices in favor for business practices that violate not only the law but also their client’s personal rights.

Feb 24, 2012

Reduction in Seller Contribution towards Closing

We all knew it was coming and it looks like it is here and that being the announcement in the Federal Register that HUD intends to reduce the amount a seller can contribute towards borrowers closing costs from the current 6% to 3% as indicated previously in a Federal Register publication in July, 2010.

Jan 26, 2012

Reducing Risk and Opportunity

In press release 12-010 dated Friday, January 20, 2012 FHA announced their intention to take additional steps to limit risk and strengthen the finances of the agency. These changes, it was stated, would help FHA better manage risk while maintaining support for the housing market and access for qualified borrowers. Included in these changes would be new regulations which strengthen the process by which FHA requires certain lenders to indemnify the U.S. Department of Housing and Urban development for insurance claims pain on mortgages that are found to be deficient where meeting the departments guidelines or contain misrepresentation and fraudulent documentation.

Jan 13, 2012

The G-fee Hit

As if we didn’t already pay enough in the way of taxes, beginning January 16, 2012 we will have another to contend with, that being the G-fee hit ordered by Congress and the FHFA with respect to pricing adjustments.

Dec 30, 2011

Professionalism

It wasn’t long ago, or at least it doesn’t seem so, that people employed in the mortgage industry were considered mortgage bankers or mortgage professionals who possessed a certain skill set where banking and finance were concerned that labeled these individuals as professionals.

Dec 22, 2011

Repurchase Request

In a new twist to the never ending saga of new things to watch for in the mortgage industry is investor audits of older loans that have now gone into default. That’s right forget reps and warranties, it seems that every investor is now auditing any older loans that have since gone into default and to some degree inventing reasons why the loan should be repurchased my the original lender.

Dec 9, 2011

Shelving Broken Concepts

Once upon a time there lived young women who, during a down turn in employment, embarked upon a career adventure that would ultimately become a life changing event. Having limited job skills, she accepted employment as a loan processor for a small Savings & Loan in Maryland.

Nov 14, 2011

Just the Truth Please

Does it ever cease to amaze you how people can twist the facts with regards to almost any situation in order to achieve the results that would most satisfy them even if those results achieve no end. In this day of mass media and the information highway, articles and blogs can be placed on the internet in a matter of minutes and unfortunately, many of the authors of this information have no real experience or responsibility where the content of their article is concerned and articles relating to the mortgage industry are no exception regardless of the type of media by which they conveyed.

Nov 11, 2011

Personal Responsibility

I have had it, really. Yesterday I read the tweet from Chef Mario Batali regarding the banking industry which compared bankers to Hitler and Stalin. As one that would consider themselves a banker, credit officer and underwriter, I take extreme offense to the comment particularly when it comes from someone who during the normal course business, charges $300.00 for a truffle tasting menu at his own establishment Babbo.

Oct 29, 2011

Getting Files Closed

Ok, so I have been in the mortgage industry for 25 years and I have to say, this end of the month has been the worst ever. Well maybe not the worst but it ran a very close second. More frightening is the fact that we didn’t close near the volume that we have closed in past months.

Sep 16, 2011

A Few Changes for VA Loan Types

These days it seems as though the rules never stop changes where the preeminent mortgage programs are concerned, those of course being Conventional, FHA and VA, but it’s always nice when the change is something for the better and today I have the pleasure of delivering the good news. Recent VA circular’s issued on September 8, 2011, more specifically Circular 26-11-12 are indicating a reduction in the VA funding fee for loans closed on or after October 1, 2011.

Aug 19, 2011

Rural Development Loans

When we think about government loan programs, most often the FHA and VA programs come to mind however there is another one, that being Rural Development. I know you have all heard of them but for some reason they seem to be a loan type that very few know anything about, so being in good form as I sometimes am, I thought I would share the specifics because these days, any program that a lender can offer with a maximum 100% LTV that will allow one to roll in closing costs, is a good one.

Jul 15, 2011

Something to Believe In

Pretty recently I was having a conversation regarding homeownership opportunities for low to moderate income borrowers with an employee of a department of housing and community development agency within the city that I live. The conversation had begun during a discussion with respect to city owned properties and the liquidation of the same.

Jul 1, 2011

The 203k within the Public Sector

Ok, so as I am sure most of you can imagine, I lay awake at night and think about mortgage programs, more particularly government lending programs because, quite simply put, they are the most useful.

Jun 24, 2011

Handling HUD REO Sales

Handling purchase transactions which involve bank owned foreclosure sales are not limited to merely standard bank owned properties, and as I am sure you will all agree, each of us have handled our fair share of FHA property disposition cases.

The Plot Thickens

I have decided that it just does not pay to be nosy. As you can imagine, by that statement alone, I do have a tendency to stick my nose in places it really doesn’t belong simply because it’s interesting and of course, because it doesn’t belong there (call it my rebellious streak).

Jun 6, 2011

The 203k Underwriting Checklist

The 203k is a great program for any individual who wants to buy a handy man special or property being sold at foreclosure and fix it up, or a current homeowner who would like to complete some updates to their existing home however many lenders are still unwilling to offer the program.

May 30, 2011

The Spirit of Underwriting

I was in the kitchen this morning having a conversation with a coworker. We were reminiscing about the good old days of HUD field offices, case number assignment lines and of course processing and underwriting without the benefit of fax machines, AUS or even the internet for that matter. Those were the days when a final typed 1003 was exactly that, a document that you rolled into the typewriter and typed and carbon paper was an office necessity.

May 23, 2011

FHA Then and Now

Very recently, while teaching an FHA Underwriting class for FHA Online University, the history segment of the training made me stop and think. It was unusual really, because I have taught this particular class at least once a month for the past four years and honestly, other than an occasional joke as to how students need to take notes because the historic information pertaining to the agency was on the “big” test, I never really thought much about it.

Grim

Yes, it is, grim that is, and I am not referring to Wilhelm & Jacob Grimm. But just as they composed those fairy tales in the 1800’s, representing what might have been described as the capricious and cruel reality of daily life for most Europeans of that time, we to continue to face a housing and mortgage market that can also be described capricious.

Apr 18, 2011

The “Safe” Mortgage

As if there are not enough acronyms in the mortgage industry, the federal government has moved forward in coining a new one, QRM, this being the acronym for the newly defined Qualified Residential Mortgage. Ok, I know that everyone is thinking that all mortgages are QRM’s if they meet guidelines but in this case, the guidelines or standards which will eventually define what a QRM or “Safe” mortgage is, will differ vastly from what defined a qualifying mortgage of the past.

Apr 2, 2011

Considerations While Underwriting The Low to Moderate Income Borrower

The most recent past has seen the mortgage industry struggle with developing sound underwriting practices that serve to not only protect lenders against default, but to also promote affordable home ownership for all types of borrowers.

Mar 11, 2011

Privatizing FNMA and FHLMC

Earlier this week, someone asked my opinion as to if I thought there was any benefit in privatizing the GSE’s. Unfortunately, I was a little short on time and couldn’t go into a great length as to if I thought it desirable or not and honestly up until the conversation occurred, I hadn’t really given it a lot of thought.

Mar 4, 2011

Processing Due Diligence

These days, underwriters constantly stress the importance of collecting the appropriate documentation in order to complete acceptable due diligence on the cases intended for underwriting. Often times, these requests appear to be the result of ultra conservative underwriting practices and the documentation required nothing less than excessive particularly if the request for additional items is being made a few days prior to closing.

Feb 18, 2011

When Costs of Repairs Can Be Rolled Into the Loan

In today’s real estate environment, Purchase transactions that involve bank owned properties are pretty common. Often these cases are originated under the FHA 203k mortgage insurance program due to the overall condition of the property and the need for the completion of certain repairs which are required for the property to meet HUD minimum property standards.

Jan 14, 2011

New Quality Control Measures

HUD has recently announced new lender requirements where quality control is concerned. These requirements have been set forth in ML2011-02 and outlines for lenders what new provisions need to be added to their current QC plan.

Jan 30, 2015

Maximizing the Slow Season

Written By: Frankie Lacy

Typically the mortgage industry slows down after we move out of the holiday season and into the first few months of the year. Business may not start to pick up until mid-spring or early summer. We can utilize this time to clean house and sharpen our skills in preparation for the next busy season.

Jan 16, 2015

Verifying Borrower Identity

There are many reasons each borrower’s identity must be verified. First, lenders must verify data integrity on the loan application, disclosures, credit, and automated underwriting findings.

Jan 2, 2015

What Kind of Asset Is This Anyway?

Often, asset review is a straightforward piece of the loan analysis process. Borrowers submit recent checking and savings account statements to verify funds to close. The underwriter will review the statements for large deposits and insure the most recent balance is used to qualify.

Oct 3, 2014

The Mortgage Industry: What’s In It For Me?

The mortgage industry has been through quite a few ups and downs since 2007. We have experienced layoffs, sweeping regulatory changes and fluctuations in business. The press and public opinion on the mortgage industry has largely been negative due to mortgage fraud and the bursting of the housing bubble.

Sep 19, 2014

File Notation Best Practices

When underwriting a file, there are several ways to make loan notations:
-The comments section on the underwriting transmittal (1008)
-The loan origination system (LOS) notes
-A separate underwriter rationale write up

Aug 21, 2014

USDA New Regulations: 7 CFR 3555

Effective September 1, 2014, USDA will replace the 7 CFR 1980-D regulations with the 7 CFR 3555 regulations for its guaranteed rural housing program. The new handbook will house all previous administrative notices (AN’s) and the existing rules in one comprehensive document. The new handbook will also include all rule changes based on regulation 7 CFR 3555.

Aug 8, 2014

Underwriting Remotely: What are the Pros and Cons?

Employing remote underwriters is a cost effective measure for many mortgage lenders that is also beneficial for the underwriter. Many correspondent lenders have slowly expanded their licensed territory to include multiple states in various time zones. Employing remote underwriters in these states creates a seamless interface with underwriting regardless of branch location.

Jul 11, 2014

Do You Have Enough Information to Calculate Income?

Before an underwriter can determine the correct calculation for computing income, she/he must determine if there is sufficient data within the documentation submitted. The first place to reference when trying to determine whether you have the correct documents is your AUS findings. However, some findings reports give vague messages such as “refer to Fannie Mae Selling Guide”.

Jun 27, 2014

Underwriter’s Toolbox: A List of Must-Have Resources

Underwriters are required to juggle new production, condition review, emails, and phone inquiries each day. In addition, managers, processors, and sales professionals may approach underwriters throughout the work day for assistance on a variety of issues. As a result, underwriters must streamline their process flow as much as possible.

May 30, 2014

May 16, 2014

Career Progression in the Mortgage Industry

So you've taken classes, shown initiative, and communicated your desire to progress into higher positions. You want to expand your knowledge levels within your company’s organization. However, it seems like you have waited forever to get the green light and your manager keeps giving you the brush-off. What should you do next?

May 2, 2014

Income Analysis Forms and Formulas

By now, many of us already know the basic formulas for calculating income. We also know that, in addition to executing formulas, underwriters are called to perform an analysis of the stability and continuance of qualifying income. This can be a daunting task when analyzing multiple business structures over two years.

Mar 29, 2014

Underwriting Rental Income

Calculating qualifying rental income is one of the more complex income calculations an underwriter can perform. This is particularly true when the borrower owns multiple investment properties. The challenge is determining when rental income can be used to qualify and, once income is calculated, reconciling the total debt ratio.

Mar 15, 2014

Property Condition Considerations

As many of us around the country desperately cling to the hope that spring will come sometime this year, we can also stop to think how the long, harsh winter may affect property conditions. Roof, gutter, and foundation damage from prolonged snow pile up, ice damming, and flooding is a very real possibility for homeowners in 2014.

Mar 1, 2014

Feb 14, 2014

Freddie Mac Updates

As of January 12, 2014 Freddie Mac Loan Prospector will issue new recommendations in response to the final CFPB’s Ability to Repay and Qualified Mortgage rules. The feedback messages will address the following loan types:

Jan 31, 2014

Jan 3, 2014

2013 Wrap-Up: Looking Forward into 2014

2013 brought major changes to mortgage lending with the introduction of new regulations, the end of the mini-refinance boom, and an intensified focus on quality. As we prepare to conduct business in the new year, we can reflect on how those changes will impact us as mortgage processors and underwriters.

Dec 20, 2013

Refinance vs. Purchase Transactions

2013 saw the end of the mini-refinance boom as interest rates increased in late summer to early fall. As a result, it is important for mortgage processors and underwriters to reacclimatize themselves with executing purchase transactions. For those who have been underwriting and processing refinances for some time, there are some key differences to identify.

Dec 6, 2013

Preparing a File for Clear to Close

Once a file has been fully underwritten and all conditions are satisfactorily met, it is ready to be cleared to close (CTC). Underwriting and processing must perform a final quality control check prior to releasing the loan to the closing department. This process will prevent errors at the closing table and delays in the post-closing process of selling the loan.

Nov 22, 2013

Longevity in the Mortgage Industry: What does it Take?

The mortgage industry is faced-paced, constantly changing, and sometimes uncertain. There are cycles of “feast or famine” where we experience excessive loan volume, followed by a sudden and steep drop in loan volume.

Nov 9, 2013

DU & LP Changes

In response to policy changes relating to the Ability to Repay and Qualified Mortgage regulations, Freddie Mac (LP) and Fannie Mae (DU) have made updates to their AUS systems. LP’s changes were made effective October 27, 2013 and DU’s changes will be effective November 16, 2013.

Oct 25, 2013

Reviewing Purchase Agreements

A thorough review of the purchase agreement (P/A) or sales contract is critical to the accuracy of your loan package. Some of the initial points of review are the property description, parcel identification numbers, and the seller and buyer names. The property description and parcel ID numbers on the contract should match the title report and the appraisal report.

Oct 11, 2013

Networking in the Mortgage Industry

Recently several mortgage lenders across the U.S. have laid off staff or restructured in response to the end of the “mini-refi boom”. As a result, many of us are left wondering what we can do to create opportunities for ourselves despite a job market that is flooded with talent.

Sep 13, 2013

Debt to Income Ratios

There are two debt-to-income (DTI) ratios on every loan: housing or front-end ratio and total or back-end ratio. The housing ratio tells us what percentage of the borrower’s monthly gross income is allocated toward the monthly principal, interest, tax, and insurance (PITI) payment. The total ratio includes the monthly PITI and all other monthly debts including auto loans, credit cards, child support expenses, student loans and more.

Aug 23, 2013

What Are the Characteristics of a Good Underwriter?

I am often asked this question by processors or other mortgage professionals that are looking to transition into underwriting. Underwriting can seem mysterious and out of reach to some as they try to understand the duties and responsibilities associated with the title.

Jul 26, 2013

The Value of Mortgage Education

Mortgage education has become a vital tool for residential and commercial lending professionals in the current environment. Right now, there is a heightened emphasis on compliance with lending regulations and underwriting guidelines.

Jul 12, 2013

The Perils of Piece-Mailing

Are you ever tempted to place a loan back into the underwriting queue before all conditions are in? Do you believe that submitting a “deal breaker” condition for underwriting review without all the other conditions will speed up the approval process? If so, this article is for you!

Jun 14, 2013

Best Practices: Letters of Explanation

Letters of Explanation (sometimes abbreviated to LOX or LOE) are a common condition on loan files. Underwriters request them to explain large deposits, residence histories, derogatory credit, credit inquiries, and much more. However, it is important to understand that in most cases, the LOX is just the beginning.

Apr 13, 2012

From Fax to Facebook

Written By: Theresa Furzland

My son and I have recently been having a recurring conversation regarding the benefits and down sides of technology. He is a music/computer science major and I find it interesting how it is a natural inclination for him to combine these two subjects.

A Hidden Gem

Are you aware that there is a zero down program available? And no, it isn’t VA.
The USDA offers the Rural Housing Loan Program that is available to mid and low income persons in rural area.

Jul 8, 2011

Paperless Power – Pros and Cons

Our company, LendSmart Mortgage, is currently undergoing a software change that will allow us to be virtually paperless. I am of course an old dog, but in this business you have to be used to learning new tricks on a daily basis so I’m not really flustered.

Shortcuts

I sat down at my computer tonight and thought I’d see how many acronyms I could rattle off the top of my head. Here is my 10 minute effort: (and if you know what they all stand for – you’ve been in this business too long!)

Looking Around

I’ve been writing about the different perspectives of the mortgage industry and it has really been an interesting mental activity for me. Not only did I get the opportunity to appreciate the wide variety of experience I have had the fortune to acquire over the years, it also makes me feel old.

May 20, 2011

Refi whys?

Yes, I’m still receiving the rare refinance inquiry from my loyal past clients and referrals. These calls generally start like this – Hi Theresa, I’ve been seeing ads everywhere that interest rates are at record lows and I should refinance my mortgage now...or...I got a phone call saying I could get a great refinance deal and it won’t cost me anything and will lower my rate as low as 3.5%.

Perspectives – Origination

This week I’m looking through my originator eyes. I tend to think of myself more as a Mortgage Loan Advisor than a Loan Officer. As I have already mentioned, probably more than once, I never set out to be a loan originator and I am the first to admit that I am not a “salesman”. I do love this part of the process however and for one reason.

Apr 26, 2011

Perspectives – Homeowner

I really thought this would be the easiest of these views to write, and as I get down to it I realize that it is actually the hardest. Maybe this is because it is really impossible for me to separate myself from my lifetime in this business. I have been a mortgage professional longer than I’ve been a homeowner.

Signs of Spring

It’s the time of year when we all start watching for those long awaited signs of spring, especially here in Northern Minnesota, where I live. It almost seems to be a sport, or at least a lively competition. We are currently enjoying my favorite...the maple sap is flowing. It means more work for us, and busy days and some late nights for the next few weeks as we will be making two trips into the woods daily to gather, then the process of “boiling” down.

Jan 31, 2011

Roll with the changes....

The New Year brings new challenges to our industry. Good, bad or just plain frustrating we all know that to work in this business is to continually adjust to changes and 2011 looks to be no different in this aspect.

Dec 26, 2010

The benefits, Importance and Necessity of Cross Training

With the additional demands and ever changing rules and regulations that we are dealing with these days it is more important than ever to be as knowledgeable as possible in all aspects of our industry.

Dec 3, 2010

Beating the Basics

I know I’ve brought this subject up before, but as we come to the end of another year and look back over the fiascos of 2010, it just seems to me that now more than ever we need to revisit the basics.