Here Come the Changes! Fannie Mae Sets Release Weekend for Desktop Underwriter™ 10.0

Here Come the Changes! Fannie to release DU 10.0

Well, we finally know a *LITTLE* more about Fannie’s plan to release the brand-spanking-new version of Desktop Underwriter™ (DU™).

If you took Real Estate Institute’s live Mortgage continuing education class last year, you heard me talk about Fannie’s plans to revamp and update their underwriting engine to take into account “new and improved” (*your mileage may vary) credit report data that the mortgage industry has not previously utilized. The data to which I’m referring is called trended credit data, and it incorporates much more information about consumers than most of you have ever seen before.

Right now, our mortgage credit reports are basically “snapshot” reports – that is, they show the consumer’s payment history, current balance, credit limit, dates opened, etc. That data is updated typically once per month from each reporting account, and what we know about our customer is what is reported on that day from that creditor. Thus, if Joey Bagadonutz is someone who pays off his credit cards in full each month, but his outstanding balance on the day the account reports to the bureaus is $3,500, we see that balance as $3,500 with no indicator of how long it has been that high. Now, imagine that the limit on Joey’s account is $4,000. Our current underwriting algorithms see him as a SIGNIFICANT CREDIT RISK because of his credit utilization. Not good for Joey.

With trended data, not only will we be able to view the outstanding balance and limit, we’ll be able to see how much Joey has paid on his accounts each month for the past two years! For a guy like Joey who pays his account in full, this is fantastic; we’ll be able to really dig into his excellent credit history beyond today’s “well, he’s never been late.” Thus, Joey gets a better risk evaluation, which leads to a better rate, which leads to happy Joey, pink unicorns, rainbows and Santa Claus! Can’t get any better than this, right?

Well, if you’re Joey, yes.

However, if you’re someone who carries a balance each month, not so much. Let’s say you’re working with Bubba Buysalot on a purchase of a new home. Bubba is a guy who has 6 open credit cards, is under 50% utilization on all of them, and has never missed a payment. In today’s credit world, our algorithms see him as a TOP-TIER RISK LEVEL because of his utilization and payment history. Good for Bubba. Now, with the new trended data, we dig deeper and see that Bubba has made just the minimum payment on all six accounts and his balance over time has been increasing. Now, Bubba is no longer a top-tier borrower. He gets a worse risk evaluation (due to the fact that those who make minimum payments default on debt at a rate 3 to 5 times higher), which leads to a higher rate or a declined loan, which leads to sad Bubba, rain clouds, bee stings and Lucy pulling away the football when he tries to kick it.

You can see both sides of this coin, right? Deeper information and improved risk assessment is good for creditors, Fannie Mae and MBS investors, but it’s not good for every applicant.

OK. So WHEN is this new version of DU coming out? Good question. According to Fannie’s preview document released at the end of January, we can expect the rollout to occur on the weekend of June 25, 2016. We also can expect a series of training webinars and informational communications in the months leading up to the roll-out date. As of right now, all we really know is that this new release will evaluate trended credit data, as well as simplify the process for applicants with multiple financed properties. We’ll learn a lot more when Fannie issues the release notes sometime later this month. It will be interesting to see if they also incorporate some of the other changes they’ve been working on, such as creating a way for DU to evaluate borrowers with non-traditional credit histories, or if those will be relegated to a future release.

Now that you have this knowledge, it’s time to get out there and start educating your prospective borrowers about it, especially those who are sitting on the fence about purchasing a home. While you’re at it, start informing your referral sources, too! I’m sure there are gaggles of real estate agents and financial planners out there who’d like to know about these changes well in advance.

More to come when the Release Notes are, well, released. Until then…

Happy Originating!

Peter



Real Estate Institute is an NMLS-Approved Course Provider, #1400102. Each year, thousands across the country choose Real Estate Institute for its mortgage pre-license, SAFE test prep and continuing education programs. If you have questions about your education requirements, our compliance experts are available at 800-995-1700 from 8 a.m. – 6 p.m. (Central Time), Monday through Friday.

FANNIE AND FREDDIE LIMITED TO QUALIFIED MORTGAGES

In response to a directive last week from the Federal Housing Finance Agency, both Fannie Mae and Freddie Mac today issued bulletins indicating that they will only purchase qualified mortgages when the Ability-to-Repay rule goes into effect on January 10, 2014.  EFFECTIVE WITH APPLICATIONS TAKEN ON OR AFTER JANUARY 10, 2014, both Fannie and Freddie will rely on selling lender Representations and Warranties that all loans purchased are, in fact, qualified mortgages or are otherwise exempt from the ability-to-repay rule (i.e. the loan is secured by an investment property).

Aren’t ALL loans eligible for sale to the GSEs automatically Qualified Mortgages?  Why is this a big deal?

While there is a “GSE Exemption” in the QM rule that grants loans eligible for purchase by Fannie and Freddie QM status for the next 7 years (or until the GSEs are no longer in receivership, whichever occurs first), those loans still must meet certain overarching guidelines.  In order to ensure that this happens, Fannie Mae and Freddie Mac are making the following changes to their product eligibility guidelines effective with applications taken on or after January 10, 2014 (note that individual lenders/investors may modify their product guidelines before this date, so be sure to watch for bulletins for those that you do business with):

  • Loans that are not fully amortizing will be ineligible for purchase (i.e. interest-only loans) except for investment properties
  • Loans with terms longer than 30 years will be ineligible for purchase
  • Loans with points and fees greater than 3% of the loan amount (or that exceed limit for small-balance loans, if applicable) will be ineligible for purchase, except for investment properties

The elimination of the interest-only and other odd products will only impact a small percentage of the GSEs’ business (based on recent origination trends), but the points-and-fees restriction could have a large impact on originators – ESPECIALLY those with affiliated business relationships – because of the way that “points-and-fees” are calculated under the rule.

We’ll be discussing the Ability to Repay and Qualified Mortgage rule in depth in our CE courses this year, so be sure to get your spot reserved early!  We’ll be publishing our CE schedule for 2013 later this month.

In the meantime, you can find the bulletins from Fannie Mae and Freddie Mac and some good information on compliance with the QM/ATR rule from the CFPB at the links below.

See you in class!

Peter

Fannie Mae Lender Letter LL-2013-05

Freddie Mac  Industry Letter 5/6/2013

CFPB Ability to Repay and Qualified Mortgage Rule: Small Entity Compliance Guide

Can You Expect a Hike in the Fannie/Freddie Guarantee Fee in Your State?

The Federal Housing Finance Agency (the agency tasked with overseeing the Fannie and Freddie conservatorship) has announced that it intends to hike the guarantee fee on all loans sold to the agencies secured by properties in the states with the highest cost of foreclosure.  Those states are:  Illinois, Florida, Connecticut, New Jersey and New York.  This fee hike would go into effect in 60-90 days (it needs to be formally published in the Federal Register first for public comment), and means that loan originators will likely see a worsening in pricing on loans made on properties in these states in roughly 45 days.  Once the notice is published, you’ll have a chance to comment on the proposal at www.regulations.gov.  It’s worthwhile to make your voice heard, so take a few minutes and give them your thoughts on the matter!  You just need to wait until after the notice is officially published.

Happy originating!

HVCC is dead, long live HVCC! Fannie and Freddie announce new Appraiser Independence Requirements.

In monarchies of old, it is said that whenever a King or Queen died, the courtiers would lament the passage of the old ruler and usher in the new in the same breath.  While chants of “The King is dead!  Long live the King!” are stuff of legend and lore, it seems appropriate to make the comparison to Friday afternoon’s announcement by both Fannie and Freddie regarding the “new” Appraiser Independence Requirements to replace HVCC effective November 1, 2010 at the latest.

As promised, we are providing you with a synopsis of the release.  Here are the highlights:

1)   Under the new requirements, lenders selling to Fannie or Freddie are still responsible for engaging (ordering appraisal reports from) appraisers.  This can be done through lender roster appraisers, lender-approved appraisal management companies or through correspondent lenders who may have their own appraisers or appraisal management company relationships.  In no case is a true third-party (including mortgage brokers) allowed to compensate appraisers or order appraisals unless through a lender-approved Appraisal Management Company (AMC).  Much to the chagrin of most mortgage brokers, there is essentially no change from the existing HVCC requirement here.

 2)   Lenders must continue to keep the origination function completely isolated from the appraisal function.  In other words, any employee who works in mortgage origination (or “sales”) should not order an appraisal or “have any substantive communications with an appraiser or AMC relating to … valuation or having an impact on valuation, including ordering or managing an appraisal assignment.”  The only change from the existing HVCC requirement is that AMCs are now explicitly included on the list of prohibited contacts for sales/origination employees.  Also, an exception to these requirements has been added for small entities who truly can’t keep the two functions absolutely separate, as long as they have “prudent safeguards” in place to ensure that no influence or interference with appraisals occurs from a sales employee.  Note that this exemption only applies to entities that are actually selling loans to Fannie and Freddie, NOT to correspondent lenders or brokers.

 3)   Lenders are now explicitly permitted to order appraisals from Appraisal Management Companies who are affiliated with them, as well as staff (employee) appraisers or appraisers acting as independent contractors.  This removes all doubt of the acceptability of such relationships which were questioned by many in the industry since HVCC was first announced.  It will be interesting to see the reaction to this, as it raises serious questions about a conflict of interest in the transaction.  How can you assure appraiser independence if the appraiser is being compensated by an entity that is wholly owned by the lender selling the loan to Fannie or Freddie?  This seems to cut against the general intent of these rules.

 4)   Second appraisals should not be ordered on any transaction unless the lender has reason to believe that the original appraisal was flawed or tainted (reasons for which must specifically be noted in the file) OR the second appraisal is required by law or ordered as part of a standard appraisal review or QC process.  If second appraisals are ordered for review/QC, lenders need to have a policy of selecting the “most reliable appraisal, rather than the appraisal that states the highest value”.  This is a slightly more in-depth explanation of the prohibition on “value shopping” than appears in HVCC.

 5)   Lenders are now explicitly allowed to use appraisals transferred from another lender or lender’s AMC, including for transactions where a mortgage broker has originated the loan.  Note that if a lender elects to do so they must assume complete responsibility for that report’s compliance with the appraiser independence requirements.  This provision should come as a relief to mortgage brokers across the country who have long been fighting for the ability to transfer reports and save borrowers’ time and money.

 6)   Borrowers must continue to be provided with copies of appraisal reports “promptly upon completion at no additional cost…and in any event no less than three days prior to closing.”  This 3 day requirement can be waived by the borrower in writing, so long as the waiver request is completed at least 3 days before closing.  In practice, just as with the rescission waiver allowed in the Truth-in-Lending Act, don’t expect lenders to accept these appraisal report waivers either.

 7)   It should go without saying, but appraisers must continue to be State-licensed or certified by the State in which the subject property is located.  Additionally, all of the prohibitions on coercion, influencing or attempting to influence the value or composition of an appraisal report remain in effect.  They are too numerous to list here, but are fully detailed in the Fannie and Freddie releases.

 A document with the full requirements can be found at: https://www.efanniemae.com/sf/guides/ssg/relatedsellinginfo/appcode/pdf/air.pdf

If you read the above document, remember that the term “Seller” refers to the entity actually selling a loan to Fannie Mae or Freddie Mac, which is not always the entity funding that loan.

***The effective date for the sunset of HVCC and implementation of the new requirements is November 1, 2010 or when the Federal Reserve issues final regulations on the Dodd-Frank bill, whichever is earlier.  HVCC remains in effect until that time.***

HVCC – Not Yet Gone and Certainly Not Forgotten

Since news of the Dodd-Frank Wall Street Reform and Consumer Protection Act swept across America this summer, it seems that the only provision that met with almost universal support from the mortgage industry is the elimination of the Home Valuation Code of Conduct (HVCC) – the appraiser independence provisions whose unintended consequences have been plaguing transactions for nearly a year now.  In the bill is contained a well known and much celebrated provision that automatically sunsets HVCC.  Less well-known, however, is the clause that says the HVCC sunset will not occur until regulations are released to enforce the appraisal independence provisions required under the Dodd-Frank bill – currently scheduled to be “on or about October 21, 2010”.  In other words, anyone who thought we were going back to the pre-HVCC business model is mistaken.

If you’ve been around the industry since HVCC went into effect, you know that there have been multiple petitions circulating concerning the law and countless columns written by mortgage and real estate professionals about the problems with HVCC and how to fix them.  Although the fixes seem second-nature to those of us who make our careers in home sales and/or finance, the concern has always been that the people issuing the regulations are not industry professionals.  While that in and of itself is not a problem, we must hope that they listen to input from the professionals who have witnessed first-hand the problems that have been caused directly by HVCC.  Some of those problems include higher costs to consumers and appraisers working outside areas with which they are familiar resulting in less accurate reports and increased processing time for loans.

On Friday, in a little-noticed release from Fannie Mae, we got a glimpse of how things are progressing.  In the notice, Fannie reminds all of its lender partners that HVCC remains in effect until new regulations are released and that “Fannie Mae is working with the Federal Housing Finance Agency (FHFA) to develop and adopt appraiser independence requirements that will replace HVCC.”  Fannie Mae states that it has received input from key industry participants.  The statement in the release that warrants some concern (if you are an industry professional) is the one that says, “Updated requirements are expected to be substantially similar to the current provisions.”  We’re wondering what “substantially similar” means.  We’ll have to wait until “on or about October 21, 2010” to find out.  You can be certain that we’ll have a post as soon as the news hits the wire.

Stay tuned.