Mortgage Processor Blog :

Discovering FHA

2009-07-03T11:01:00.001-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

We are witness to the mad dash to become FHA approved. It seems that every broker has applied for a mini-eagle and the brokers that had the mini-eagle have applied for their full eagle. FHA has become the mortgage program of choice not only because of the flexibility of the program but also because it seems to be the only option to get borrowers qualified.

While I have seen an upward trend in the number of FHA mortgage applications from an underwriting standpoint, I am also witness to the number of mortgage professionals who have taken it upon themselves to immerse themselves into the program by educating themselves in all aspects of the program from origination to underwriting and while this is important, there are aspects of the program which all new initiates of the program need to be aware of, and this is the “back room”.

From a broker standpoint, I will say that origination and processing standards are paramount points of training simply because most of the back room functions will be completed by the underwriting lenders, however for those companies that have moved from loan correspondents to unsupervised lender, the back room is a very real consideration and is something that needs to be addressed prior to the closing of the first FHA loan application.

Remember that even while a lender is in test cases immediately after conversion from loan correspondent to unsupervised lender they are responsible for handling the closing and post closing functions associated with FHA lending. There are additional steps that need to be completed with these and I have found that most new lenders have not equipped themselves with the information necessary to close or post close the cases. So here is a little heads up;

1. Remember that certain FHA specific closing documents need to be completed with the closing package and the Security Instruments must indicate the FHA case number.

2. The UFMIP collected from the borrower at time of closing must be remitted to HUD via FHA Connection within 10 days of loan closing. Each lender must be set up on www.pay.gov in order to remit the UFMIP and the set up process takes about 14 days so if you haven’t completed you might want to do it today.

3. The FHA case binder must be completed and shipped to FHA for Insuring purposes within 30 days of closing and must contain FHA connection print outs for Appraisal Logging, Insuring Logging and evidence that the UFMIP has been remitted to HUD.

4. Case binder stacking orders are available on FHA connection. Word to the wise, be careful with the paperwork reduction act, if the case binder does NOT contain all documentation used to make the credit decision it is possible that your underwriter will end up with a poor rating if the case is audited so be sure to ship everything in the credit and valuation package in the case binder.

5. Make sure you provide a Mortgagee Record Change form in the FHA case binder if the case has already been sold on the secondary market. FHA will need to make the necessary changes in FHA connection as to who the servicing lender is.

6. Post closers, check FHA Connection regularly for Mortgage Insurance Certificates (MIC’s). These need to be forwarded to your investors to demonstrate that the case has been insured. Keep a copy with your closed and sold loan files.

7. Lastly, don’t panic if you receive the case binder back from HUD with a NOR (Notice of Rejection). Read the notice and determine what the deficiency is and correct it. Once corrected, resend the case binder to HUD for insuring.

Keep mind that there are other factors that apply to closing and post closing FHA loans but the above information will get you started. Closers may want to take some time and training as to what additional documentation is required and disclosure of the UFMIP and monthly MIP from a Regulation Z standpoint as well as Initial Escrow Account Statement standpoint.

Also keep in mind that Compliance Issues matter. If your underwriters are not underwriting for compliance, they need to start. Review the final HUD I before you allow the loan to close if not serious errors where maximum mortgage amount calculations and minimum closing costs requirements are concerned can and will occur. No one likes to buy a loan down and getting the funds from the borrower after closing is near impossible.

Underwriting a performing asset is certainly critical where the FHA loans are concerned but managing the closing and post closing piece are just as critical. Its my experience that just as many errors in this area are made as with processing and underwriting however from a closing standpoint they can be costly. Additional information pertaining to the closing and post closing piece can be found on FHA Connection and need be, call FHA, they are great and always willing to help.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Compliance Update

2009-06-26T12:53:00.002-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As of July 30, 2009 there will be several new changes regarding early disclosure law, closing restrictions as well as changes to Regulation Z and RESPA so I thought now might be a good time to bring some of this stuff to everyone’s attention so that when underwriting the compliance piece of the mortgage application we get it right. The changes fall under The Mortgage Disclosure Improvement Act (MDIA) and will affect all mortgage applications for any consumer purpose mortgage transaction subject to the Real Estate Settlement Procedures Act (RESPA).

The MDIA will broaden the category of application which requires early disclosure of mortgage applications which will result in the securitization of a consumers dwelling including second and vacation homes and applies to purchase transactions, refinances and assumptions. The new rule will not apply to HELOC application. Under the new rule, estimated disclosures must be given no later than three business days after receipt of application for any consumer purpose mortgage and should include a Good Faith Estimate of Settlement Charges (which need not contain an itemization of the amount financed), Truth in Lending disclosure as well as a Servicing Transfer Disclosure.

It should also be noted that “Business day” will now be defined as a day the creditor’s office is open and is conducting normal business. Additionally if the application reaches the creditor through an intermediary agent or broker, the application is considered received when it reaches the creditor rather than when it reaches the intermediary agent or broker. If the application is denied or withdrawn within three business days of receipt than early disclosure is not required.

Currently HUD’s Regulation X defines “application” as the submission of a borrower’s financial information in anticipation of a credit decision whether written or computer generated. If the submission indicates no particular property than the application should be considered a pre-approval and not an application for RESPA covered mortgage loans. Under the new MDIA requirements the early disclosures must contain the following statements: “You are not required to complete this agreement merely because you have received these disclosures or signed a loan application.” This statement must be grouped together with the required early disclosures.

The new MDIA requirements will also allow a restriction on fees charged by the lender. Neither a creditor nor any other person may impose a fee on a consumer before the consumer has received the early disclosures other than a reasonable fee for obtaining a credit report so collection of appraisal fees upfront is prohibited except under the circumstance of a face to face application where the borrower was directly provided the early disclosures.

There will also now be a waiting period prior to consummation of the mortgage application if revised disclosures must be provided to the borrower due changes in the terms and conditions of the mortgage application which result in an increased APR of more than 1/8th of percentage point in a regular transaction or more than 1/4th of one percentage point in an irregular transaction from the time that the early disclosures were provided to the final loan terms. Under the new rules the new the corrected early disclosures must be received by the consumer not later than three business days before consummation of the mortgage.

What this means for everyone is that if you are required to provide the borrower revised disclosures because the terms of the conditions of the transactions are changing to such a point that the APR will increase by the aforementioned ratio’s, than you must wait at least 3 business days from the receive of the corrected disclosures to close the mortgage. The consumer can execute a waiver of the three day period under certain circumstances such as financial emergencies however the waiver must be received in writing.

These are the larger points where the new guidelines are concerned however there additional changes including changes to section 32 regulation as well rescission rules. Further guidance can be obtained on HUD’s website or other government regulatory agencies such OTS and FDIC.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

When to Downgrade AUS Findings to a Refer

2009-06-19T11:01:00.002-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Very recently I had a conversation with a fellow underwriter who, while she was underwriting a case which was rated an Approve/Eligible, found several items of concern within the loan documentation as submitted by the borrower. These items where located in standard documents submitted to establish income and assets sufficient to close.

Her concern was that although the case was rated an Approve/Eligible, the documents which caused concerned could not be assessed by the AUS in determining overall case acceptability from an underwriting standpoint. Her next question was when is it acceptable to downgrade a case to refer and possibly proceed by rejecting an application which has been otherwise approved by Total.

The answer to this question is really pretty simple. Whenever you, the underwriter personally feels that the overall case file exceeds the risk threshold of a case that would otherwise be acceptable than downgrade the case to refer, proceed with manual underwriting and if necessary, reject the loan.

It is important to remember that the AUS, more particularly Total Scorecard is designed to assess overall risk using the data that we as underwriters provide. Using complex mathematical equations, it reviews LTV, ratio information, proposed monthly housing expense and so on to determine if the case is an acceptable risk for HUD purposes. It in no way will complete an analysis’s the collateral nor does it specifically review the documentation provided by the borrower to determine if circumstances that may be present in this documentation may impede the borrowers ability to repay the mortgage debt in a timely manner. Only the underwriter can do this and determine through due diligence if these circumstances exist.

In looking at the case file that was discussed with my underwriter friend, she had determined by reviewing the borrowers bank statements that the borrower demonstrated consistent overdrafts in her checking account more particularly her checking account balance was going down to zero about 2 to 3 days after each pay period. Additionally she could see wire’s coming into the borrowers account from several individuals not present on the loan application as if the borrower was borrowing money from friends and relatives each and every month.

When considering this and the fact that the purchase would result in an $800.00 increase in the borrowers housing expense, that the borrower had no savings pattern and was receiving a gift for closing, the underwriter was concerned about the borrowers overall financial behavior and her ability to repay the debt. In addition it was noted that although the borrowers credit score was acceptable (due to a rapid rescore) the borrowers overall credit was not. Multiple outstanding collections were still appearing on the borrowers credit report as was prior late payments and although through rapid rescore the borrowers credit score was sufficient to receive an Approve/Eligible, review of the borrowers overall demonstrated an overall disregard for timely repayment of debts. These items were the two main items that caused concern where the case file was concerned but not the only issues. The end result was the down grade of the case to refer and ultimate loan rejection.

As you can see there is more than one factor that goes into overall case underwriting and more often than not, these factors can not be assessed by AUS alone. Only due diligence in underwriting can determine what factors create an increase risk where the case is concerned. With this in mind it is important to understand that as underwriters you can and should downgrade AUS results when necessary in order to weed out potential default cases. As always, Happy Underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

VA Cash Out Refinance Transactions

2009-06-12T11:55:00.002-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Just want to bring to everyone's attention something that could be extremely useful in the market today and that is the VA cash out refinance program. As we are all aware, FHA lowered the maximum LTV on cash out refinance transactions beginning for all case numbers ordered on or after April 1, 2009 to 85% from 95% which caused some low groans in the industry. VA on the other hand is still out there allowing 100% LTV on cash out refinance transactions and better than that, investors in the secondary market are still purchasing them.

In addition, VA has moved to guarantying 25% of the Freddie Mac conforming loan limit for the county in which the property is located so there are no longer and crazy calculations to appease the investors in the secondary market where these types of transactions are concerned. Considering this, if a lender has the ability to originate VA insured mortgages a 100% cash out refinance transaction for eligible veterans should not be a hard sell.

When calculating the maximum mortgage under these circumstances, a lender can lend up to 100% of the appraised (NOV) value plus any EEM improvements as well as the VAFF. In others words the borrower would have the full benefit of 100% of the appraised value and the VAFF would be financed on top of the for a total LTV of say 103.30% assuming the case was a subsequent use case. Processing procedures are the same for this type of transaction, full or alternative documentation standards as are all government loan transactions so there are no additional items that need to be addressed. In short, if your firm has an investor who will purchase them, they any approved VA broker or lender can originate them.

Further guidance where the 100% LTV guidelines are concerned can be found in the VA Lenders Handbook, which is located on VA’s website. Be sure however to check with your investors to make sure that they will purchase them. Most of the investors that I am working with at this point still have the minimum 620 credit score requirement in place for the VA as well as FHA and the rule appears to apply to the 100% cash out transactions as well so make certain you review any other additional guidelines that might impede your ability to get them sold.

For those of you brokers out there that are not signed up with VA yet, well now might be a good time to get the ball rolling. Broker approval where VA is concerned is actually pretty simple, you just need a sponsoring lender to provide you with evidence (a letter) indicating that they will be sponsoring you where the VA Home Loan Guaranty program is concerned and you mail this off with a $100.00 check as a couple of other things and you should have your approval in about a month. Hope the heads up was helpful and as always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Must Know Facts About the VA Mortgage Guarantee Program

2009-06-05T11:49:00.001-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

The past couple of years have been all about FHA. It seems as though every broker and lender that had not offered the program in the past were becoming approved and every conventional underwriter was working on getting their DE. It now seems that FHA sister program, that being the VA Home Loan Guaranty program is also on the rise. Many lenders and brokers have submitted applications to VA for approval in recent months so I thought now might be a good time to let everyone know about the things that are specific to VA that every originator, processor and underwriter need to know.

First I want to talk about the appraisal piece as well as case number assignment and the TAS system. It is important to know that VA provides for a random selection of appraiser at time of case number order so it’s important that processors are aware that in order to have an appraiser assigned to your case, you must complete case number assignment in the TAS system in the VA portal.

Once your case number is assigned, so to will be the name and contact information of your appraiser. This is the point at which you can go ahead and order the appraisal. Also remember that you will need to go back into TAS to pull the appraisal once it is completed and if you are a new lender, you must have your LAPP approval and your underwriter must complete his or her five appraisal test cases before you can complete the NOV without VA oversight. If you have not applied for LAPP approval then you will need to have the Certificate of Reasonable Value issued by VA.

Next, don’t forget the VA specific stuff like child care expenses and your maintenance and utility charges. VA requires that any borrower demonstrating dependents under the age of 10 on the 1003 where those borrowers are both employed outside of the home, provide information as to the child care expenses, if any, for the younger dependent children. This means a letter from the borrower indicating if there are any expenses incurred and if so the amount of such expenses. Remember to verify this information from the daycare provider and include it in the borrowers DTI.

Loan officers really need to pay attention to this from a prequalification standpoint because if the day care expenses are significant, it could kill your deal. Also do not forget to calculate your maintenance and utility charges for the property because this also plays a part in your residual income calculations. A maintenance and utility charge apply to all VA guaranteed mortgage transactions and is calculated at .14 cents a square foot. So basically multiply the square footage of the property by .14 cents and include this number on the final Loan Analysis under estimated monthly housing expense.

Finally, don’t forget your residual income calculations. VA requires that a borrowers residual income be calculated to determine if the monthly income left over each month after considering the borrowers monthly debt including taxes, social security, estimated monthly shelter expenses and debts and obligations meets VA residual income guidelines. These guidelines can be found on VA’s website in the VA handbook and vary depending on the number of family members, geographic location of the property as well as the loan amount. Make sure that the borrower’s residual income is never less than the required VA guideline because if it is the case will more than likely get rejected.

As far as processing is concerned documentation standards are similar to any full documentation loan products so collect the pay stubs, W-2’s, bank statements and so on. Remember also that the VA Funding Fee varies depending on your down payment and transaction type so pull the VAFF schedule and keep it handy for use. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Where To Start

2009-05-29T12:14:00.003-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Recently I have instructed a lot of students who were looking to make a jump from Conventional Underwriters to FHA Underwriters as well as other industry professionals such as real estate agents or title agents that were looking to break into the mortgage business altogether. More often than not, the big question was “Where is the best place to begin?” The answer to that question is relatively easy for those individuals who already have experience in mortgage credit analysis even if it is related to other mortgage products but for the individuals who have no real exposure to the mortgage process as a whole it’s a little more difficult.

It's important to realize that there are several pieces to the mortgage lending puzzle and not even a college degree in business administration is going to teach to you to underwrite a loan let alone an FHA insured mortgage. It is something of an acquired skill that one achieves by doing. Understanding the guidelines and knowing maximum mortgage limits is not enough to actual assess the overall risk of each case. Complicate it a step further and realize that underwriting isn’t an exact science as there are no two cases alike so each case has to be assessed on its own merit.

Employing technology tools like Total Scorecard helps but quite frankly there are a lot of aspects to any mortgage file that the AUS can’t assess so it really is up to the underwriter to determine that this information is acceptable from a mortgage credit risk standpoint. We will leave the valuation piece of it alone. The bottom line is it takes time to learn the skills and practice to master them. Education and training are critical but practice makes perfect.

So back to the question, “where is the best place to begin?” I actually began as a loan closer working with 2nd mortgages, this after resigning from the police department. It was helpful considering the only real life work experience I had was working in an undercover capacity and not as a bank teller. I learned a lot of valid things including collateralization concepts as well as some of the credit documentation piece. Let’s just say I knew we needed paystubs and W-2 wage statements to determine if the borrower qualified. I could also look at an appraisal understand principals of fair market value and how it related to our exposure from a risk standpoint so all in all completing the function of closing prepared me for the processing piece.

I would say it was pretty impressive stuff for a girl who was more familiar with the term of “illegal book” than collateralization. Once I moved into the processor position, I was also able to originate because I began to understand the application process including what documentation I needed and how to read a credit report and appraisal. As I processed more and more applications, I actually developed a sense of what financial behavior had to be demonstrated by a borrower in order to determine them a satisfactory credit risk and what documentation could be used to determine this.

It didn’t take to much time before I found myself mumbling “I wouldn’t lend this guy .50 cents for a candy bar”, and my underwriter agreed. I will say that my prior police experience helped in the area of fraudulent documentation so even that was useful. Nothing like a trash bag of shredded paper and tape to teach you want documents need to be analyzed to make your case.

I was also fortunate enough to play around in the closing and servicing area which gave me the ability to see how the underwriting machine affected the closing and insuring piece. No better teacher than to try to get a loan insured just to find out you are missing a document that should have been obtained at an underwriting level. A little of that sort of thing goes a long way in making sure you collect the right things in the future. Being able to set interest rates helped me understand the pricing piece and ultimately become somewhat fiscally responsible where my borrowers were concerned not to mention sort out problems where funding issues where concerned.

All in all exposure to all areas where the mortgage lending process was concerned helped me acquire the skills needed to be a successful underwriter, understand financial behavior and learn to assess long term portfolio performance. To sum it up any skills acquired regardless of the first position you land as a mortgage professional is going to go a long way in determining what type of underwriter you will become which is real question. As far as the first question goes which was where is the best place to start, anywhere you can, the experience will serve you well. Good Luck!

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Purchase Transactions

2009-05-22T11:37:00.005-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As foreclosures increase so do the steady stream of purchase money mortgage transactions. Originating, processing and underwriting any mortgage transaction is similar. However, there are a few things that we need to pay closer attention to on the purchase transactions, particularly where FHA and VA is concerned.

Origination of a purchase is not significantly different than originating any other mortgage transaction type. However, it is important that originators remember to use the HUD/VA Addendum to the loan application if the mortgage product will be a government loan. Additionally, you must remember to disclose the UFMIP or VAFF as an APR charge on your GFE. In addition to collecting standard documentation such as 1 month worth of paystubs and 2 years W-2 wage statements, you will also need to collect 60 days worth of bank statements which indicate sufficient funds for closing.

If the borrower can not demonstrate these funds at time of application be sure to ask where they are coming from so that you can determine that the source is acceptable. If the funds will come from a gift, collect a gift letter, evidence of the transfer of the gift and donors ability to give the gift and remember to source any other large deposits on the borrower’s bank statements that do not appear to be payroll related. All funds required for closing must be fully documented.

The Contract of Sale must also be collected at time of application with all applicable addenda. You want to make sure that the contract includes the FHA financing addendum which will include the Amendatory Clause and Real Estate Certification. Additionally the contract should contain a "For Your Protection Get a Home Inspection" disclosure or clause and should indicate the financing type as FHA. If the transaction is a FSBO, you may need to have the buyers and sellers sign the amendatory clause found in your LOS.

Once the documentation is collected and the case is originated, turn it in to processing as quickly as possible. More often than not, the contracts will contain drop dates for commitments as well as closing and if it is a bank foreclosure sale, they want to see the commitment by the date indicated in the contract. Processors when you set your file up, cover all of your bases so there are no mishaps prior to loan closing, that is a great way to ruin business partner relationships, particularly where real estate agents are concerned.

Make sure you have all the documentation you need, that you have addressed any situation in the file that might call for additional documentation, recalculate your income to determine that your ratio’s are in order and make sure that all of the data entered in to your AUS is correct. Minor changes to AUS at time of underwriting can result in a Refer and you need to know that before you submit to underwriting.

Underwriters, condition for everything you need and make sure you get it. Don’t skimp on the purchase transactions. More likely than not you are increasing the borrowers housing expense and you want to make sure that they can afford the property that they are purchasing. Document any situation that is not addressed in your AUS findings because HUD will if they pick the case up for a PETR.

Make sure your approvals are clear so that the closing department knows exactly what to do. Do forget to let them know what the maximum cash to close it, maximum seller contribution is and so forth. These items can effect down payment requirements as well as reserves as indicated in your AUS. Remember once they are closed it finished and the funds are disbursed so you don’t have a 3 day right of rescission to get additional things.

Lastly, full documentation is the trend so make sure you are covered from the start. Originators collect everything you might need so you don’t have to keep going back to the borrower and processors do the same from a set up standpoint. If you manage if from the beginning the case should move right through underwriting and close on time. Happy borrowers and business partners mean more business and everyone could use more of that.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Fraud In The News

2009-05-15T11:33:00.003-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Hello again everyone! I really hate being redundant but I feel a compelling need to discuss the whole fraud issue again this week due to some disturbing statistics regarding the subject. After reading this new information I have come to the conclusion that the issue is far worse than ever before and given the changing DNA of mortgage lending, I really think it is important for underwriters that are trying to embrace the old new mentality of underwriting to understand exactly what they are dealing with.

It is enough to try to embrace underwriting beyond AUS for underwriters who have grown up using a documentation checklist let alone complicating it further with documentation which is anything but legitimate. Assessing financial behavior and cumulative risk is a job in itself given the short period of time an underwriter actually has with a particular borrowers file and adding the possibility of material misrepresentation of documentation makes it that much more complicated so I though I would share a few tools that might make the process a little easier for everyone.

First, I think it is important for everyone to know what we are dealing with. Fraud is a growing problem in the mortgage industry and it is getting worse, not better. Instances of fraud are up by about 400% since 2007 with 63, 173 Suspicious Activity Reports (SAR’s) filed in 2008 which led to 560 indictments compared to 734 SAR’s in 2007. Data for 2009 indicates over 2000 SAR’s filed through February, 2009 alone. In general, instances of mortgage fraud resulted in losses of 1.5 billion in 2008. That’s a lot SRP. Based on statistical data, the states with the largest problems are *Florida, Nevada, Michigan, California, Utah, Georgia, Virginia, Illinois, New York and Minnesota so for those of you underwriting properties in these states, pay attention.

We all understand that any misrepresentation or omission of documentation or information needed by an underwriter to render a loan decision, fund or purchase a loan or insure a loan is considered fraud. This means even the little white lies. Material misrepresentation where fraud for home is concerned seems to be the biggest culprit so review your loan documentation carefully. Falsifying employment documentation or even gift documentation where the true intent of the gift is donor repayment constitutes fraud. Interested third party contributions to down payment is another big one so verify sufficient funds to close and address any issues that appear out of the ordinary. Request whatever documentation you need to determine that the funds for closing are coming from an acceptable source.

Occupancy fraud is also a big one, particularly where FHA insured mortgages are concerned. Think about the streamlines alone. A borrower who has previously vacated their premises in favor for a new home which they financed using conventional financing could easily misrepresent their primary residence as an investment property in order to benefit from the higher loan amount they would be allowed on a streamline refinance if the property were owner occupied. Given the limited documentation requirements in this program it would be impossible to determine without requiring a full credit report on all streamline transactions.

Finally, I suggest that every underwriter out there do some research. Look into the “Red Flags” that might indicate fraud and how to identify them. There are lots of tools available on the web to assist you. Some fraud training is not a bad idea. Remember, if you determine that you have a fraudulent case it is your responsibility to report it. The FBI monitors this type of activity and if your case is an FHA loan you must report it to HUD in Neighborhood watch. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Calculating Income for Self Employed Borrowers

2009-05-11T19:02:00.002-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As everyone is aware I teach some government lending training courses for FHA Online University and one of the questions that I get pretty frequently is about calculating income for a self employed borrowers. Typically the answer I give is pretty short simply because we are usually discussing something else at the time the questions is asked and I don’t want to loose focus on the topic of discussion which is generally how to adequately document employment. Well I thought today I would discuss in greater depth how to calculate income for a self employed for the benefit of all of those students whose questions required a little more discussion.

First, I want to tell you that I always use the adjusted Gross Income Method (AGI) and follow the FNMA worksheet which is provided on their website. This worksheet is awesome because it will walk you through the calculations so that you know exactly what you can add back in and what you need to subtract out. Remember for FHA and VA purposes you will always need to collect the most recent two years tax returns with all schedules.

If your borrower files corporate tax returns (1120’s) or partnership returns, you will need these also. If you are underwriting a Conventional product and the AUS only calls for the most recent year, then this will be sufficient for underwriting purposes. Remember, if your borrower has filed an extension for the most recent tax year, be sure to collect a copy of this as well.

Always begin with the borrowers individual tax returns (1040’s) and start with the borrowers adjusted gross income. You may then begin subtracting income or adding back income as appropriate. For instance, you may subject wages and salary considered elsewhere but add back in any tax exempt income. You will also address business income or loss as identified on the schedule C at this time if the borrower files one. Schedule E depreciation will also be added back in at this time as would things like non taxable social security benefits.

Once you complete this step, you will then begin with the adjustment schedule as per your worksheet. This section allows for the add back of IRA deductions, one half self employment tax, self employment health insurance as well as Keogh Retirement plans and alimony paid if you are counting this as a debt against the borrower.

Next you will address any corporate tax returns or partnership returns if you have any, and will determine the income available to the borrower. You will begin with taxable income and then subtract the total tax due, add back in depreciation and depletion then subtract any mortgages, notes or bonds payable in less then year. This information would also be found on the borrowers 1120’s. Remember to allow the borrower only the percentage of these add back with relation to the percentage of the business owned by the borrower.

Additionally, if you have an audited P&L from the borrower you may include this income in terms of total net profit. Remember, use the FNMA self employed income analysis the first few times you calculate the income. It will help you to become more familiar with the items you can add back in and things that you need to subtract from the borrowers income. As always, happy underwriting.

https://www.efanniemae.com/sf/formsdocs/forms/1084.jsp

(Above is the link to the worksheet)

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Post Endorsement Technical Reviews

2009-05-01T13:59:00.005-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

We have seen a lot of changes in the past two several years where mortgage underwriting is concerned and it now seems as if things have come full circle. Several years ago we watched as Automated Underwriting Methods replaced more traditional risk assessment methods and documentation requirements lessened just to return to a more traditional risk assessment methods including increased documentation and merging AUS methods with manual methods. Due diligence in underwriting has become as important today as it was 10 years ago and underwriters no longer have the luxury of simply validating their findings, we really need to underwrite the loans.

Along with these changes comes an increase in the number of loans being selected by FHA for Post Endorsement Technical Review (PETR). Quite frankly they seem to be over selecting which is fine with me, this will weed out the bad apples. Since there are quite a few new FHA Direct Endorsement underwriters out there I thought I would share with you the principals and practices behind the PETR’s. I would like to start by saying every DE underwriter is subject to them (yes even me) and when you get that letter in the mail indicating that one was completed, panic will usually set in immediately. I have to tell even after 20 years of underwriting and PETR letters, I still panic.

A Post Endorsement Technical Review is a loan audit which is completed by a HUD underwriter 2 or 3 months after the loan has closed. In short, they re-underwrite the loan including recalculating income, assets to close and so on. If they find no deficiencies where underwriting is concerned they will usually give the underwriter a satisfactory rating (underwriting report cards) and the PETR is complete. Underwriters are not notified of the review if the rating is satisfactory but can check them in FHA connection if they would like. Valuation reviews are also subject to PETR and the underwriter’s performance is also rated where appraisal review is concerned.

Things get a little more interesting however when the underwriters performance is rated unsatisfactory for either credit or valuation underwriting. In these cases a letter is sent to the Lender employing the underwriter indicating what deficiencies were found and these deficiencies can range from miscalculation of income to expired documentation, failure to document large deposits or credit explanation. It becomes far worse if income was recalculated and the loan is re run through Total Scorecard and as a result receives a Refer.

In these cases you are bound to have several material deficiencies as most Total accepts are documented more lightly the true manual underwrites. If an underwriter receives such a letter from HUD it will indicate all of the underwriting deficiencies as noted by the HUD underwriter. The lenders underwriter will then have 30 days to respond to the request providing the missing documentation or providing an explanation (a really strong one) as to why the underwriter did not address the information. The responses and supporting documentation must be returned to HUD within 30 days. If the HUD underwriter deems it sufficient they will clear the case and indicate the rating as acceptable. If they don’t agree, they will send another letter indicating that the information provide is unacceptable and in some cases will request that the lender indemnify the loan.

A lender can continue to refute the PETR if such an indemnification is required but make sure you have a leg to stand on if you do, it never helps to looks foolish. Sometimes a phone call to the HOC and a conversation with the underwriter helps so if you can’t get your point across in writing perhaps pick the phone up and call. My best advice where the PETR’s are concerned is to document your files well enough, regardless of AUS findings so that you don’t have to answer one, in short shoot for a satisfactory rating every time. It might upset a loan officer or two but better that then the underwriting manager or maybe a VP that will need to sign the indemnification agreement. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Forensic Appraisal Review

2009-04-24T15:57:00.002-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Last week I touched upon some of the stuff that an underwriter might look for when trying to determine if a file contained fraudulent documentation. On the same note, I though I would touch upon the appraisal as well, only more for the purpose of forensic loan audits and overall appraisal review.

As we are aware, the discipline of forensic loan review it quite new and is basically comprised of an overall review of a closed loan file in order to determine if violations exist in the file where RESPA, Regulation Z, predatory lending or constructive fraud is concerned. These reviews are generally manual with use of certain computer based tools to determine APR violations or potential section 32 violations where HOEPA is concerned.

As the forensic auditors review the loan file documentation, they must also review the property appraisal. This is extremely important as it might ultimately determine if a particular case could be deemed to contain documentation, such as the appraisal, which allowed a lender or broker to charge additional or excessive fees which stripped the borrower of certain equity or much worse allowing a loan application to become approved which may have not otherwise been approved due to excessive LTV.

Consider this: A borrower is contacted by a mortgage broker via telephone solicitation and the mortgage broker or lender informs the borrower that they can assist them with a refinance transaction and provide them with additional cash out for home improvement. The borrower agrees and the loan process begins. The broker soon finds out that the property is not worth the $250,000 that is needed in order to pay off the existing first mortgage, roll in closing costs including 3% of broker fees as well as give the borrower the cash promised.

Additionally, the maximum LTV allowed for the particular loan program that the broker or lender wants to place the borrower in is 80% so if the property does not appraise for at least $250,000 the loan will be rejected or the loan amount will have to be cut, which will prohibit the cash out and the broker will not be able to make their 3% broker fee.

The broker or lender, after being told the fair market value is only $200,000 contacts the appraiser and explains that they need a value of $250,000. The appraiser proceeds to find comparable sales which are not located in the subject’s market area but are within a reasonable distance, say 2 miles which are significantly larger then the subject in a neighborhood where properties traditionally sell for more due to its location. He or she proceeds to adjust the comparables for appraisal purposes doing minimal downward adjustments for size, no adjustments for location, and further increases the value of the comparable sales but doing an upward adjustment for condition which offsets the downward adjustment for size and ultimately creates an inflated value for the subject property.

The appraisal does not suggest that certain comps were readily available in the subject’s market area because with this the appraiser would have had to use the more comparable properties which would have resulted in a lower value. The end result is an appraisal that suggests a fair market value $50,000 greater then the actual fair market value. Under these circumstances the broker or lender has made their fee and the loan application gets approved when it would not have otherwise been approved by the underwriter and the borrower is in a negative equity position once the loan disburses.

This is a clear case of constructive fraud. The loan broker or lender with the help of the appraiser purposely inflated the value of the subject property to deceive not only the underwriter but to also benefit financially from the increased fee they were now able to charge by demonstrating an increased equity position which in reality did not exist. Worse still is the fact that most appraisers Errors and Omissions insurance does not cover fraud so the borrower and servicing lender really do not have much recourse short of trying to demonstrate that it was not fraud but omissions of relevant facts where the property appraisal is concerned that contributed to the inflated value.

When reviewing the appraisal of the files which are being audited look carefully at the comparable sales used by the appraisers. These are usually the first indicators as to if the property value has been stretched. If the comparables are greater then 1 mile from the subject property, have closed more then 6 months prior to the effective date of the appraiser and are much larger then the subject property with downward adjustments for size then you may have a stretched value.

Also look for other indicators such as room size and sq footage errors. This information can usually be check on your state departments of real estate taxation. Any such errors in this area could also indicate fraud. Finally, if you think you will be doing a lot of appraisal audits it might not be a bad idea to brush up on overall appraisal standards for conforming and government lending so you know what you are looking for, remember knowledge is power.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Mortgage Fraud

2009-04-19T21:19:00.001-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As with any full documentation, mortgage products such as FHA, VA or Conventional financing, documentation standards are a major consideration, more particularly the validity of the documents contained in the mortgage file. Demonstrating a borrower’s willingness and ability to repay the mortgage debt is critical for long term asset performance as is valuation verification where overall collateral assessment is concerned.

It is more important today than in the past that we thoroughly document each and every loan file to not only determine overall loan quality but to conform to the increasingly tighter credit and appraisal standards which are now the norm. It is also for this reason that we must be more aware of mortgage fraud red flags then ever before.

Mortgage fraud has always existed in the mortgage industry however over the past 7 years several programs were available which allowed borrowers to simply state their income or better yet, provide no income at all. Needless to say things have changed drastically over the most recent two years and instances of mortgage fraud are now on the rise and it is something that mortgage professionals need to take seriously.

There are two basic reasons that individuals will try to perpetrate fraud, these being “Fraud for House” and “Fraud for Profit” with one being no less harmful than the other. As foreclosures increase, so does investor activity and the potential for things like flipping and equity theft. As credit standards tighten so does the potential for individuals who might consider fraudulent pay stubs in order to qualify for the property of their choice.

Fraud is defined as the deliberate deception perpetrated for unlawful or unfair gain and where mortgage lending is concerned generally involves material misrepresentation or omission of information with the intent to mislead a lender into extending credit that otherwise would have not been extended.

“Fraud for House” schemes usually include misrepresented income and/or assets as well as occupancy fraud. False or forged employment verifications as well as false pay stubs, W-2’s or tax returns may be provided by the borrower. False bank statements or loans represented as gifts may also be provided. Review the file for inconsistencies and compare documents to each other to find other potential red flags.

“Fraud for Profit” schemes can include things like foreclosure rescue scams, equity theft, property flipping as well as affinity fraud. When trying to identify these it is important to know who you are doing business with as well as understand what potential fraud schemes individuals can perpetrate. Look for information and documentation discrepancies as well as things like significant cash proceeds on transactions as well as what appears to be a non-arms length transaction.

In general loan application red flags to consider are: Significant or contradictory changes from handwritten to typed application, employer information that is not consistent with documentation contained in the file, commutes that are significantly unrealistic, downgrading property, lack of accumulation of assets compared to income or visa versa, years of schooling not congruent to profession or unsigned and undated application, low year to date income or significant changes in the application throughout processing.

Needless to say these are not the only indications of mortgage fraud so use a common sense approach to reviewing the documentation contained in the mortgage file. Fraud is easier than ever to perpetrate do to internet tools as well as other software now available to the general public. If you are reviewing a file and something does not seem right then chances are you are right so keep looking. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Acceptable Appraisals in a Difficult Market

2009-04-11T17:36:00.002-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As we forge ahead in this very uncertain market property appraisals have become an issue. HUD has even gotten into the act changing their approach from “there is no clear definition of a declining market” to the issuance of ML letter 2009-09, which adopted the use of the Market Conditions Addendum as well as provided further guidance and requirements for properties located in a declining markets such as the use of active listings as well as requiring that two comparable sales provided in the appraisal report be comparables that have closed within 90 days of the effective date of the appraisal.

These requirements have come at a time when most appraisers are already having serious issues finding any comparable sales located within 1 mile of the subject property which closed within 6 months of the effective date of the appraisal. Underwriters on the other hand are under the gun where accepting such reports are concerned as HUD is policing underwriting policies and practices harder than ever, has begun reimplementation of the use of Special Work Assessment Teams and have begun over selecting particular cases for PETR. So what can appraisers do to provide underwriting with a comfort level that the information provided in the report is not only the best available but also provides a clear indication of the true fair market value of the property.

When I consider that the declining market we are experiencing has been further complicated by a overall lack of sales data in almost any given market area and the fact that appraisers are finding it increasingly more difficult to provide comparable sales within 1 mile or less that have settled within the most recent six months, let alone 2 within 90 days as is now required per ML 2009-09, I have formulated some suggestions as to what might provide a greater comfort level.

First and foremost remember that the underwriters out there are getting beat up pretty hard at a HUD level during reviews so they need to be provided as much information as possible. Over documentation is a good thing. Next, make sure that at least 1 of the comparable sales, preferably 2 are in the subjects immediate market area particularly if the property is located in an urban area. You may find slightly more flexibility if the property is in a suburban area or rural area but even under these circumstances, the closer the proximity the better. If you must utilize comparable sales that are not in the subjects immediate market area make sure that the appraisal report clearly indicates the what, whys and how the neighborhood selected is similar to that of the subject property.

Strong narrative comments as well as supporting documentation will help. DO NOT limit your comments to things like “best available or similar neighborhood” tell the underwriter why and how it is similar. If you comps are somewhat dated provide adequate adjustments to take into consideration factors such as a declining market. If the subject property is located in a declining market, indicate in the report at what rate it appears to be declining and if the comparables are greater then 3 months old make adjustments to take these factors into consideration.

If you feel that the area has stabilized, discuss this in detail. Include information at what rate of decline the subject’s market area has seen over the most recent 12 months and indicate at what time period it seemed to level out. In instances of declining values further explain to the underwriter that it is more efficient to analyze data from a broader range of comparables, including properties not limited strictly to the subject immediate market area to determine the broad range of the market. This method will give the underwriter a clearer picture of overall market price for competing properties in competing neighbors in the subject’s market area.

Lastly, make sure the comments are not buried somewhere at the end of the appraisal report. Perhaps use a single narrative addendum that is placed directly behind the comparable data grid so that the underwriter can not loose the information at the end of the appraisal. If supporting documentation will be provided, include it in this area as well. It may seem like more work but perhaps a list of recent settled sales from the appraiser’s data source can also be provided so that the underwriter can determine that there really is nothing else available and that the appraiser is not trying to conceal other sales that might indicate a lower value range.

I think if I were provided this type of data I would be more inclined at that point to determine if the property is acceptable, not the appraisal. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Underwriting Beyond AUS

2009-04-03T11:43:00.004-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As most of you are aware, I teach a few government underwriting classes for FHA Online University. Very recently while teaching the underwriting courses I have decided that there are two types of underwriters, those that embrace underwriting in the truest sense of the word and by that I mean underwriting beyond the AUS finding and those underwriters that still embrace the AUS as the literal decision and by this I mean an underwriter that has chosen to remove themselves from the underwriting process to act solely as one who validates the AUS, which has made the decision.

So often I talk to students who questions seem to be driven not by common sense or by credit and valuation assessment, but by credit scores and AUS indications. For instance when discussing a borrowers overall credit behavior, these individuals don’t seem to be interested in things like the number of late payments on a borrowers credit report, the age of the late payments, the extent of the borrowers credit history, the number of newly opened accounts, if or not the borrower demonstrates an overall conservative use of consumer credit, what the borrowers current ratio is versus what it will be once the transaction will be completed, were the late payments caused by extenuating circumstances that were beyond the borrowers control or did it appear to be a case of financial mismanagement.

Instead they would simply state, the loan can’t be done, the credit score is to low. My response might have been, “well, based on the information you have, could it be a false negative or in some instances a false positive.” By this I mean if a borrower has only 3 revolving accounts appearing on their credit report and for the sake of discussion all of them are demonstrating a history of 60 months with no late payments, however, two of them have outstanding principal balances of 90% of the available line which is causing the low credit score, would this be indicative of a false negative?

For instance say the total outstanding credit available to the borrower is only $900.00 between all three accounts because the borrower has chosen not to incur debt. Further, the borrower’s outstanding balance is a total of $400.00 with an outstanding balance on each of the two credit cards of $200.00 with total lines of $300.00 each. Taking it a step further, the borrower has demonstrated a significant savings pattern, say $15,000 in a passbook account and for the most part pays the two accounts in question, in full each month. In this particular instance the credit score, as a snap shot in time, could be demonstrating a falsely low credit score which overall examination of the case would indicate that the borrower is more then a fair credit risk. In other words AUS findings and a credit score alone is not enough to determine if the case is approvable.

In contrast, the underwriter that embraces mortgage credit and valuation analysis in addition to using AUS and credit score indicators as a tool, are more likely to evaluate each piece of documentation provided to determine the overall credit risk where the case is concerned. In most instances this type of underwriter may lay the AUS findings aside and view the documentation provided on its own merit excluding the documentation checklist requirements even from a documentation reduction standpoint thinking to themselves yes, the doc checklist states I only need one pay stub but prudent underwriting requires that I collect more because it does not appear that the borrower is working a 40 hour consistent work week. Or perhaps, they will want an additional month bank statement because they are seeing a regular monthly payment to an account that is not appearing on the borrower’s credit report.

In this day and age of underwriting we are beginning to see a blending of both concepts, the use of the AUS coupled with the authority and responsibility of the mortgage underwriter. It is no longer acceptable to just view the AUS findings and credit score as a means to approve or reject a loan. Every underwriter needs to review all documentation in the file, document certain situations further regardless of AUS and demonstrate consistently the risk or lack thereof of the mortgage application which they are underwriting.

In short underwriters today need to understand the principals behind credit and valuation underwriting, overall risk assessment as well as collateral assessment. Depending solely on AUS and credit scoring is not enough in this environment. For those underwriters that learned to underwrite in the most recent era of the AUS, forget what you know and begin looking at the over case and I don’t mean to make sure that you have enough pay stubs or bank statements. You need to assess risk beyond the AUS. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

New Appraisal Requirements

2009-03-27T11:57:00.004-04:00

Written By: Bonnie Wilt-HildSenior DE Underwriter & NAMP Instructor

As if we didn’t expect it, FHA is now addressing declining markets by implementing additional standards where appraisal review is concerned. Beginning with case numbers ordered on after April 1, 2009, as indicated in Mortgagee Letter 2009-09 the following requirements will be in place for property appraisals provided for properties which will be secured by FHA financing.

This mortgagee letter has implemented provisions that would require the use of Fannie Mae form 1004MC or Market Conditions Addendum to the Appraisal Report as mandatory for use by FHA Roster appraisers when completing property appraisals for a subject property that will be insured by the Federal Housing Administration. In addition to completing this form, FHA appraisers will further be required to provide additional data where standard appraisal practices are concerned, more particularly implementing the use of active listing and pending sales for appraisals when the property is located in a declining market.

Per this directive, previous mortgagee letters, more particularly ML 2007-11 and 2008-09 provide guidance as to appraisal practices in declining markets and when there is a need for a second appraisal required and these policies should continue to be followed however FHA has further stated that the following information will now be required when the property is located in a declining market:

- The appraiser must include a minimum of two active listings or pending sales on the appraisal grid of the applicable appraisal reporting form in comparable 4-6 position or higher in addition to three settled sales.

- Insure that the active listings and pending sales are market tested and have reasonable market exposure to avoid the use of over priced properties as comparables. Reasonable market exposure is reflected by typical marketing times for the neighborhood and the comparable listings should be truly comparable and the appraiser should bracket the listings using both dwelling size and sales price whenever possible.

- Adjust active listings to reflect list to sale price ratios for the market.

- Adjust pending sales to reflect the contract purchase price whenever possible or adjust pending sales to reflect list to sale price ratios.

- Include the original list price, any revised list prices, and total days on the market. Provide an explanation for DOM that do not approximate time frames reported in the Neighborhood section of the appraisal reporting form or that do not coincide with the DOM noted in the Market Conditions Addendum.

- Reconcile the adjusted values of active listings or pending sales with the adjusted values of the settled sales provided however note that the final value conclusion should not be based solely on the comparable listings or pending sales data.

- Include an absorption rate analysis which is critical to developing and supporting market trend conclusions as mandated by the Market Conditions Addendum.

In addition to the above information, FHA will also require that at least two of the comparable sales provided by the appraiser indicate that they have closed within the most recent 90 days (90 days from the effective date of the appraisal). If the appraiser is unable to provide this data due to current market conditions then a detailed explanation must be provided by the appraiser

As indicated above further information regarding these requirements can be found in ML 2009-09. Information regarding the Market Conditions Addendum can be accessed at: http://www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2008/0830.pdf

As always, happy underwriting

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Know the Guidelines

2009-03-20T11:10:00.003-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Over the past couple of weeks I have received phone calls from some lenders that are having problems with uninsurable loans. Yep, loans that FHA has reviewed and said “No, the case does not meet FHA requirements therefore it is uninsurable”. This becomes a much larger problem for the lenders out there who are using warehouse lines to fund their loans because once FHA states that they can not insure the loan, the investor who may have already funded the case then requests that the lender purchase the loans back.

What this means is that some poor lender is sitting with several loans on their warehouse lines which then can not sell because basically they are uninsured loans with LTV’s of 96.5% and if they do not have the ability to service them like a bank might, they have to reach into their pockets and pull out the funds to repurchase the cases and ultimately service them themselves.

Now this in itself does not seem like that big of problem unless you consider small to mid size lenders with a net worth of say a million or so who after buying/funding 4 or so loans off their warehouse lines to the tune of maybe 2 million finds that they no longer have any assets and go belly up. So what seems to be the problem?

After several conversations over the past couple of weeks, I think I have the answer and that answer would be poor or inexperienced underwriting. A lot of lenders have DE’d staff underwriters out of necessity recently in order to compete in the FHA market. As everyone is aware there were not many people who pursued their DE in the most recent 8 years so when FHA came back into vogue, there was quite a shortage of qualified underwriters. Even the underwriters out there that did have their DE had in a lot of cases, not used it in several years.

It seems that a lot of newer underwriters, particularly those who did a lot of conventional underwriting still hung really hard to the whole AUS checklist method of underwriting used on the conventional loans in the most recent 8 years without realizing that there are differences in guidelines where FHA and Conventional are concerned and these guidelines are not always transparent when using the AUS underwriting checklist method of underwriting. The bottom line is that FHA loans really need to be underwritten to determine not only that the borrower qualifies but also to determine that the case adheres to FHA and investor guidelines.

The biggest deficiency appears to be in appraisal review and overall lack of knowledge where FHA specific guidelines are concerned. A lot of these guidelines are simply not addressed by AUS systems including Total because the data input required would not jog flags that would require certain documentation. It is the underwriter’s responsibility to know if it conforms or it doesn’t.

Let’s use a spot approval on a condominium for example. The only information that would be provided to an AUS is that the subject property is a condo and the value. However is the condominium for what ever reason does not conform to spot approval guidelines requirements, lets say it has only 2 units, this information would not be evaluated by the AUS and would appear anywhere in the findings.

I would say that I recommend new underwriters take a look at the 4155 and 4150 and review all the mortgagee letters pertinent to credit analysis and valuation after 2005 in order to make sure that you have the guidelines down. Like I said in some cases $1,000,000 of uninsurable loans is enough to put a company out of business and we don’t want it to be yours. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Loan Modifications

2009-03-15T21:41:00.004-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

I thought I would talk about loan modifications this week and share some insight with all of the professionals out there that have embarked on this relatively new aspect of the mortgage industry. As we are all aware there are several borrowers out there who no longer qualify for a refinance due to decreasing property values and in some cases unacceptable credit. Tightening of mortgage credit guidelines have very little to help these individuals, qualifying for mortgage money is harder then ever.

It seems that for some individuals, loan modification could be the answer and several loan servicers seem to be welcoming the idea now more then in the past. Loan modification is basically the modification of one or more features of a mortgage note. These features could include interest rate reduction, principal reduction or even possibly lengthening the term of the borrower’s current mortgage. Any modification must of course be agreed upon by the borrower and the loan servicer and should ultimately improve the borrowers overall financial position.

In some cases modifications can be more financially feasible than refinancing as the borrower does not incur the settlement costs that would normally be associated with a refinance transaction and in the case of a borrower who is credit challenged, it might be the only available solution. There are costs associated with a loan modification however, these usually being the fees charged by modification specialist or attorneys who are negating the loan modification on the borrower’s behalf and these charges can range from $800.00 to $2500.00 depending on if an attorney is involved.

The modification process can be somewhat involved for the borrower and loan modification specialist depending on what documentation the loan servicer requires. This information must be collected from the borrower and provided to the loan servicer to determine that the borrower will qualify for the modification in the sense that they will be able to continue to perform under the note once the agreed upon modification terms take effect. This involved calculating HTI and DTI ratio’s for the modification specialist as well as determining what interest rate and principal balance will result in a payment acceptable to achieve these ratio’s.

In addition, the borrower must provide income and expense worksheets to determine all of the borrowers hard and soft expenses in order to demonstrate to the loan servicer that under the modification plan, the borrower should reasonably be able to afford the new modified monthly mortgage payment as well as other real life expenses.

The modification specialist must also complete the modification proposal on behalf of the borrower which should include all requested changes to the terms of the borrowers current mortgage and demonstrate the borrowers overall financial picture once the modification is effective. This also requires documentation from the borrower which must be analyzed and put in some sort of comprehensive order for the loan servicer.

Often times additional documentation such as appraisals or forensic loan audits will provide additional support, particularly if the modification specialist is trying to demonstrate that the borrowers rights were violated under RESPA or TILA when their original mortgage was received or if they want to demonstrate that based on the subjects property current value, that foreclosure will result in significant losses to the loan servicer.

Modifications can be a very effective tool for a borrower who has no option where a refinance transaction is concerned and may often be the only means for a borrower to covert their current mortgage into a fixed rate mortgage with a reasonable interest rate. Some qualifying is required and documentation requirements exist however is handled correctly could offer successful results for borrowers who have no other option. So for those loan officers out there who are looking to expand revenue options, this option might be something to think about.

NAMP offers a 3-hour live, instructor-led webinar entitled: LOAN MODIFICATION 101 in which you'll learn everything from A to Z.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Rewriting the Rules

2009-03-11T00:33:00.002-04:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

The past two months have been quite interesting in the mortgage industry. We are witnessing the slow death of the mortgage broker as well as a further tightening of mortgage credit standards where investor relationships are concerned. Each day it seems more difficult to sell mortgages on the secondary market as investors continue to bump minimum credit scores to 620 (in some cases 640) for FHA, require 4 years out of bankruptcy (yes even for FHA) and implement documentation requirements for streamline refinances. It’s becoming hard to keep up with the changes where the investor markets are concerned.

As we can no longer underwrite to FHA, FNMA and FHLMC guidelines but must adhere to the more stringent investor guidelines in order to the business sold, it is making it more and more difficult to find mortgage business that will now fit into the very small window of acceptability from sales standpoint.

Given overall economic conditions, most borrowers no longer fit into that “plain vanilla” mortgage class. Even the universal AUS systems have jumped on board demanding lower ratios and higher credit scores with no guarantee of Approve/Eligible or Accept ratings. Taking it one step further is the new issues that small and mid size lenders are dealing with in terms of their overall correspondent agreements with their investors and what is acceptable in terms of overall lender performance regarding underwriting, pull through, delinquencies etc.

It seems that the newest trends include a tremendous amount of pressure where pull through is concerned but deeper and longer reaching, overall asset performance above and beyond the first 12 months of servicing. Further,it appears that most investors are no longer considering AUS approval where initial underwriting is concerned as a means of overall protection for the lender.

In short, if something goes terribly wrong for the borrower 18 months into the servicing of the mortgage say loss of job, divorce or some other extenuating circumstance that can not be addressed in the normal scope of underwriting, the lender is on the hook for the case regardless of AUS approval or anything else. When delinquencies and overall compare ratio where FHA is concerned become slightly excessive, the investors are now eliminating the lenders ability to do business with them. Quite frightening considering the tremendous default rates recently where FHA streamline refinances are concerned, by the by, these to affect your compare ratio where FHA is concerned.

So now, lenders are not only in the position of trying to develop a solid business base without tapping the wholesale market, but developing a business base in a market where a large segment of the population has been cut out do to increasing credit score requirements and overall tightening of mortgage credit underwriting standards.

Further, we must now consider long term asset performance where the mortgages are concerned and under current economic conditions, this means giving credence to things that a year ago we would not have considered during the normal course of underwriting. All of this without indication of unfair lending or disparate lending practices. We now need to rewrite all of the rules where overall risk assessment is concerned to conform with long term assessment of the asset as opposed to the snap shot view that has been taken over the most recent 10 years where Automated Underwriting methods ruled.

The current economy has rendered this form of underwriting useless. No longer is a borrower with a 720 credit score with 60,000 in assets and 3 years on their current job a fair and acceptable risk. These factors alone do not demonstrate viability for the long term. Consider this; if this borrower is employed in the financial industry and the 60,000 in assets are from a 401k on which the borrower has two existing loans, then the overall picture become bleaker.

Employment in the financial industry is volatile at best by today’s standards and more often then not, withdraw of funds from a 401k requires extreme hardship, such as a property in foreclosure, medical emergency and so on. The simple loss of a job can render the borrowers credit score far below acceptable levels with even one late payment so this factor in itself is really carries no significant weight where overall risk assessment is concerned.

This is where the rules change. From an underwriting standpoint we now need to reassess how we evaluate risk for the long term, setting aside what we thought might be protection under AU practices and now manually assess the risk to develop evidence that the mortgage is viable long term. This will require considering factors that previously would not have been considered during the normal course of underwriting in the past. As current underwriting methods are not designed to do this nor is methods involving AUS, underwriters must again underwrite.

Now is the time to re-evaluate how we do business in terms of underwriting and develop practices and procedures which will safe guard lenders from future losses while not discriminating or participating in unfair lending practices. What practices will suffice remains to be seen. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

The Broker Crisis

2009-02-27T14:07:00.002-05:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Well, 2009 has been an interesting year thus far for the mortgage lending industry particularly where broker business is concerned. It began with the appraisal and the subsequent prohibition on broker ordered appraisals and is heading directly to being unable to do business as a result of many national investors doing away with third party originations all together. I have also seen very many smaller wholesale lenders eliminate their TPO contracts as well due to their inability to sell the business on the secondary market so it has to make you wonder the fate of the mortgage broker.

With this in mind, I thought this week would be a good week to discuss “net branching” requirements where FHA is concerned because I have a feeling that this concept is going to take off pretty quickly in the near future. FHA does allow net branching where the origination of FHA insured mortgages are concerned but there are several guidelines that must be followed in order to create an acceptable net branch situation where FHA is concerned.

To sum up the principal in it self, FHA does allow for an approved lender to maintain and support branch offices for the purpose of originating and processing FHA insured mortgages. These branches however must meet certain criteria in order to be considered an acceptable net branch under FHA guidelines which can be found in HUD handbook 4060.1.

Per this handbook and reiterated further in ML 2000-15, guidance where net branching activities are concerned are as follows:

Paragraph 1-2 of the Mortgagee Approval Handbook 4060.1 Rev-1 specifies that HUD/FHA insured mortgages may only be originated, serviced, purchased, held, or sold by mortgagees that have been approved by HUD/FHA. Approved mortgagees are permitted to conduct such activities from branch offices. However, separate entities may not operate as "branches" of a HUD/FHA approved mortgagee and if the separate entity lacks HUD/FHA approval, its mortgages constitute third party originations which violate Departmental requirements. If the separate entity was purchased and merged into the approved mortgagee in compliance with applicable state law(s), the approved mortgagee must provide a copy of the merger documents and state license(s) to HUD's Lender Approval and Recertification Division, 451 Seventh Street SW, Room B133-P3214, Washington, DC 20410.

In contrast to the arrangements described above, another common example of a net branch arrangement is one wherein the branch manager's compensation is based upon the "net" profit of the branch. The HUD/FHA approved mortgagee collects the revenue from the branch, pays the branch expenses, and then pays the branch manager the remaining revenues, if any, as a commission. Such an arrangement is, essentially, an alternative compensation program for the branch manager and is an acceptable branch arrangement if all other branch requirements are met.

Paragraph 2-17 of the Mortgagee Approval Handbook 4060.1 Rev-1 requires a HUD/FHA approved mortgagee to pay all of its operating expenses including the compensation of all employees of its main and branch offices. Other operating expenses that must be paid by the HUD/FHA approved mortgagee include, but are not limited to, equipment, furniture, office rent, and other similar expenses incurred in operating a mortgage lending business. Thus, the distinction between an acceptable and unacceptable alternative branch compensation plan is not whether the manager's or any other employee's compensation is related to the profits generated by the branch. Rather, it is whether the operating expenses are paid by the HUD/FHA approved mortgagee. If the expenses are paid by the HUD/FHA approved mortgagee, the arrangement is acceptable. If, however, the expenses are paid by the branch manager from a personal or non-mortgagee account (or by some third party), the arrangement is prohibited and a true branch does not exist.

Keep in mind that this is just some basic information for those brokers out there who are considering becoming a net branch operation of an existing lender. I suggest lenders or brokers who are considering this option do further research by referring to the appropriate housing handbooks. Best of Luck.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

3-4 Unit Properties

2009-02-20T13:44:00.001-05:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

It seems like the bulk of cases that we underwrite everyday are single unit properties. Every now and then we see a two-unit property, which are handled very similarly to our single unit properties so there really is no earth shattering news to share there. However, when we pick up that 3-4 unit property a lot of underwriters want to proceed as if we are handling a single family unit and I want to tell everyone right now, please don’t. There are different requirements where the 3-4 unit properties are concerned, particularly with FHA, and not adhering to the guidelines will result in an uninsurable loan not to mention a case that is probably not saleable on the secondary market.

Purchase and refinance transactions where 3-4 unit properties are concerned are handled similarly from a credit documentation standpoint. Paystubs, W-2 wage statement and bank statements are still required and the case is underwritten from a credit standpoint in the same manner as any other transaction type.

There are other areas however where there are significant guideline differences that must be addressed by the underwriter in order to make sure that the case is insurable under FHA guidelines. There is a deviation under standard guidelines where assets are concerned, more particularly the fact that you must verify 3 months PITI in reserves after closing using standard documentation guidelines so you need to verify sufficient funds for closing as well as required reserves and gift funds are no allowed. This is also required on refinance transactions and cash out from loan proceeds can not be considered when determining these reserves.

Next from a disclosure standpoint, you need to make sure that the borrower has executed the Hotel and Transient Use disclosure on all 2-4 unit properties. This disclosure is provided within your loan origination system and must be provided and executed by the borrower at time of application.

Finally and most importantly is your loan amount calculation where the 3-4 unit properties are concerned. This is a big and really could affect the maximum mortgage the borrower is allowed so make sure you calculate the loan amount correctly and check your Conditional Commitment correctly as well. FHA guidelines where 3-4 unit properties are concerned state that regardless of occupancy, the property must be self sufficient and in this they mean the maximum mortgage is limited so that the ratio of the monthly mortgage payment divided by the monthly net rental income does not exceed 100%. You must further consider the following:

1. The monthly payment is the PITI including mortgage insurance plus any HOA fees computed at the note rate.

2. Net rental income is the appraiser’s estimate of fair market rent from all units including the unit chosen by the borrower for occupancy less the appraisers estimate for vacancies or the vacancy factor as determined by the jurisdictional HOC, which ever is greater. I have always used 25% and it seems to work fine. Keep in mind that this calculation is used only to determine the maximum loan amount and the borrower must still qualify based on income and ratio guidelines. The projected rent may only be considered as gross income for qualifying purposes and may not be used to offset the monthly mortgage payment.

What this means is that from an underwriting standpoint you are going to be backing into your loan amount based on the borrowers monthly payment regardless of appraised value to determine that the property can carry itself. In other words if the borrowers total monthly net rental income from all units is equal to $2000.00 your total monthly PITI can not exceed this amount and your loan amount will have to be adjusted accordingly in order to achieve this regardless of what loan amount the borrower may actually qualify for. You are going to need to condition for a Comparable rent schedule and Operating Income statement in order to complete your calculations.

In closing I will say be careful with your calculations, simply miscalculating property taxes can get you into trouble (I am speaking from experience). As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

Streamline Refinance Concerns

2009-02-13T17:23:00.001-05:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Very recently I have been speaking to some friends who are employed in the mortgage industry, some of them with mortgage lenders others with banks. More often than not it seems that our conversations always turn to FHA streamline refinance transactions and what seems to be an unprecedented default rate which a lot of companies are experiencing as a result of these transactions.

The streamline refinance program was designed by HUD to put borrowers into a better financial position while depending heavily on the original underwriting of the case. The result is a streamline program where income, assets and sometimes overall credit history is not examined as it is assumed that the case was adequately underwritten the first time around and determined acceptable for HUD purposes.

In theory this makes sense when considering a reduction in the borrower’s monthly mortgage payment and overall improvement in financial position. Assuming that the borrower’s present mortgage has been paid in a satisfactory manner, there is no reason to assume that the borrower will not continue to pay the mortgage debt on time.

Traditionally, streamline refinance transactions have always been considered by lenders as a safe bet from a risk standpoint and in some instances have been over originated to offset full credit qualifying originations of loans that were associated with greater risk levels. This mentality was conceived as a method to manage what might result in an excessive compare ratio should the sub standard loans go into default. What this mentality does not take into consideration is the possible sub standard underwriting of the mortgages that are now being streamlined. In other words, what goes around, comes around.

As I said, I have had several people indicate to me that the default rate of the streamline refinances that have been originated over the past 8 months seem to be increasing steadily. In some case they have been identified as first payment defaults. One friend indicated that over 43% of all of the streamlines their company has originated in the most recent 12 months have gone into default which is an extremely high number. When considering this I have to say that I no longer feel comfortable depending heavily on how thoroughly the original case was underwritten.

Generally speaking, we verify very little where the streamlines are concerned but given the current economy as well as potential sub standard underwriting, I am beginning to think that it is not a bad idea to incorporate a little due diligence where the streamline program is concerned. Nothing major but possible a single merged credit report to get a general idea as to where the borrower is financially and to answer questions like did they pay there last two mortgage payments with their Visa card and possibly a verbal VOE to determine if they are at least employed with the means to make the payment. It seems like we all have a few things to think about. As always, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

Time for Loan Originators

2009-02-06T11:44:00.005-05:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

As a normal course of business, I teach an FHA Loan Originators course for Mortgage University. In the past, registration for this course was generally very large. As FHA returned to popularity it seemed that the originators out there could not wait to understand the program so that they could sell it effectively. Very interestingly, registration for this course is now almost non existent which for a time I thought was strange.

Now, I want to also say that I teach a Loan Modification course as well and registration for this webinar is insane. The webinar itself is capped at 100 participants per webinar and for the most part, it sells out at least 2 times a month. Well, I have now determined where all of the Loan Originators have gone, they have become loan modifiers.

I want to say that this is great news for die hard loan originators. As we are all aware, a loan originator’s bread and butter income is dependent upon the business partnerships that they have developed. Referrals play an important part as do business relationships with realtors. Refinance business is nice but more of what I would consider icing on the cake. The bottom line is if rates are not low enough to support mass refinance then income sources for loan originators will dry up.

So with that said, now is the time for the true loan originators to establish their business partner base and that being the realtors. I have several friends that are realtors and I can’t tell you how often I get calls from them asking if know just one good originator that knows FHA. In some cases they are asking if I know just one good loan originator. Several of them have actually told me that they never even see originators because they no longer stop into their office. Talk about not tapping a huge business source.

If the average real estate office sells 8 properties a month and as an originator, you can take 3 of those deals, you have a steady source of business regardless of market conditions or the refinance market. All of the successful originators that I know, they guys and girls who have been originating for20 years or better, consistently cultivate the purchase business. The bottom line is people are always going to buy homes. They were buying in the 70’s and 80’s when rates were as high as 11% and I can assure they are still purchasing. 70% of the current business I am underwriting is purchase business and it is all going to just a few select loan officers who are visiting the real estate agents on a regular basis and can demonstrate a solid knowledge of FHA as well as VA. The bottom line is the mortgage veterans are getting all of the purchase business. They prequalify the borrower, understand the credit report and quite frankly when they say they can get the done, they usually do.

For those originators out there who are serious about the business, both new and veteran, now is the time to get out and solidify your business relationships. Once your business partners trust your ability as well as your stability and professionalism, you will have a solid source of business for as long as you want it.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

Loan Modification Forensic Loan Review (Part 3 of 3)

2009-01-30T11:07:00.000-05:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Over the last couple of weeks we have been discussing the audit practices involved in a forensic loan review and how this discipline can affect lenders on both the front end of the mortgage process as well as the back end in terms of mortgage servicing. This week I thought it would be a good idea to discuss exactly what documentation would be required of the borrower in order to proceed with the manual piece of the audit.

As mortgage professionals we are all aware of our obligations where accurate and fair disclosure to the borrower is concerned, more particularly RESPA and Regulation. Further, mortgage brokers also have additional responsibility in terms of disclosure of Yield Spread premiums and so forth. If or not a lender or broker has violated disclosure requirements where RESPA and Regulation Z is concerned can therefore be easily identified on the borrowers initial disclosures as well as any final disclosure the borrower may have been provided prior to closing or at time of closing.

For instance, if the borrower was provided an initial Good faith estimate of settlement charges which did not reflect any YSP being paid to a broker and was also not disclosed prior to loan closing of such YSP however a YSP was indicated on the HUD I settlement sheet then this would be considered a violation of RESPA. A second example would be the charging of broker fees on the HUD I settlement sheet that were not originally disclosed on the Good Faith Estimate nor any subsequent GFE’s. Additionally, if the borrower was not provided a Mortgage Brokers business contract then this would be a further violation of RESPA.

In order to complete the initial manual audit, the borrower will need to provide to the auditor copies of their initial application and disclosures as well as their final loan closing documents. These documents would be but are not limited to: The initial 1003 and final typed 1003, copies of paystubs and W-2 wage statements that might have been provided to the lender, initial borrower disclosures including the Good Faith Estimate, Truth in Lending as well as any subsequent “revised” documents that might indicate a change in the loan amount or terms of the loan, all other disclosures required by law such as a Fair Lending Notice, Privacy Policy Notice as well as other required disclosure.

Additionally, the borrower should provide copies of their closing documents such as the Final HUD I settlement sheet, final Truth In Lending disclosure, Initial Escrow account statement, Note as well as a copy of their Deed of Trust or other security instruments. Additionally, requested copies of the Title Policy, Assignment if there is one and the right of rescission in the cases of a refinance transaction.

Once an auditor has copies of these documents they should easily be able to examine them to determine if a borrower’s rights were violated under the law. Also keep in mind that further violations may exist if the borrower is current in default and the lender has been attempting collection efforts so it makes sense to request copies of any correspondence that may have been received from the loan servicer with regard to the collection of the delinquent debt if this is the case.

As we can well see it is not very difficult to determine if a lender has liability where the violation of a borrowers rights are concerned so from an origination and underwriting standpoint it makes the most sense to make sure these violations do not occur in the first place. As always happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

Loan Modification Forensic Loan Review (Part 2 of 3)

2009-01-22T20:31:00.001-05:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

Back by popular demand, we are going to expand on some of the violations that occur where mortgage lending is concerned, more particularly violations that occur during processing, underwriting and the closing of a mortgage loan application. These violations are the violations that would be researched by legal professionals or other individuals during the normal course of a forensic loan review.

As there are several violations that could result in injury to a borrower, we are going to touch upon just a few to demonstrate what items could result in the award of monetary restitution or other restitution for damages should a borrower or client of a mortgage lender be determined to have been a victim of particular violations.

A forensic loan review as conducted on a borrowers behalf is a formal examination of an individuals account for the sole purpose of obtaining evidence to demonstrate that an organization or client has complied with all applicable terms, laws and requirements as indicated in the borrowers contract, in this case, with the lender or broker that the borrower selected to represent them and their interest during the mortgage loan process. As there are several state and federal requirements that govern how we as mortgage brokers and lenders do business, a forensic loan review will uncover any items of information obtained or otherwise provided to a borrower that do not adhere to the laws and regulations that govern the mortgage lending industry.

There are several areas which will be investigated during a Forensic Loan Review and these areas include but are not limited to, RESPA, TILA, HOEPA, ECOA, GLB and FDCPA. As an auditor proceeds with a manual audit which is approximately 80% of the overall forensic review, they will try to determine if the borrower’s rights were violated under any of the above mentioned laws.
As one can imagine fair disclosure is required under all of these laws both prior to mortgage loan closing as well as after loan closing as in practice regarding FDCPA. In addition, an auditor may employ the use of particular compliance software such as HOEPA calculators which will indicate any violations where section 32 is concerned.

In short, if a lender inadvertently fails to appropriately disclose any prepaid finance charge and this failure to disclose results in an increase in the borrowers APR which may very well result in a mortgage that is now considered high cost, the lender is now considered in violation as the HOEPA law requires that a borrower be disclosed this information at least 3 days prior to loan closing and such signed disclosure is required by law to be included in the borrowers mortgage file. Further consequences could also develop as a result of lack of disclosure in this instance. Things such as predatory lending and possibly even constructive fraud may also be implied by the borrower’s legal council.

The above mentioned areas are not the only areas of concerned that must be addressed by mortgage lender or loan servicer. As stated, areas such as predatory lending or constructive fraud will also be investigated. The sole purpose of the audit is to determine unlawful practice and disclosure which has ultimately cause financial damage or violation of the borrower’s rights. If determined that any such violation has occurred the borrowers counsel has the leverage they need in order to place a stay on a lender or servicer, sometimes in the case of foreclosure, until the matter is resolved. Next week I will discuss possible restitution should it be determined if the borrowers rights were indeed violated. As always happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

Loan Modification Forensic Loan Review (Part 1 of 3)

2009-01-19T15:20:00.001-05:00

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

I want to discuss something this week and actually for the next couple of weeks that might seem somewhat off the topic of underwriting, however, in my opinion is directly tied to this function and this would be forensic loan review.

Although an after thought where mortgage lending is concerned this piece of the mortgage function should be strongly considered not only from a compliance standpoint but also from the standpoint of future lender liability. It’s not a term that we have heard often in the past but with the rise of loan modification cases the term will become quite relevant in the years to come.

As we wade our way out of the mortgage mess that was created over the past 7 or so years, government officials as well as lenders have become well aware of the unscrupulous lending practices that plagued us over the past several years, which have resulted not only in the collapse of the mortgage market but the subsequent increase of mortgage foreclosures.

As lenders try to minimize overall losses that might be sustained as a result of the excessive foreclosure rate, loan modification has become in some instances, a method to cut future losses as well as help a borrower retain ownership of their property, hence home retention departments.

Loan modification companies as well as attorneys have taken on the arduous duties of helping those individuals who received mortgages that were not in their best interest either do to excessive interest rates or other features, modify their current mortgages into more sustainable mortgage products and due to declining markets nationwide many lenders are beginning to also see this as a viable solution to foreclosure. However there are still lenders out there that purchased and securitized these mortgages that refuse modification attempts at any level.

As a result, many of the attorneys and loan modifications companies have implemented the use of the Forensic Loan Audit in order to gain legal leverage against these loan servicers. The bottom line is this, if a forensic loan audit determines that the borrowers rights were violated under state or federal law, the attorney may purse legal action against the loan servicer which could not only stay a pending foreclosure but result in actual as well as statutory monetary damages being awarded the consumer should the court find in the borrowers favor.

Several pieces of the mortgage process are audited during a forensic loan audit to determine if there have been violations where the overall mortgage process is concerned. Cases are examined to determine compliance where RESPA and Regulation Z are concerned, reviewed to determine if predatory lending practices where used and examined to determine if misrepresentation or constructive fraud occurred anytime throughout the mortgage process. Evidence of violation where any of these items are concerned could result serious legal consequences for the loan servicer and as stated above, legal leverage for the borrower where loan modification is concerned.

80% of the forensic loan review can be completed by simply reviewing the borrower’s mortgage documents, reviewing the results of any technology tools, underwriting practices and the borrowers closing documents. Quite frankly, something as simple as under disclosure of the borrower’s APR by as little as .125% could result in serious consequences including reopening the borrowers rescission period which could place a stay on foreclosure proceeding until the case is heard in a court of law.

Forensic loan review is a useful tool for all lenders, servicers as well as the loan modification companies. As mortgage professionals I think we all need to be aware of the standards and practices under which they will be conducted in the future. The trend is gaining momentum from both an offensive and defensive standpoint. Next week I will be further discussing the audit process, outlining the areas which I will believe will be the focus of the reviews in the future and what we as mortgage professionals need to look for in order to make sure that from a compliance standpoint the borrower’s interests have not been jeopardized. Until then, happy underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.