Automated Underwriting. Classroom Text

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WARNING! Protected by International Copyright Laws8 1998, 1999, 2000, 2001, 2002, 2003 The Mortgage Training Institute a division of MTI Services Corporation This Material and the service marked, copyrighted training and sales processes are licensed to The Mortgage Institute graduates only. Reproduction is strictly prohibited.

Automated Underwriting

The Reasoning Behind Automated Underwriting

The mortgage industry is rapidly moving into the automated age. Lead-generation companies that utilize mass-marketing technology; loan origination software that plugs directly into a company’s pipeline reporting; internet websites that can originate and “pre-approve” a loan, these are all examples of how the process of getting a loan into ‘The System’ has improved. It would be foolhardy to develop methods to increase production on the front end if there were no improved system for getting loans out the back end! Thus, Fannie Mae and Freddie Mac have developed automated underwriting systems that are designed to do just that – to utilize technology to reduce costs and streamline processes throughout the mortgage cycle. And it’s not just Fannie Mae and Freddie Mac, many portfolio and subprime lenders have developed technology

designed to expedite and simplify the approval process.

Each entity has its own system; yet despite the different names, are intended to achieve the same goals. Fannie Mae calls her system Desktop Underwriter (DU), while Freddie Mac calls his Loan Prospector (LP). Portfolio and subprime lenders have trade names for theirs, as well.

Automated underwriting represents a more sophisticated way of assessing mortgage risk, enabling the tailoring of specific loan data contained in the file based on an

individual borrower’s risk profile. These flexibilities include: streamlined documentation and appraisals, less stringent mortgage insurance requirements, and expanded LTV ratios and product offerings. The automated systems are currently designed to underwrite the following loan types:

Ø Owner Occupied

Ø Second Home

Ø Non-Owner Occupied

Ø Purchase

Ø Rate & Term Refinance

Ø Cash Out Refinance

Ø One to Four Unit Properties

Ø First Mortgages

Ø Fixed rate, Adjustable rate, Balloon mortgages

Ø Construction to Permanent

Ø Community Lending

Ø Tiered pricing products (Level I, II or III)

DU and LP will perform an underwriting analysis using either a completed 1003 or a subset of information from the loan application. The option to underwrite using a less-than-complete 1003 supports the need for ‘point of sale’ qualification, where quick, yet conditional, credit recommendations can be made using the information gathered during

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a borrower interview. In situations where a credit recommendation is performed using a partial 1003, the lender and borrower must complete the 1003 prior to closing, with any modified information resubmitted to the AU for approval.

Desktop Underwriter and Loan Prospector are designed to evaluate a loan file based on risk layering, as opposed to looking at each individual component. This allows for a more accurate determination of a borrower’s likelihood of default. These AUS models have been developed after many years of data being compiled on borrower credit habits, transaction type and their relationship to default rates. This layering of risk concept can provide for more latitude in certain areas of your file, such as debt ratios, or can be more restrictive in other areas, such as transaction type versus LTV.

These risk layers generally fall into three categories, and we call them the 3 “C’s” of Underwriting:

Credit Credit history

Credit score Capacity Income

Assets and Liabilities Debt ratios

Collateral Collateral Type and LTV

Value, Condition and Marketability

How to Access Automated Underwriting

As a processor working for a mortgage broker, it is not likely that you will have unlimited, unrestricted access to an automated underwriting system. These systems are designed to perform many functions for a wholesale lender, and for Fannie Mae and Freddie Mac.

First, the AU systems can and should be utilized as a ‘pre-qualification’ tool by the mortgage originator. This requires written authorization from a borrower, as their credit report will be pulled by the lending agency. Second, the AU systems are used by the lending agency as a monitor of borrower activity; if the same borrower has applied for two different owner-occupied loans at the same time through two different lenders, the systems will pick it up. Next, many wholesale lenders use their systems to monitor origination activity versus funding activity, and finally, the systems are used as final underwriting and acceptance/eligibility tools by the wholesale lenders.

There are different means of reaching these systems, and depending upon your company policy and the wholesale lenders you work with, you may use one or all of these avenues to access DU, LP or other AU systems.

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Agency Direct Access Your company may be set up to access DU or LP by going directly to the agency website and inputting your data into their system. In order to do this, your company will need to have a User ID and a Password, which are now

electronically transmitted to you once you have successfully registered as a user with Fannie Mae and/or Freddie Mac. Your company will also be responsible for all fees generated by this direct access method. The biggest advantage to utilizing direct access, however, is that your file will receive a response almost immediately.

Both Fannie Mae and Freddie Mac offer training to mortgage industry personnel on how to input 1003 information into their systems to perform underwriting analyses. It is recommended that you take advantage of these training sessions if this is the method of choice for your company to access AU.

Lender-Sponsored AU Many wholesale lenders have developed systems that integrate their product offerings with DU and LP credit recommendations. It is necessary to become an approved broker with each wholesale lender in order to access their systems. The information on your borrower will generally be uploaded from your loan origination system (LOS), or processing software, directly into the lender’s system. Many lenders have time restrictions that must be met for an approval to be valid, and some will not allow the loan to be locked in with their secondary marketing department until their AU has been completed. Also, you may not receive your underwriting analysis for several minutes. Frequently, the cost of accessing DU or LP for an underwriting decision will be borne by the wholesale lender.

Most lenders that offer AU access through their websites also offer training, either on-line or with a manual. Again, it will prove expeditious for you to take advantage of this training.

E-Commerce Portals As we mentioned earlier, the mortgage industry is moving rapidly into the lead in e-commerce and business-to-business (B2B) technology offerings. There are several broad-based B2B vertical portals through which originators can access products and services sponsored by

wholesalers, investors, and vendors, including automated underwriting systems, such as DU and LP. As with the lender-sponsored AU, your borrower information will be

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uploaded directly from your LOS into these portals once you have selected a sponsoring lender. Other services such as flood certificates, appraisals, and mortgage insurance products can be obtained using this method.

The Underwriting Recommendation

After each loan is submitted for preliminary underwriting analysis, DU or LP will display the underwriting recommendation on the appropriate screen, depending on access venue. In most cases, the recommendation is defined in terms of the credit risk profile of the case and in terms of meeting the requirements of Fannie Mae or Freddie Mac purchase eligibility. These two recommendations will tell you if: 1) the credit risk meets underwriting guidelines, and 2) if the loan is eligible for purchase by either entity. It is possible for your loan to meet the underwriting guidelines, yet not be eligible for

purchase. Sometimes the loan is not eligible for purchase, according to the automated system, because of variances in the loan parameters such as LTV or property type. You will need to confirm with your lender if they have a particular commitment that allows for these variances, and if so, you should continue to process the file according to the processing requirements, and submit it to your wholesale lender for manual approval of the variance.

It is important to clarify that the AUS models do not make the decision to grant or deny credit – that is left up to the wholesale lender. The AUS models are tools that are utilized to enhance a lender’s ability to extend mortgage credit by consistently applying requirements and guidelines when evaluating a borrower’s creditworthiness.

FNMA UNDERWRITING FINDINGS REPORT

Fannie Mae will issue its recommendation via an Underwriting Findings report, and issue you Verification Messages/Approval Conditions telling you how to process your loan in order for it to meet approval/eligibility requirements at closing.

The Fannie Mae recommendations that could come back are:

Approve/Eligible Based on the data submitted to DU, the loan meets credit risk criteria and is eligible for purchase. This is as strong of a “pre-approval” that you can get! Make sure your verified information matches what’s on your initial application, and you’re sure to go to closing! You must comply with all of the Verification

Messages/Approval Conditions listed in the Underwriting Findings

report and document the loan file accordingly. And, you must apply due diligence when reviewing the documentation in the loan file to determine if there is any potentially derogatory or contradictory information that is not part of the data analyzed by Desktop Underwriter. Furthermore, you should review the credit report to confirm that the data that Desktop Underwriter evaluated with

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respect to the borrower’s credit history was accurate and complete. Any information that you are aware of that appears to have

escaped DU notice should be documented in your file in accordance with full Fannie Mae underwriting guidelines.

Approve/Ineligible The loan meets credit risk requirements based on the underwriting guidelines (such as debt ratios, cash requirements, loan purpose), but does not meet purchase requirements (such as LTV or loan type). You will need to review the reasons listed for the Ineligible finding, and investigate alternative parameters that may alleviate the perceived additional layering of risk in the file. A lender can deliver loans that receive an Approve/Ineligible recommendation to Fannie Mae if the lender has a negotiated variance in its

commitment that covers the ineligible condition specific to the loan transaction.

Refer/Eligible The data submitted to DU indicates that the borrower does not meet the credit criteria as set forth in the underwriting guidelines, such as liquid assets, debt ratio, or credit history. Thus, DU cannot recommend approval of the loan, however, Fannie Mae indicates that it would purchase the loan based on other eligibility factors such as LTV and loan type. The Underwriting Findings will outline the main reasons for the Refer recommendation. You must then determine if you have compensating factors to overcome the reason for referral, and know that you will have to document them. This may then allow an underwriter who is manually reviewing your file to make an assessment for approval.

Refer/Ineligible Based on the data submitted to DU, the loan does not meet Fannie Mae’s credit risk and eligibility requirements. The system will have evaluated a combination of risk factors, including the LTV, debt ratio, liquid assets, each borrower’s credit history, employment status, property type, loan type, and the purpose of the loan. Based on the data submitted, DU cannot recommend approval of the loan, and finds that the layering of risk renders it ineligible for purchase. If you can make the loan meet the credit requirements at final approval, a lender can deliver the loan to Fannie Mae if the lender has a negotiated variance in its commitment that covers the ineligible condition specific to the loan transaction.

Refer with Caution Based on the data submitted to DU, and after assessing all information, the system cannot recommend an approval. The layering of risk associated with the information contained in the file represents a greater risk of default than those with an Approve or Refer recommendation. The loan may be eligible for sale to Fannie Mae based on loan parameters; however, the perceived degree of

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risk is too high. Certain transactions that contain a high degree of credit risk that receive this recommendation are not allowed to be sold to Fannie Mae, even if they receive an Eligible finding. Among the more common transactions included here are:

♦ Limited cash-out refinance mortgages with LTVs greater than 90% (other than fixed-rate mortgages securing one-unit properties).

♦ Cash-out refinance mortgages with LTVs greater than 75%. ♦ Mortgages secured by investment properties with LTVs greater

than 80%.

♦ ARMs secured by three- and four-unit investment properties.

♦ Mortgages subject to subordinate financing with LTVs greater

than 75% and CLTV’s greater than 90% to 95%, such as

80/15/5 and 90/5/5

Your documentation requirements will be listed in the Verification Messages/Approval Conditions section, specifically identifying credit issues you should address,

employment income docs needed, asset verification required, and type of appraisal needed.

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FHLMC FEEDBACK CERTIFICATE

Freddie Mac will issue its recommendations via a Feedback Certificate. After identifying the Evaluation Status of the data submission, it will also provide an assessment for purchase eligibility, credit risk class, documentation class, and minimum collateral assessment. Here are the main components of the Feedback Certificate:

Evaluation Status: Complete – the AUS has processed the transaction successfully.

Invalid - there is information missing or inaccurate that prevents the AUS from processing your request. Refer to the Feedback

Certificate for reasons.

Ineligible – the AUS cannot evaluate your transaction, it does not meet acceptable transaction guidelines (such as five unit property, too many borrowers, etc). Refer to the Feedback Certificate for reasons.

Incomplete – the AUS was unable to acquire the needed credit data to evaluate the transaction. Refer to the Feedback Certificate for reasons.

Purchase

Eligibility: Freddie Mac Acceptable – the loan is eligible for purchase by

Freddie Mac according to their standards as set forth in their Seller/Servicer Guidelines.

Freddie Mac Ineligible – the loan is eligible for evaluation but not for sale to Freddie Mac as per their standards as set forth in their Seller/Servicer Guidelines.

500 Freddie Mac Eligible – the loan receives an A-Minus Offering. It may be eligible for Accept processing subject to specific terms.

Credit Risk Class: Accept – based on the analysis of credit and other data submitted,

the credit risk class is acceptable – provided all information is true, correct and complete.

Caution – the application has serious risks that must be evaluated with a full credit and collateral analysis to determine if it is salable to Freddie Mac.

Documentation

Class: Accept Plus – this is the most expedient processing available. It

uses stated income and debt, expanded ratios and only requires a verbal employment verification for salaried borrowers.

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Self-WARNING! Protected by International Copyright Laws8 1998, 1999, 2000, 2001, 2002, 2003 The Mortgage Training Institute a division of MTI Services Corporation This Material and the service marked, copyrighted training and sales processes are licensed to The Mortgage Institute graduates only. Reproduction is strictly prohibited.

employed borrowers can qualify for Accept Plus regardless of how long they have been self employed.

Streamlined Accept – there are substantially fewer documentation requirements than full processing.

Standard – this requires standard, or full processing documentation as identified in the Seller/Servicer Guidelines.

Your documentation requirements will be listed on the Documentation Checklist provided with the Feedback Certificate. You should review the Loan Information Section in the Certificate in detail, however, to identify any credit issues you should address, and specifics on employment and income docs needed, asset verification required, and type of appraisal needed.

In summary, the concept of using an AUS as a processing tool is simply put:

Enter & Review Process & Submit Completed Submit Data Recommendations/ Package Loan Loan to Lender for To AUS. Feedback Info. Accordingly. Final Approval.

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