CHAPTER 5 - MORTGAGE LOAN ORIGINATION ACTIVITIES Study Guide

Appraisal Report - URAR, or 1004

An appraisal is an opinion of market value (most probably selling price) as of a certain date that is supported by objective data. It is only an estimate or opinion; it is not a guarantee of value. It is only valid as of its effective date, which establishes terms, conditions, and economic circumstances upon which the value is estimated. This Uniform Residential Appraisal Report (URAR) is the primary appraisal form used in the real estate industry to report property values. A full appraisal report is also known as a Fannie Mae Form 1004. An exterior inspection, or a drive-by appraisal, is referred to as Form 2055. Below are important aspects of appraisals that a MLO should know. MLO Requirements and Limitations · An MLO is prohibited from attempting to influence the independent judgement of an appraiser · Anyone receiving any incentive as a result of the loan closing is not allowed to selectthe appraiser · The borrower is not allowed to pay the appraiser at thedoor Appraisal Terms · Subject property - Property being purchased, refinanced or seeking secondaryfinancing · Comps - Properties that have sold recently, close to subject property and similar in size and features (generally 3-6 comps required on a loan transaction) · Geographic and Market Analysis - Addresses the economic setting of the property and the market forces that might impact the value · Functional Obsolescence - Internal and external factors that could impair the ability to sell the property. (ex. 5 bedroom house with 1 bath) · VA appraisal - Certificate of reasonable value (CRV) or a Notice of Value (NOV) · Automated Valuation Model (AVM) - Computer programs that can provide a probable value range for properties by performing a statistical analysis of available data · HVCC - Home Valuation Code of Conduct - Result of Fannie Mae settlement with New York City Attorney General to improve appraisal independence and integrity rules. Replaced by the provisions of Dodd Frank Act. The processor orders the appraisal and the appraisal is valid for 12 months; however, it must be re-certified (updated) if the appraisal will be four (4) months old or more at closing.

Hazard and Flood Insurance

An insurance policy is a contract in which one parry agrees to compensate another parry for a loss that occurs as a result of a designated hazard. Providing funds to a borrower to purchase a home carries with it a great deal of financial risk for the lender, who is said to have an insurable interest in the property. Lenders, therefore, normally require different types of insurance: • Homeowner's hazard insurance • Flood insurance (if applicable) • Mortgage insurance (if the LTV is greater than 80%) Hazard Insurance - The borrower is required to maintain proper insurance to protect against possible loss or damage to the property that will be collateral for the mortgage. Insurance coverage may be for both dwelling and contents in case of fire, other damage, theft, liability for property damage and personal liability. If required insurance is cancelled or not obtained, a lender can insure the property and force the borrower to pay for it. This insurance, known as force-placed insurance, has become controversial because it is often more expensive than what consumers can obtain on their own. Flood Insurance - Property located in areas Flood Zone A or V (areas that are designated as high flood zones) must have flood insurance required by lender for life of loan. In fact, federal law requires mortgage lenders to assure that all properties within designated flood prone areas have flood insurance before the lenders provide a mortgage on the property. Flood insurance covers losses from flooding, including structural damage; damage to furnace, water heater, and air conditioner units; flood debris clean up; and the replacement of floor surfaces. For more information, visit http://www.fema.gov. Flood insurance is provided almost exclusively by the National Flood Insurance Program (NFIP), which is operated by the Federal Emergency Management Agency (FEMA). Private Mortgage Insurance (PMI) - Private mortgage insurance (PMI) is offered by private insurance companies to insure a lender against default on a loan by a borrower and against a loss in the collateral value of the home at the time of the trustee/foreclosure sale. In the event of default and foreclosure, lenders can make a claim for reimbursement of actual losses (if any) up to the face amount of the policy after foreclosing and selling the property if a loss occurs. If the loan-to-value (LTV) of any conventional loan exceeds 80%, private mortgage insurance (PMI) is required. PMI protects the lender against losses that result from default by the borrower. Mortgage Insurance Premiums for FHA Insured Loans - FHA charges two types of mortgage insurance for loans that it endorses. Both are referred to as Mortgage Insurance Premiums (MIP). As of April 1, 2013, the FHA increased mortgage insurance and the length of time a borrower must have to pay the insurance. · Upfront Mortgage Insurance (known as Upfront MIP) is 1.75% of thebase loan amount. It is a one• time charge and can be added to dosing costs or can be financed by adding it to the loan amount. It is paid on all types of FHA insured loans, except HECM 's which utilize a different MIP charge. · Annual MIP is paid monthly as part of the monthly mortgage payment. The calculation is Loan Amount x MI rate/ 12 months = Monthly MI Payment.

Assets and Liabilities

Assets are items of value owned by the borrower, such as cash on hand, checking or savings accounts, stocks, bonds, insurance policies, real estate, retirement funds, automobiles, and personal property. In practically all cases, a borrower must have some assets in order to satisfy a down payment and complete a mortgage transaction. It is important that the application clearly indicate the source of funds that the applicant will use to close the mortgage loan because these funds must be verified in the file. Some sources of funds include: · Cash in the Bank - If the applicant indicates on the application that he or she will use cash currently on deposit in the bank to close the loan, then the loan originator can easily verify this by asking for the last two or three months' worth of bank statements. o Two months' statements must be obtained because investors want to see seasoned funds (funds that have been in the account for a minimum length of time). o If the bank statements reveal any large deposits, the applicants must provide a written explanation of the source of those funds, along with supporting documentation like a canceled check. o A large deposit, as defined by Fannie Mae, is any deposit that exceeds 50% of the monthly qualifying income for the loan. · Sale of Current Residence - In this case, the applicant must supply a copy of the Closing Disclosure or HUD-1 Settlement Statement from the sale transaction, verifying that the property has been sold and that the applicant received sufficient proceeds to close the new loan. · Gift Funds - The donor(s) must complete a gift letter indicating the amount of the gift and the donor's relationship to the applicant. The relationship must be acceptable to the investor. Typically, the individual must be a family member. o The gift letter must state that no repayment of the funds is required, and the creditor must verify that the funds have been given; this is generally done with a copy of a cancelled check. The donor must also typically provide a copy of a bank statement from which the funds were transferred to evidence the ability to give. · Sale of Other Assets - Some of the items often sold for cash to close a real estate transaction include cars, boats, RVs, guns, artwork, antiques, jewelry, and coin collections. In the case of an asset sale, the applicant must prove ownership of the asset that was sold, provide a market value for that asset (i.e., a Blue Book value for cars or an appraisal for jewelry), and show the bill of sale and proof of payment. · Secured Borrowed Funds - Unsecured borrowed funds, such as from a credit card advance, are NOT an acceptable source of down payment. All borrowed funds must be secured by an asset, such as a 401(k). · Cash on Hand - Some applicants do not use or trust commercial banks and keep their cash at home. This is referred to as "unverified cash" or "cash on hand." Investors generally do not allow cash on hand to be used as a source of down payment or closing costs. • Reserves: Cash on deposit or other highly liquid assets a borrower will have available after the loan funds - Prefer at least 2 months PITI - Non-owner occupied require 6 months Liabilities are financial obligations or debts owed by a borrower. Debts are any recurring monetary obligation that cannot be canceled. Liabilities, including various credit-related obligations, must be considered in order to determine the likelihood of repayment. Most lenders require that the borrower's monthly mortgage payment plus other liabilities not exceed a certain percentage of the person's income. · Revolving Accounts (e.g., Credit Cards) - For credit cards and other revolving accounts, the payment that will be used in the calculation of the borrower's debt-to-income ratio is the minimum monthly payment shown on the credit report. If a credit report does not show a minimum monthly payment, the underwriter will use 5% of the unpaid balance as a payment when calculating the ratios. · Installment Loans - Monthly payments for installment loans (such as auto loans) with fewer than ten (10) payments remaining may be excluded when calculating qualifying ratios. Installment loans can also be paid off or paid down to fewer than ten (10) payments in order to help an applicant qualify for a loan. · Auto Leases - Monthly auto lease payments are always included in the qualifying ratios regardless of the balance remaining on the lease (as compared to auto loans, which may be excluded if ten (10) or fewer payments remain). · Student Loans - If payment on a student loan is deferred, Fannie Mae and Freddie Mac both require that the underwriter include a payment in calculating the borrower's debt ratio for qualification purposes. Generally, this is done by obtaining a payment letter from the institution holding/servicing the student loan (e.g. Sallie Mae). If no payment letter can be obtained, the lender must use 1% of the unpaid balance. · Contingent Liabilities - A borrower has a contingent liability when he or she has co-signed for another person's installment debt, but the actual payments are being made by the primary obligor. Such liabilities do NOT have to be taken into consideration when calculating the borrower's debt ratio as long as both of the following are true: o The payments have been made on-time for the previous 12- month period. o The lender documents that the payments were made from the primary obligor's account(s).

Evaluating Credit

Credit scoring is an objective means of determining creditworthiness of potential borrowers based on a number system. A credit score is a numeric representation of the borrower's credit profile compiled by assigning specified numerical values to different aspects of the borrower. These numbers are adjusted up and down based on the strengths and weaknesses of particular qualifications. The numbers are added from all the categories and a credit score based on these various criteria is assigned. Credit scores also play an important role in automated underwriting since Fannie Mae and Freddie Mac have identified a strong correlation between mortgageperformance and credit scores. The higher the score, the better the credit risk. The lower the score, the higher the risk of default. The loan originator will order a credit report from one or all the credit bureaus in order to review the applicant's credit history. This is a record of debt repayment, detailing how a person paid credit accounts in the past as a guide to whether he is likely to pay accounts on time and as agreed in the future. The Fair Credit Reporting Act indicates that consumer reporting agencies may maintain bankruptcy information on a consumer's credit report for no more than 10 years from the date of entry of the order for relief or the date of adjudication, whichever the case may be. Generally speaking, however: · Chapter 7 bankruptcy (Liquidation ) and Chapter 13 (wage earner plan) remain on a credit report for ten (10) years. · Derogatory accounts may only remain on a borrower's credit history for seven (7) years. Credit scoring is considered an objective means of determining creditworthiness of potential borrowers based on a number system. Calculated differently by all credit bureaus, although credit scores range from about 300 to 850. The three most familiar credit bureaus are: Experian, Equifax and TransUnion.

Loan Origination

Mortgage Professional Functions • Origination: Making or initiating a new loan - Initial contact with borrower - Ordering credit report, other required documentation • Loan Processing: Verifying information in the loan file - Employment and other verification - Coordination of loan process • Underwriting: Evaluating and deciding whether to make a new loan, and if so, on what terms - Done by the funding source - Evaluates credit scores/history, appraisals, job history, collateral, etc. • Servicing: Continued maintenance of loan after closing - Done by lender, servicing company, other - Mortgage and escrow statements, collecting payments, pursuing late payments

Loan Origination Process

Pre-qualification - MLO reviews the borrower history to determine if they are likely to get approved for a loan, and approximate loan amount. • Does not guarantee approval; not binding • Done by any MLO • Does not require disclosure Pre-approval. Lender uses an application to determine that potential borrowers can be financed for a certain amount for a specific property; done only by a lender. • Rendering a credit decision; may be binding • Only done by a lender • Triggers mandate disclosures with completed applications

Insurance Types

The American Land Title Association (ALTA) is the national trade association for title insurance companies and title insurance agents. The American Land Title Association (ALTA) forms are used almost universally throughout the nation. The two types of title insurance coverage are (1) standard and (2) extended. Standard Coverage Policy - A standard title insurance policy is usually issued to homebuyers. No physical inspection of the property is required and the buyer is protected against all recorded matters and certain risks such as forgery and incompetence. The title company does not do a survey or check boundary lines when preparing a standard title insurance policy. Losses Protected by Standard Title Policies · Matters of record · Off-record hazards such as forgery, impersonation, or failure of a party to be legally competent to make a contact · The possibility that a deed of record was not delivered with intent to convey title · Losses that might arise from the lien of federal estate taxes, which becomes effective without notice upon death · Expenses incurred in defending the title Losses Not Protected by Standard Title Policies · Defects in the title known to the holder to exist at the date of the policy but not previously disclosed to the title insurance company · Easements and liens that are not shown by public records · Rights or claims of persons in physical possession of the land but whose claims are not shown by the public records · Rights or claims not shown by public records but which can be discovered by physical inspection of the land · Mining claims · Reservations in patents or water rights · Zoning ordinances Extended Coverage Policy All risks covered by a standard policy are covered by an extended coverage policy. An extended coverage policy also covers other unrecorded hazards such as outstanding mechanics' liens, tax liens, encumbrances, encroachments, unrecorded physical easements, facts shown by a correct survey, and certain water claims. Also covered are rights of parties in possession, including tenants and owners under unrecorded deeds.

Loan Origination Process - Application

The application is referred to as the Uniform Residential Loan Application (URLA) - also called "the 1003," Fannie Mae's form number 1003. Form 65 is a similar form created by Freddie Mac. Mortgage Fraud is investigated by the Federal Bureau of Investigation and is punishable by up to 30 years in federal prison or $1,000,000, or both.It is illegal for a person to make any false statement regarding income, assets, debt, or matters of identification, or to willfully overvalue any land or property, in a loan and credit application for the purpose of influencing in any way the action of a financial institution.

Loan Origination Process - Loan Originator and Processor

The core of the mortgage loan originator's job is to obtain a complete and accurate 1003 supported by documentation from the borrower. The Loan Originator assists the borrower in completing the loan application and collects the necessary documentation to validate information provided on the application. The application is designed to be completed by the borrower, with the loan originator assisting in data input. A Mortgage Loan Originator is required to accurately document all information a borrower provides during the interview process without leading or coaching borrowers on their answers. The Mortgage Loan Originator signs and dates the application. Borrower/Customer - Each borrower associated with a mortgage loan application must answer questions accurately and truthfully. Concealing, adjusting, or withholding any material facts that may affect the application constitutes mortgage fraud. A fact is considered "material" if knowledge of that fact would lead a lender to consider a different course of action on the application. A lender will provide financing based on information provided in a borrower's loan application. If a lender determines any information is inaccurate and untruthful, it may result in the lender approving a loan that it would otherwise not provide. Borrowers who provide inaccurate information may be guilty of "fraud for property" and could be subject to both civil and or criminal penalties. The borrower(s) signs and dates the application. Co-Borrowers - Someone who signs the note along with the primary borrower and accepts the joint obligation to repay. A co-borrower must have acceptable credit/assets and if no joint assets/liabilities, two applications should be used. The loan processor performs clerical or support duties as an employee under the directions of a licensed mortgage loan originator or an exempt lender. The first step in the loan process is to gather information and prepare the loan package. The loan processor orders an appraisal of the property and a credit report on the borrower. The processor also sends out the necessary verification letters to confirm the borrower's employment, income, bank accounts, and other liquid assets, and any other claims made by the borrower that must be verified. Typical verification letters include the Verification of Deposit (VOD) and Verification of Employment (VOE). The VOD is a form completed by the borrower's bank to confirm the status and balance of the borrower's bank accounts. The VOE is a form completed by the borrower's employer to confirm the borrower's employment and employment history. The processor who is confirming information regarding the borrower of a VA loan must send out a Request for Certificate of Eligibility (COE) in addition to the aforementioned verification letters. The COE is a form completed by the VA that confirms the borrower is sufficiently entitled to a VA loan. The processor then compares the information on the returned verifications with the borrower's loan application to make sure they are the same. If not, the borrower is asked to explain the differences.

Loan Origination Process - Underwriter

Upon receiving the loan package, the underwriter analyzes the risk factors associated with the borrower and the property before making the loan. Underwriting is the practice of analyzing the degree of risk involved in a real estate loan. The underwriter determines whether the borrower has the ability and willingness to repay the debt and if the property to be pledged as collateral is adequate security for the debt. The underwriter also examines the loan package to see if it conforms to the guidelines for selling in the secondary mortgage market or directly to another permanent investor. In any case, the loan must be attractive to an investor from the perspectives of risk and profitability. If any part of the loan process is poorly done (the processing or underwriting is subpar, for example) the lender might find it difficult to sell the loan. In addition, if the borrower defaults on a carelessly underwritten loan, the loss to the real estate lender can be considerable. For example, if the appraisal is too high and the borrower defaults, the lender may sustain a loss. Automated Underwriting System (AUS) is a technology-based tool that combines historical loan performance, statistical models, and mortgage lending factors to determine whether a loan can be sold into the secondary market. An automated underwriting system (AUS) can evaluate a loan application and deliver a credit risk assessment to the lender in a matter of minutes. It reduces costs and makes lending decisions more accurate and consistent. AUS's promote fair and consistent mortgage lending decisions because they are blind to an applicant's race and ethnicity. The most widely used automated underwriting systems are Fannie Mae's Desktop Underwriter® and Freddie Mac's Loan Prospector®. FHA-insured loan processing uses the FHA Total Scorecard AUS. Contrary to popular belief, Desktop Underwriter® and Loan Prospector® do not approve loans. They provide quick feedback as to the eligibility of the borrower and property for particular Fannie Mae or Freddie Mac loan. As useful as an AUS is, it is only as good as its inputs. If a lender inputs incorrect data (accidentally or intentionally), then the AUS results are invalid.

Evaluating Income

· Standard income documentation: For salaried and hourly individuals, this typically includes paystubs for the most recent 30-day period and W-2s for the most recent two-year period. · Commission Income: Lenders will require copies of income tax returns for the past two years and information on current income if commissions represent 25% or more of an applicant's annual income. In order to account for the variability of an applicant's commissions, lenders will average the past two (2) years of income. · Overtime and Bonus Pay: In order to account for the variable income such as overtime or bonus income, lenders will average the past two years. · Non-Taxable Income: Grossing Up - Some income sources, such as permanent disability payments, Social Security benefits and child support, may be exempt from federal income taxes. Most investors/governmental agencies allow the lender to calculate how much tax the borrower would pay if this income were taxable and add that figure to the gross amount received. This procedure is known as grossing up. The allowable "gross up" factor is usually 25%; in other words, the non-taxable income can be multiplied by 125% to adjust it accordingly. · Rental Income (Other Real Estate Owned): If the borrower wishes to use rental income as a way of qualifying for a loan, the loan originator should obtain 1040 tax returns, complete with all schedules, including Schedule E. If 1040 tax returns cannot be used, the lender will calculate the rental income by 75% of the amount shown on the lease agreement. Generally, a 25% vacancy/maintenance factor should be subtracted from the monthly gross rent (thus the 75% mentioned earlier). Reduced by 25% · Unemployment Compensation: For applicants whose work is seasonal, unemployment income can be used as part of qualifying income. Some trades, such as fishing, construction and farm work, are seasonal with regular down time. During this time, most workers receive unemployment. If unemployment is part of the natural annual work cycle, then it may be included in qualifying income. The loan originator should obtain two years' copies of tax returns and average both the employment income and the unemployment income. In general, unemployment compensation received due to layoffs or termination cannot be used as qualifying income. · Self-Employed Borrower: If an applicant is self-employed, the loan originator should obtain tax returns for the past two years. Twenty-five percent of income derived from 1099 income is considered self-employment and 25% or more ownership in a business is also considered self-employment. At least 25% ownership of the business. · Disability payments count as income if they are a permanent source of income, but the lender will use caution if they are only for a limited time. If the benefits have a defined expiration date, the remaining term should be at least three years from the date of the mortgage application. Creditors should review the borrower's disability award letter to determine if the disability income is taxed or non-taxable. Not all disability payments are income tax-free. 25% marked up · Social Security income counts as permanent income for a borrower who has reached retirement age. If these payments are the result of a disability or some other condition, the lender treats them like other disability payments and requires no greater amount of documentation than what is imposed on a regular-paid employee. 25% marked up · Pensions and Retirement Benefits -Lenders generally consider pension and retirement benefits as stable income, although they may investigate the source to determine solvency. · An auto allowance is an amount an employer gives an employee for the business use of her car. This amount of reimbursement may be offset by deducting actual expenses from the allowance. The remainder is considered taxable income by the IRS and when averaged for the previous two years is considered income for loan qualification. · Alimony, child support, and/or maintenance can be considered part of the borrower's monthly qualifying income if it's determined they are likely to be made on a consistent basis. Such a determination is dependent on whether the payments are required by written agreement or court decree, the length of time the payments have been received, the age of the child (child support payments generally stop at age 18), the overall financial and credit status of the payer, and the ability of the borrower to compel payment if necessary (e.g., through a court order). They should be expected to continue for a minimum of three years to be used in income calculations. They do not need to be listed as sources of income if a borrower does not want them considered for the loan, per ECOA. To verify receipt of income, the borrower must verify child support payments either by six months of cancelled checks or six months of consecutive bank statements showing child support/alimony deposits. · Foster Care Income - Qualifying payments for foster care are generally not taxable, according to IRS Publication 525. To fully document the income for use in loan qualification, an MLO must: 25% marked up o Obtain a letter from the state agency case worker to substantiate the foster worker's placement and that the placement of children will be ongoing. o Document receipt of reimbursement for the previous 24 months. Because the income will likely be sporadic and change monthly, use a 24-month average. o Place a letter in the loan file from the borrower stating he intends to continue with foster care.

Overview of URLA - Form 1003

• Type of Mortgage and Term of Loan • Property Information and Purpose of Loan • Borrower Information • Employment Information • Monthly Income and Combined Housing Expense Information • Assets and Liabilities • Details of Transactions • Declarations • Acknowledgement and Agreement • Information for Government Monitoring (HMDA information)