MBA CMB Origination & Underwriting
QA/QC Audit Practices
- Manual - Verbal re-verification - Appraisal review - Settlement statement review - Automated scoring models - Re-underwrite audited loans
Subject to completion per plans and specs
an appraiser uses this language on new construction. It will require a final inspection of completion
Jointly
indicates that both applicants' assets and liabilities will be disclosed by completion of this section. Must be checked if co-borrower is spouse
Not jointly
indicates that only the borrower or co-borrower's assets will be disclosed by completion of this section
Property types
- Single family house (SFR) - 2-4 family - Condo - Cooperative (Co-op)
Hybrid ARM
- 2 types - Begin at fixed rate, convert to ARM (Ppl choose for predictable payment for a period and plan to refi or move before the rate adjustment) - Begin at ARM, convert to fixed rate - less common - Increase in rate is capped at a specific amount
Monthly income information for Self-employed applicants
- 2 years' full tax returns (both individual and business if the business is a corporation, S corporation, or partnership) - 2 years' financial statements - A corporate profit and loss statement for the current year to date
Qualifying conventional
- 36% of borrower's stable monthly income - Max can be exceeded up to 45% if borrower meets the credit score and reserve requirements in the Eligibility Matrix
VA guarantees
- A portion of the balance against foreclosure loss - Repayment of mortgage loans made to qualified veterans up to a specified amount
Uniform Collateral Data Portal (UCDP)
- A single portal through which lenders electronically submit appraisal reports for conventional mortgages delivered to GSEs - Through UCDP lenders can upload appraisal data and view edits and submission details
Drive by appraisal
- A value estimate made without examining the interior of a property - Appraiser takes a street view and picture - Analysis includes reviewing comparable sales, county records and other public information to determine the value - Less costly, but less accurate without a full inspection
Automated underwriting
- AUS is one of the largest tech innovations in mortgage industry - widely implemented - FNMA - Desktop Underwriter (DU) - FRE - Loan Product Advisory (LPA) - Evaluates borrower data and generates finding
Reviewing risks
- Ability to repay requires lenders to determine reasonableness of borrower to repay mortgage prior to consummation - Penalty and liability if lender closes loans failing to meet these requirements - This is presumption of compliance for loans that originated as qualified mortgages - DTI 43% max or GSE eligible - ATR has provision for max points and fees-this rule establishes compliance safe harbor for QM is APR of loan does not exceed APOR by 150 bps
Real Estate Settlement Procedures Act (RESPA - Regulation X)
- Administered by the CFPB - Promotes consumer notification in a timely manner on the nature and costs of the settlement process - Offers consumers protection from unnecessarily high settlement charges causes by certain abusive practices - Eliminate kickbacks - Provide consumer disclosures - Disclose business arrangements - Ensure fair advertising
Secure and Fair Enforcement for Mortgage Licensing (SAFE Act) objectives
- Aggregate and improve flow of information between regulators - Provide increased accountability and tracking of originators - Enhance consumer protections - Provide consumers with free easy to obtain information regarding originator's employment history and past disciplinary actions
Fixed rate mortgages features
- Amortizations - 10, 15, 20 ,25, 30 years - Partial prepayment shortens term but doesn't reduce payment - Usually payment combines P&I - IO payments for the first few years possible - Most common
Second mortgages
- An additional loan on the same property - Can be fixed or ARM - May have different terms than the first mortgage
Wholesale origination risks
- Greater risk of fraud losses - Price competition - Potential of higher prepayment risk from broker churning - when loan originator solicits customer for repeat business causing early prepayment of the loan
appraisal management companies
- An independent entity through which mortgage lenders order residential real estate valuation services for properties on which they are considering extending loans to homebuyers - AMC fulfill an administrative function in the appraisal process, including selecting an appraiser and delivering the appraisal report to the lender - Individual appraisers who work for AMCs provide the actual property valuation services
Interest rate caps
- Annual cap - limit annual interest rate increases to a specified percentage - Life of the loan cap - max amount the interest rate can increase over life of loan
Payment Frequency
- Another loan feature that affects the payment amount - Types of frequency are - Monthly - Bi-weekly - increased number of payments reduces total interest cost on loan because principal amortizes more quickly
transaction red flags
- Any transaction where there is a potential relationship between the parties involved - Any large payoff on the closing disclosure that do not specifically show as liens on the title
Fair Housing Act (FHA)
- Applies to the mortgage and home improvement loans and protects the applicant from discrimination based on: - Race, color, handicap, national origin, gender, religion, familial status - HUD retains responsibility for Fair Housing Act
Documentation sources for employment, income, assets, credit and liabilities
- Appraisals - Credit report - Verifications - Complete bank statements/transaction records - W-2s, pension, 4506-C, Social Security, and paystubs - Other asset documentation - Divorce decree/separation agreement, bankruptcy discharge papers, etc - Self-employment (2 years tax returns) · Flood certifications
Full residential appraisal
- Appraiser considers the site, any amenities, and the physical location of the property - Final appraisal includes visual picture of the neighborhood, site, and improvements of the subject property - Uniform Residential Appraisal Report (URAR) - Appraisal report used for most single family homes
Debt-to-income (DTI) ratio
- Back-end ratio - DTI= total monthly debt/GMI - Calculates the % of GMI to total monthly indebtedness
MI payment options
- Borrower-Paid - Lender-Paid
Borrower-Paid MI
- Borrowers can pay in monthly or single premium or split premium with some paid upfront at closing and some paid monthly - Monthly is disclosed on the LE and CD and can be collected at closing
Retail origination channel
- Business to consumer (B2C) - Walk-ins, real estate brokers, builder/developers - Analysis needed: geographic location, neighborhood, population/demographics, competition - Brick and mortar location = added expense - Lender may either sell loan post-closing to investors, or portfolio it but typically retains the servicing
Compensating factors
- Can justify risk of higher expense/income ratios like: - Large down payment - Demonstrated ability to save - Significant liquid assets and reserves for contingencies - Demonstrated excellent long-term credit use - Income not counted toward qualifying ratios (less than 2 yr history) - Pending salary increases - Reduction in monthly payments
TILA Mortgage Loan Originator Compensation
- Comp can not be based on the terms of the transaction - Prohibits compensation from the consumer and creditor - Makes originator screening and training more consistent between banks and non-banks - NMLS number required on certain documents
appraisal red flags
- Comp sales are not similar in size, style, and age to subject property - Subject property is not bracketed by the comps - At least one of the comps should be selling for a little less than the subject, and at least one should be selling for slightly more than the subject - Comps are separated from the subject property by highway, park, industrial park, gold course, or lake
Market analysis strategies
- Consumer direct - internet, radio, print, direct mail, and phone - Walk-in locations - B2B relationships
correspondent origination cost structure and profitability
- Costs less than retail to originate but since they are not servicing, results in less revenue - Gains revenue from sale of the loan to the wholesaler
Product Development
- Creating a Loan Product - Balancing Act
Prevalent mortgage fraud methods
- Creation of a borrower from thin air - Straw buyer/borrower - Employment and income fabrication and misrepresentation - Down payment and asset fabrication and misrepresentation - Credit misrepresentation or concealment - Occupancy fraud - Property value misrepresentation - Fraud at the closing table - Reverse mortgage - Spoofing
Ability to repay requirements (ATR)
- DTI 43 or GSE eligible - Expands safe harbor - Increase small loan definition - Broaden right to cure for DTI and other technical errors - Fix appendix Q - Revise points and fees definition
Secure and Fair Enforcement for Mortgage Licensing (SAFE Act)
- Defines the activities of a originator and the compliance requirements for all originators - Registration to NMLS for mortgage bankers, mortgage brokers, and depositories - Registration to State licensed registry is for mortgage banks and brokers
Appraisals
- Determination of fair market value of the property - Ordered when the application is taken - Appraisers must be state certified - FHA loans- HUD-approved appraisers only - VA determines which appraiser will be used - Appraiser considers the site, amenities, and physical condition of property - Final appraisal presents visual picture of neighborhood, site and improvements of the property - Used to verify that the property serves as adequate collateral for the loan amount being requested
wholesale origination benefits
- Have the ability to generate large volumes quickly - Geographic diversity in the servicing portfolio - Ability to reduce overall loan origination costs
Collateral
- How well will the property serve to recover the loan balance if the borrower defaults - Appraisal review and analysis - Ensure that appraiser is qualified - Ensure that property value substantiates the loan - Assesses approach to estimated value - Assesses appraiser's considerations - LTV
Appraiser Independence Requirements (AIR)
- Developed by GSEs, FHFA, and industry participants to replace the Home Valuation Code of Conduct (HVCC) - Ordering process must be separate from loan production (without influence) - Appraiser must be state licensed/certified - Applies to all loans of one- to four- unit properties, except government-insured loans - Mortgage lenders and other 3rd parties are prohibited from influencing the appraiser in the development of the opinion of value - Borrowers must be given a free copy of the appraisal no less than 3 days prior to closing borrower may pay for appraisal but not for copy) - Sets restrictions on the selection, retention, and compensation of the appraiser
Nonconforming loans
- Do not meet requirements for purchase by GSEs - Often have higher interest rates - Non-QM
Branches
- Enable mortgage lenders to collaborate with individual LOs - "net branches" handle administrative functions
QA/QC department must
- Enable the lender to detect fraud - Be independent of sales/origination and underwriting - Be staffed by experienced mortgage personnel - Have a direct communication line to senior mgmt - Encourage due diligence on professionals
Processing quality measures
- Ensure order-outs such as the appraisal are completed in accordance with guidelines - Complete verifications according to the company's guidelines - Monitor regulatory compliance regarding disclosures and timelines - Identify agency, investor, and company requirements, particularly with respect to procedures and documentation - Check file for completeness and determine any additional documentation needed to complete a file - Detect discrepancies between information and documentation, and resolve or report such discrepancies to the LO or other supervisor if necessary
Truth in Lending Act (TILA - Regulation Z)
- Ensures applicants are informed on the true cost of credit - Allows borrower's right of rescission - Requires lenders to inform their customers of the direct and indirect terms and conditions of their credit arrangement - Attempts to give the applicant information to compare and understand the lender's loan programs - Has specific guidelines on timing of disclosures at the time of application and through life of loan - Requires upfront disclosures no later than 3 days after application received - Requires a max interest rate be disclosed and stated in a variable rate
Assets
- Evaluate applicant's available resources to cover: - Down payment - Closing costs - Adequate liquid assets - Reserves (standard reserves = 2 months of PITI
Appraisal Regulatory requirements
- Evidence for such fees may be established by objective 3rd party information, such as government agency fee schedules, academic studies, and independent private sector surveys - Fee studies shall exclude assignments ordered by known appraisal management companies - Valuation Independence Rules - Reg Z - Misconduct by an appraiser or AMC must be reported to the appropriate state agency -The appraisal fee must be reasonable and customary for the market
Loan-to-value (LTV) ratio
- Expressed as a % of the property's value - LTV= loan amount/sales price or appraised value (whichever is less) - The lower the LTV, the higher the equity interest in the property; risk is reduced
Affordable housing programs
- FHA - USDA - VA - MBA Convergence - State bond programs - Section 8 - Making Home Affordable Program - Fannie (HomeReady, HomeStyle) - Freddie (HomePossible, ChoiceRenovation, HomeOne)
Standard ratios
- FHA - HTI=30% DTI=43% - VA - HTI=n/a (uses residual income concept) DTI=41% - Conventional - HTI=28% DTI=36% - Jumbo - HTI=33% DTI=38%
Uniform Residential Loan Application (URLA)
- FNMA (Form 1003) FRE (Form 65) - Borrower information - Employment and other income information - Financial information regarding assets and liabilities - Financial information regarding real estate - Loan and property - Allows for the appropriate documentation of the file - Leads to efficient closings - Decreases applicant frustration - 9 sections
Fair lending laws
- Fair Housing Act (FHA) - Equal Credit Opportunity Act (ECOA - Regulation B) - Home Mortgage Disclosure Act (HMDA - Regulation C) - Community Reinvestment Act (CRA - Regulation BB)
Valuation Independence Rules - Reg Z
- Federal law imposes requirements on the valuation process to ensure "independence" including the following: - Appraiser selection - Ordering the appraisal - Compensation for the appraisal - Conflicts of interest - Corporate independence
Property Inspection Waivers
- Fieldwork recommendation that results in an offer to waive GSE appraisal requirement - When a loan casefile is eligible for the PIW and the waiver is exercised by the lender and GSE accepts the submitted value estimate as the market value for the subject property - GSE provides R&W relief on the value, condition, and marketability of the property
Closing
- Finalize the legal transaction between the mortgage lender and the borrower - Generate a properly executed, quality loan product that meets regulatory requirements and investor guidelines - Complete final QC check to ensure compliance with applicable guidelines and regulations - Create the mortgage obligation - Distribute funds - Legally transfer the title
payment types
- Fixed-rate mortgage - ARM - Hybrid - Temporary buydown
Prevalent mortgage fraud schemes
- Flipping - Chunking - Property theft - Air loans - Foreclosure "rescue" (equity stripping)
Types of fraud
- Fraud for housing - Fraud for profit
Housing-to-income (HTI) ratio
- Front-end ratio - HTI= total monthly housing expenses/GMI - Calculated % of gross monthly income paid for housing expenses
Appraisal Types
- Full residential appraisal - Drive by - Field review - AVMs - Property Inspection Waivers
Ways loans can amortize
- Fully amortizing - Non-QM - Balloon - Interest only (IO)
QM Points and fees cap
- Generally 3% of total loan amount - Higher caps for loans <$110,260 - Up to two additional bona fide discount points allowed depending on rate
4 factors when performing market analysis
- Geographic area - where to originate - Neighborhood - Population - Competition
Convertible ARM
- Hybrid ARM that allows the borrower to start with a lower rate ARM and convert to a 30yr fixed loan at a specified conversion rate. - If the interest rate is at a higher level when it is time to convert, the borrower can choose to keep it as an ARM loan
Two-step mortgage
- Hybrid ARM that offers fixed rate for set time and adjusts only once, usually at 5-7 years. - After, interest rate is adjusted to market conditions
Types of ARMs
- Hybrid ARMs - Two-step mortgage - Convertible ARM
right of rescission starts
- If a person is buying a home with a mortgage, they do not have the right to cancel the loan once the closing documents are signed - If they are refinancing a mortgage, they have until midnight of the 3rd business day after the transaction to rescind the mortgage contract - Right of rescission only applies to borrower's primary residence - 3-day clock starts when all of the following has happened: - They sign the credit contract - They receive TILA disclosure - They receive 2 copies of a notice explaining your right to rescind - Business days include Saturdays but not Sundays or legal public holidays
Ability To Repay (ATR) - 8 provisions
- Income or assets - Employment status - Fully amortizing mortgage payment - Simultaneous debts secured on the same property - Property taxes, insurance, and condo fees - Debts, alimony, and child support - DTI ratio - Credit history
Payment Shock
- Increase in housing payment - This is new housing payment divided by existing housing payment
FHA Loans
- Insured by the Federal Housing Administration against foreclosure loss - Borrowers are charged a Mortgage Insurance Premium (MIP) - Loans are designed for the low and moderate housing market - Lower min credit score - Lower down payment
Loan Features
- Interest rate - Payment type - Payment frequency - Loan amortization - Loan term
Adjustable-rate mortgage (ARM)
- Interest rate increases or decreases over the life of the loan - Changes in interest rate are determined by: Market conditions and Financial indices
Fixed-rate mortgage
- Interest rate is set at the inception of the loan - Rate does not change for the life of the loan
Effective processing involves
- Knowledge programs, products, and their requirements - Successful communication with the borrower and the LO - Regular follow-up on requested documents - Anticipation of underwriter concerns - Effective use of technology - Proactive, team approach to loan approval
Realtor origination
- LO obtains spot loans on a individual basis through real estate brokers - Spot loans are usually made on existing properties
Builder/Developer origination
- LO serves as primary financing agent for an entire new subdivision - Commitment to builder/developer to provide long-term financing to an owner /occupant who has not been approved yet - Construction-to-perm loans - used to build a residence that converts to a specified loan product type at the end of construction
Lender-Paid MI
- Lender can provide a credit to cover the cost of the MI premium - Usually results in higher interest rate for borrower - Stays on the life of the loan
Wholesale origination channel
- Lender that obtains closed/funded loans from brokers and/or correspondents - Geographic flexibility increases profit potential - Correspondent - closes and funds, then sells to wholesaler - Broker - takes application, then forward to investor/lender for closing/funding - May purchase loans singly (brokers) or in bulk (correspondents) - Has option to table fund
correspondent origination channel
- Lender that originates, processes, underwrites, and closes loans using its own funds, but doesn't service the loans - Funds loans
Conventional MI
- Less expensive - Can be automatically terminated or has the ability to have borrower requested cancellation based on either original value or with a new appraisal at the current value
Credit history
- Level of indebtness - Delinquencies - Types of credit - Balances vs. available credit - Types of credit available - Slow pays - Recent credit inquiries - Bankruptcy - Foreclosure
Qualified Mortgage Defined
- Limits on loan features - Points and fees cap - Relevant underwriting requirements
Qualified Mortgage GSE Eligibility
- Limits on loan features - Same as permanent definition - Points and fees cap - Same as permanent definition - Relevant underwriting requirements - Must be eligible for purchase, guarantee, or insurance by: Fannie Mae or Freddie Mac (sunsets when conservatorship ends or 7 years) HUD, VA Department of Agriculture or Rural Housing Service (sunsets when agency rules take effect or 7 years)
File and documentation review
- Loan application - Credit report - Proof of fees paid - Contracts related to transaction - Regulatory disclosures
Regulatory disclosures in loan file
- Loan estimate - Settlement cost booklet (your home loan toolkit) - Servicing disclosure statement - Adjustable-rate disclosure rider, if applicable (required on ARM loans) - Any state application disclosures (if necessary)
Verification of Deposit (VOD) red flags
- Low-income applicant with large amounts of cash on deposit - Inconsistent typeface or handwriting throughout the form - Post office box for the depository address - Excessive amount in checking account versus interest-earning savings account
Single MI premiums
- Lump sum premium that can be paid in cash by borrower, though seller concessions or from a lender credit - Can be refundable (more expensive) or non-refundable (most common) - Must be disclosed on the CD and the LE and must be counted in the points and fees rules
MBA Convergence
- MBA initiative that is driving collective action with lenders, other industry participants, and gov't partners to facilitate new solutions to the nations rental and housing affordability challenges - Promotes more sustainable, affordable homes for purchase and rental for underserved people and communities, especially minorities and low-to-moderate-income Americans
Affinity relationships
- Marketing arrangements between mortgage lenders and individual companies, trade and professional associations, or local government organizations - Strategy offers employees or members special rates or services in exchange for volume of loans the affinity group provides the lender
Conforming loans
- Meet requirements for purchase by GSEs - Loan limit requirement - Solid borrower credit - Standard documentation
Debts
- Monthly housing expenses - Loans, credit cards, etc - Alimony/child support
FHA MI
- Mortgage Insurance Premium (MIP) - Used to protect against losses within the FHA program when borrower defaults - Calculated on both an annual basis and then divided into 12 payments and collected monthly - Also an upfront MIP that is charged of 1.75% of the loan amount and most often is financed into the total loan amount - Non-refundable for loans with LTV greater than 90% (cancellable after 11 years)
Monthly housing expenses
- Mortgage payment - Mortgage insurance - Special assessments - HOA or condo dues if any
Income approach
- Most appropriate for investment loan where applicant wants to rent out property - Calculations - Calculate the amount of rent the property is expected to generate - Subtract the rental losses from expected vacancies - Subtract operating costs
Cost approach
- Most appropriate if the property is unique (i.e. church) - Based on the theory that no property has greater value than the cost of replacing it - Calculations - Derive a value for the lot as if it were vacant - Estimate the cost of constructing the structure using current materials - Depreciate the cost to reflect current condition of property - Add depreciated cost to value of the lot to produce an estimated value for the property
Monthly MI premiums
- Most common - Calculated on a yearly basis and then divided into 12 payments which are added to monthly PITI and collected with the monthly payment
30 year fixed rate mortgage
- Most common - Offers lowest monthly payments b/c 40 has higher interest rates
Sales approach
- Most common method - Based on sales prices of comparable properties - Calculation - Select at least 3 comp properties that have sold recently and are like the subject property - Adjust for any dissimilar features - Designate a value for the subject property using adjusted values
Second home
- Must be occupied by the borrower for some portion of the year - Restricted to one-unit dwellings - Must be suitable for year-round occupancy - The borrower must have exclusive control over the property - Must not be rental property or a timeshare arrangement - Cannot be subject to any agreements that give a management firm control over the occupancy of the property - A LLPA applies to certain loans secured by second homes - in addition to any other price adjustments that are otherwise applicable to the particular transaction
Suspicious Activity Report (SAR)
- Must report any cash transaction where the customer seems to be trying to avoid BSA reporting requirements - Must be filed if the customer's actions suggest there are laundering money or otherwise violating federal criminal laws and committing wire transfer fraud, check fraud, or mysterious disappearances
Nationwide Mortgage Licensing and Registry System (NMLS)
- National repository created by the SAFE act to serve as the primary repository and regulation system for both federal registration and state licensing of both companies and individuals in the business of originating residential mortgage loans - Depositories, non-depositories, individual mortgage loan originators
Loan application red flags
- No SSN - No details of the purchase transaction listed - Same current address as the employer's address, but borrower does not indicate being self-employed - Claim of being with current employer for more than one year, but income is in round dollar figures - Liquid assets that exactly match the funds needed to close
Refinance
- No buyer/seller on refinance - The appraisal may be waived on a refinance if the previous appraisal is less than 6 months old or the LTV is low - Documentation can be streamlined on a refinance - The customer generally does not have to pay closing costs and settlement charges for the refinance out of their pocket - the costs are included in the loan amount - Title insurance is typically less costly than a purchase - No realtor involved with fees on refinance
QM Limits on loan features
- No negative amortization or IO periods - No balloon payments - Loan term may not exceed 30 years
Conventional loans
- Not insured or guaranteed by the federal gov't - Can take on any form that the borrower and mortgage lender agreed to, subject to state and local laws - May require private mortgage insurance if the loan amount exceeds 80% of the value of the property
Government Loan Programs
- Offer gov't insurance or a gov't guarantee that protects the mortgage lender against the loss due to borrower default - VA - FHA - USDA
USDA Loans
- Offered and guaranteed by the Rural Housing Service with the US Dept of Agriculture - Protects mortgage lenders who make these loans on residential properties in rural areas - Offers direct lending to qualified borrowers - Low interest rate - Zero down payment (100% LTV) - Income limitations based on county and household size - Owner occupied only
VA special features
- Only offered to veterans, those on active duty reserves, and their surviving spouses (unmarried co-borrowers also eligible) - Little or no down payment required - Veteran charged a funding fee for VA's guaranteeing the mortgage loan - Fee can be financed as part of the loan amount -Veterans must obtain a certificate of eligibility. May not have a dishonorable discharge - Residual income requirement - Owner occupied only
Piggyback Loan
- Origination of a second mortgage (often by the first mortgage lender) that closed simultaneously with the first loan - Created to assist borrowers who wanted to avoid paying PMI
Investment properties
- Owned but not occupied by borrower - LLPA applies to all mortgage loans secured by an investment property - in addition to any other price adjustments that are otherwise applicable to the particular transaction
Non-QM amortizing Balloon
- Periodic installments of principal and interest that do not fully amortize the loan - Borrower required to pay a large amount (or balloon) payment at maturity - Borrower's payments do not actually fully pay off the loan at the end of the term
Fully amortizing
- Periodic payments of P&I - Calculated to fulfill the obligation completely at maturity - Because principal is paid, the outstanding balance of the loan declines over time - May be in place for life of loan or may follow short interest-only period
Types of second mortgages
- Piggyback - Home Equity Line of Credit (HELOC)
QA functions
- Pre-funding/pre-closing - Post-closing - Resolution - Recovery - Fraud referral - Feedback to other functions - Evaluation of process and procedure - Ongoing training - Reporting
Occupancy types
- Primary residence - Second home - Investment properties
Equal Credit Opportunity Act (ECOA - Regulation B)
- Prohibits discrimination based on any of the 9 prohibited aspect of the credit transaction show below - Sex, marital status, age, race, color, religion, national origin, receipt of public assistance benefits, applicant's exercise of any of his or her rights under the Consumer Credit Protection Act - Defines when an inquiry about a loan becomes an application - Requires disclosures for the status of a loan - Amended by Dodd-Frank - Requires lenders to provide the borrower with copies of appraisals and other written valuations conducted as part of the credit process for most loans
Closing documents
- Promissory note - Riders and/or addenda to note - Security instrument (mortgage or deed of trust) - Closing disclosure - Title insurance policy - Hazard insurance policy - Initial escrow statement - Real estate contract - HOA agreement - ARM rider
Primary residence
- Property that the borrower occupies as his or her primary residence - Multiple borrowers, parents or legal guardian wanting to provide housing for their handicapped or disabled adult child - Children wanting to provide housing for parents
Transaction types
- Purchase - Refinance
Contracts related to transaction
- Real estate sales contract - Lock-in agreement - signed by the applicant and lender specifying the interest rate, the discount points, and the number of days the lock is effective - Earnest money deposit and source of funds - Subordination agreement, if required - for second mortgages previously secured by the subject property that must agree to keep the second lien position open
B2B relationships
- Realtor origination - Builder/Developer origination - Affinity relationships - Branches
Secure and Fair Enforcement for Mortgage Licensing (SAFE Act) Requirements
- Registration or licensing in NMLS - 20 hours of pre-licensing education - Federal and state testing requirements - 8 hours of continuing education per year - Federal criminal background checks - Assessment of credit and character - State requirements as a specified by each state
Impacts of ATR on MI
- Require MI paid by borrower at the time of closing that is non-refundable must be included in the 3% points and fees calculation - Types of MI that are non-refundable and paid upfront include borrower paid single premiums and the portion of a split premium that is paid upfront
Mortgage insurance
- Required on loans that are sold to GSEs whenever LTV is greater than 80% - Protects lender against a portion of the loss in the event of default - Risk-based so many variable on loan can influence price - Can be private through 6 different MI companies - Can be offered through government programs - In form of monthly payments or upfront premiums or VA funding fees (VA) or Guarantee fees (USDA)
Home Mortgage Disclosure Act (HMDA - Regulation C)
- Requires covered institutions to compile and disclose data about applications they receive and the home purchase and home improvement loans they originate or purchase during each calendar year - Makes information available to the public to show whether financial institutions are servicing the housing credit needs of their neighborhoods and communities - Help identify possible discriminatory lending patterns and assist regulatory agencies in enforcing compliance with anti-discrimination statues - Requires certain lenders to report the ethnicity, race, gender, and gross income of mortgage applicants and borrowers - Lenders must also report information regarding loan location, pricing of the loan, and whether the loan is subject to the Home Ownership and Equity Protection Act (HOEPA) - Lenders must identify the type of purchaser for mortgage loans that they sell
Bank Secrecy Act
- Requires financial institutions in US to assist government agencies in preventing and detecting money laundering - Requires financial institutions to file specific reports electronically with the Financial Crimes Enforcement network (FinCEN) in conjunction with following requirements: - Currency Transaction Report (CTR) - Suspicious Activity Report (SAR) - Foreign Bank Account Form (FBAR) - Money Instrument Log (MIL)
Origination Channels
- Retail - Wholesale - Correspondent - Direct/Call Center/Internet
Retail vs. Correspondent
- Retail typically retains servicing vs correspondents sell servicing - The retail production costs more but results in more income due to servicing - Correspondent - cost less to originate but results in less revenue
Special products and programs
- Reverse mortgages (Home Equity Conversion Mortgage loans) - Second mortgages - Non-QM
Appraisal Valuation Methods
- Sales approach - Cost approach - Income approach
Non-QM amortizing interest only
- Scheduled payments (usually monthly) of only the interest that is due on the loan - No principal is paid - the outstanding balance of the loan does not decline - Feature may be in place for the life of the loan or for a short period of time before P&I payments are required - Borrowers choose IO when the plan to move before the IO period ends, expect their income to significantly increase, receive large bonuses at certain times of the year, or expect value of home to rise sharply
15 year fixed rate mortgage
- Shortens life to 15 years - Interest paid by borrower is significantly less than 30yr - Higher monthly payments
Home Equity Line of Credit (HELOC)
- Special loan product where homeowner borrows against the equity value of their home - Setup as a special line of credit for a max draw vs a fixed dollar amount - Borrowers issued credit cards or checkbooks to access equity - Interest rates on most are adjustable
Hybrids MI Premiums
- Split premiums - Part of the payment is paid upfront and other part is paid monthly - Less common - Used to help borrower qualify and keep their debt ratio lower
AVMs
- Statistical models that assist lenders in determining whether to allow a less costly, streamlined appraisal such as an exterior inspection only or to provide additional support to the appraisal used in determining acceptable collateral for the mortgage transaction - Drawbacks of AVMs include difficulties in statistically quantifying such things as marketability
Opinion of value
- Subjective and dependent on many factors that the appraiser must identify, forecast, and measure - Gives detailed info on the property (interior and exterior condition) - Analyzes the neighborhood and determines whether it is growing, declining, or stable - Notes the public amenities available to the property - Comments on any concern caused by physical, economic, or hazardous features that can cause a future decline in value or would need a special type of attention - Adjusts purchase price to determine effect on value for seller contributions - Market conditions addendum
Temporary buydown
- Subsidy of the loan interest rate - Helps the borrower meet the payments during the first few years of the loan by: - Advancing money to an individual to reduce the monthly payments of the borrower (generally 1-3 years) - Increasing payments each year until the buydown funds are paid out - Payments revert to those stated in the note once buydown period has ended - Generally used for construction lending
Credit score
- Summary of information on the credit bureau file - Ranks consumers according to risk - Typically a single 3-digit number
Consumer Financial Protection Laws
- TILA-RESPA Integrated Disclosure (TRID) - Ability-to-repay requirements (ATR) - Real Estate Settlement Procedures Act (RESPA - Regulation X) - Truth in Lending Act (TILA - Regulation Z) - Secure and Fair Enforcement for Mortgage Licensing (SAFE Act)
Reverse mortgages (Home Equity Conversion Mortgage loans)
- Tax-exempt loan that allows homeowners age 62 and older to convert home equity into cash - Requires the owner to pay taxes, insurance, and maintenance. Failure to pay property taxes and insurance may result in default according to the terms of the note - Does not require repayment until the homeowner moves out, sells the house, or dies - May be called due and payable if certain conditions are not met - FHA's Home Equity Conversion Mortgage (HECM) is only reverse mortgage insured by US gov't - Insured by HUD - Higher fees and interest rates - Seniors taken advantage of by unscrupulous lenders - Inheritance risk - heirs might not have the funds to pay off the loan
ARM features
- Terms - 6month, 1/1, 5/1, 7/1, 10/1, etc - Often offers a lower initial rate than a fixed-rate mortgage - Fixed for an initial period, then adjust periodically
Product development balancing act
- To create a successful loan product, you have to balance borrower needs and investor appetites - Borrower needs - Money (income and credit) - Flexibility - Properties - Investor appetite - Risk of default or loss - Cost of servicing - Potential fraud - Prepayment speeds - Liquidity - Niche in the market - Market for securities backed by such loan products
State bond programs
- US Department of Housing and Urban Development (HUD) gives grants to state and local organizations nationwide - These organizations, in turn, uses these funds to help homeowners bridge the down payment gap - State and local housing finance agencies (HFAs) administer many of these programs
Appraisal Documentation requirements
- Uniform Residential Appraisal Report (URAR) (FNMA Form 1004, FRE Form 70 - Included in report - 2 full sets of color pics of property - 2 sets of color pics of each of the 3 comp sales - Room sketch and floor plan - Location map, identifying the subject and all comparable sales - FEMA 10-digit flood map ID number (if in flood zone)
Fraud for housing
- Unsophisticated/simply planned - Intent is to repay the note - Smaller losses per individual transaction - One loan per borrower, generally - Few misrepresentations per loan file - Those involved generally are not paid for their part in misrepresentation - Primarily found in income, asset, or transaction funds docs
QM Relevant underwriting requirements
- Use max rate in first 5 years after first payment, full amortization - Consider and verify income or assets - Consider and verify current debt obligations, alimony, and child support - Monthly debt-to-income ratio cannot exceed 43%
Bi-weekly fixed rate mortgage
- Variation of the 30yr - Requires 26 payments per year - Each payment is half the size of a monthly mortgage payment - Substantially decreases total interest costs - Quicker loan amortization - Shortens loan term to approx. 24 years - Appeals to budget conscious borrowers who want to pay from each paycheck
Verification of Employment (VOE) red flags
- Verification of employment form is signed by someone with same or similar name to another part in the transaction - Bank statements and flow of funds into the bank account are not consistent with type of employment claimed - W-2 employee shows erratic and inconsistent deposits - Borrower's name or initials are in the employer's name, but borrower claims not self-employed - Dates are inconsistent on the form - Income amounts in round dollar figures
Fraud for profit
- Very well planned and orchestrated - Intent is to flip the property or to eventually default (bust out) - Large losses per individual transaction - Often times there are many loans involved in one scheme - Multiple misrepresentations (may include identify theft) - Participants are often paid for their part in the fraud - Goal is to make a quick profit
Pre-closing/Funding QA
- Volume of audited loans determined by company - Underwriter referral - "High risk" - recommend 100% audited - New and "watch list" players - New and "watch list" channels - New and "watch list" service providers - Product types
Post-closing QC
- Volume of audited loans determined by internal or investor guidelines - Standard guideline is 10% of all closed loans - Random - Strategic sampling - Targeted (discretionary) - Early payment default (EPD) - High default - Product - Player
Retail vs. Wholesale
- Wholesale channel has geographic flexibility vs retail is defined by the physical limits of its sales force - Wholesale can easily switch to more profitable markets based on economic conditions enhancing profit potential - Retail shops have fixed costs of a brick and mortar location
capacity
- Will the borrower be able to make the monthly payments - Ability to repay the loan - Income sources - Assets - Expense/income ratios
Credit/character
- Will the borrower be willing to repay the loan in a timely manner and in accordance with the terms of the loan - Willingness to repay the loan - Credit history - Credit score
Capital/Cash
- Will the borrower have cash to close - Liquid assets for down payment, closing costs, and financial reserves to maintain loan payments - Evaluate with - Verification of deposit - Bank statements/transaction history - Verification of assets - Closing disclosure from sale of real estate - Verification of gift funds - Verification of grants
the 4Cs
- cash/capital - collateral - credit/character - capacity
Types of Conventional Loans
- conforming - nonconforming
Income sources
- employment - Interest/dividends from investments - Alimony/child support - Public assistance - Retirement/pension - Rental income/loss
Types of Nonconforming loans
- jumbo - subprime
Housing & debt ratios
- o Starting point for mortgage lender to evaluate capacity to repay loan - Housing-to-income (HTI) ratio - Debt-to-income (DTI) ratio
Gross monthly income (GMI)
- total income before deductions - Received for 2 years and expected to continue for 3 years - GMI is the denominator for qualifying ratios
Direct/Call Center/Internet origination channel
Similar to retail but this model derives business only from online sources and/or from either an inbound or outbound call center
Wholesale vs. Correspondent
Correspondent sells servicing rights and is compensated at time of sale vs wholesale services the loan and runs risk of prepayment
wholesale origination compensation rule
Compensates originators based on the value of the loan (committed price) plus the value of the servicing rights (SRP - Servicing Release Premium) and if closed with an above market rate, then a YSP (Yield Spread Premium) is added
Retail origination compensation rule
Compensation to the loan originator is fixed per loan
Retail origination benefits
Greater ability to reduce fraud (centralized operations)
correspondent origination benefits
Greater ability to reduce fraud (centralized operations)
wholesale origination cost structure and profitability
Have more profit potential if fraud is reduced, loans do not churn, loans are competitively priced because of benefits
Creating a Loan Product
Involves meeting needs and pairing needs with what programs and products are available in the market to determine what is best for the borrower
Field review
Is subject to another drive-by or in-person inspection of the property
Money Instrument Log (MIL)
Must indicate cash purchases of monetary instruments such as money orders, cashier's checks, and traveler's checks valued between $3k and $10k
correspondent origination compensation rule
Pays originator a fixed amount per loan
right of rescission transaction type
Primary residence refinance transactions
Direct/Call Center/Internet origination benefits
Reaches more markets from one central location
Currency Transaction Report (CTR)
Reports cash transactions exceeding $10k in a single day, whether in one or multiple transactions
Retail vs. Call Center/Internet/Direct Mail
Retail is defined by its sales force physical location vs call center model can reach a greater number of consumers from one location
Right of rescission executed
The lender must give up its claim to the property and refund all fees within 20 days
Foreign Bank Account Form (FBAR)
US citizens and residents with a financial interest in or authority over foreign bank accounts or "foreign financial accounts" with an aggregate value of $10k are required to file a Foreign Bank Account report (FBAR) with the US Treasury by October 15 each year
Qualifying VA residual income
VA does not have a max DTI ratio but generally recommends a DTI of no greater than 41%
Retail origination cost structure and profitability
Will cost more to uphold a physical location and the cost to originate are high but have income potential in servicing revenue
Housing-to-income ratio (front-end) indicates
ability to cover fixed monthly mortgage
Total debt-to-income ratio (back-end) indicates
ability to cover monthly housing and other existing debts
Appraisals competed "as is" condition of the property
existing conditions are minor and do not affect the safety, soundness, or structural integrity of the property, and the appraiser's opinion of value reflects the existence of these conditions
Single family house (SFR)
separate freestanding residential building with one occupying family
Subject to repairs or alterations
the appraiser is stating that either repairs or alterations to the property must take place, requiring a final inspection for the property to have the determined valuation
2-4 family
two or more residential units are attached, either side-by-side or one above another
Cooperative (Co-op)
usually owned by an association where residents own shares in the co-op
Condo
usually residential property attached to other units where only part of the property is owned
