Week 1 - Originations & Loan Production

Conforming loan limits:

-- single-family one-unit properties in the contiguous states, District of Columbia, and Puerto Rico is $453,100. -- single-family limits for Alaska, Guam, Hawaii, and the U.S. Virgin Islands are $679,650. -- the maximum limit is $625,500 in certain designated high-cost areas -- the Max is $938,250 for certain high-cost areas within AK, Guam, HI, and USVI.

The process of creating a loan involves a number of different activities, including:

1. Meeting needs (borrower's needs and investor's appetites) 2. Pairing needs with available programs/products 3. Differentiating between what programs/products are easiest to qualify for 4. What is best for the borrower

2/28 adjustable-rate mortgage

A 2/28 (3/27, etc.) ARM is a type of hybrid adjustable-rate mortgage in which the rate is fixed at a higher rate than the fully indexed rate for the first two years, then adjusts every six months for each of the next 28 years, unless refinanced, to the value of a rate index at that time, plus a margin. These margins can be high, so the payment almost always goes up even if market rates are the same or lower. For example, the rate is eight percent for two years and the index is currently four percent, but the margin at the end of two years is six percent. Even if the index remains at four percent after two years, the loan rate will jump to 10 percent. These loans often are offered to borrowers with lower credit scores who may not qualify for a conventional loan. The idea is to give these borrowers two years to rebuild their credit and become eligible to refinance at a better rate. These borrowers may avoid private mortgage insurance (PMI) because often the two-year ARM is for 80 percent of the sales price and is combined with a loan on the other 20 percent that usually has a fixed rate with a balloon payment. This enables borrowers to finance 100 percent of the sales price (but not the closing costs.) Those who get a 2/28 usually plan to refinance in two years, but it is important to make sure the prepayment penalty does not run past the two-year mark.

Convertible ARM

A convertible ARM is a hybrid ARM that allows the borrower to start with a lower-rate ARM and convert to a 30-year fixed loan at a specified conversion rate. In other words, at a specified time, the rate stops adjusting and remains the same for the rest of the loan. However, if the interest rate is at a higher level when it's time to convert, the borrower may not want to do it. In that case, the loan would become a regular ARM, which would continue to adjust. A convertible mortgage enables borrowers to have initially lower payments with the option to make it a fixed-rate mortgage at the time of conversion, when payments could go up. There is usually a fee to be paid when the loan converts, and the rate can be slightly higher than the going rate for fixed-rate loans.

'ABCD' prime/sub-prime loan classification is actually four categories:

A-paper borrowers have good credit histories, B-paper have some credit issues, C have only fair credit, D have serious delinquencies, or major credit problems such as bankruptcies or foreclosures.

Amortization

Amortization means the pay down of the loan over time — principal payments applied reduce the principal balance of the loan. As principal payments are applied, the loan balance declines and interest is reduced. The reduction in interest in each payment results in ever-increasing loan principal application as the loan moves closer and closer to maturity. • Includes the following: — Fully amortizing — Balloon — Interest only (10) — Negative amortization

Document Management Systems:

Benefits include: ¥ ability to produce the appropriate documents for a particular loan based on loan information ¥ some third-party service providers including compliance checks with a document generation service ¥ delivery focuses on sending documents to a web site for closing agents and/or customers ¥ immediate delivery and avoidance of express mail or courier fees

Department of Veterans Affairs (VA) and VA Loans

Established by Congress in 1944 as part of the Servicemen's Readjustment Act or "GI Bill" • Special features include: — Only offered to veterans, those on active duty or reserves, and their 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 pan of loan amount • Veterans must obtain a certificate of eligibility — Through an online portal, through a lender, or by submitting a written Request for a Certificate of Eligibility (VA Form 26-1880) • VA guarantees only the following: — A portion of the balance against foreclosure loss (25%) — Repayment of mortgage loans made to qualified veterans up to a specified amount

Federal Housing Administration (FHA) and FHA Loans

FHA was created by the government in 1934 • Insured by the Federal Housing Administration against foreclosure loss • Special features include: — Borrowers are charged a mortgage insurance premium (MIP) • upfront premium at closing 175 basis points (1.75%) of the base loan amount • Annual premium is based on LIV, loan amount, and amortization term and is included in monthly payment. For most loans: 80 basis points — Designed for low- and moderate-housing market • Generally benefit: — First-time buyers — Borrowers with cash liquidity restrictions — Borrowers who do not meet criteria of the conforming market

Practice Quiz

I. Several supporting documents are supplied by the applicant. Name three of these documents. 1) 2) 3) 2. For each of the following applicants, select a loan program (FHA, VA, Conventional, or USDA/RuraI Housing Service) that will probably be best. I) Veteran: 2) Low-income applicant in a rural community: 3) First-time homebuyers with few funds for down payment: 3. Name and describe two ways that title to real property can be held. 1) 2) 4. Name three types of documents used to verify income for self-employed applicants. 1) 2) 3) 5. Section VIII (Declarations), requires the borrower and co-borrower to answer "Yes" or "No" to important declarations as they apply. Name five declarations requested in this section. 1) 2) 3) 4) 5) 6. Explain what happens after the initial loan application is completed. 7. Indicate whether the following statement is true or false: If the applicant does not furnish ethnicity, race, or sex, under Federal regulations, the mortgage lender is required to note the information on the basis of visual observation and surname, if the applicant was present. a) True b) False

Borrower needs include the following key factors:

Money (income and credit) Flexibility Properties

Monthly Mortgage Payment

PITI - The monthly principal, interest, tax, and insurance payment, or PITI, demonstrates what a buyer's actual payment will be including property tax, hazard insurance, flood insurance, mortgage insurance (PMI), as well as HOA or condo dues. — Pl: Monthly Principal and Interest payment — T: Monthly real estate property Taxes — l: Monthly Insurance payments that may include: • Monthly homeowners (& flood) insurance for all properties except condominiums • Mortgage insurance for all FHA mortgages & conventional mortgages with less than a ¥ down payment ¥ HOA or condo dues

key factors that affect an investor's appetite for loan products:

Risk of default or loss (return required for associated risk) Cost of servicing (high cost to service due to complicated structure) Potential fraud Prepayment speeds

Calculate the Monthly Mortgage Payment

TASK: Compute the monthly P&I (principal and interest) payment for a $200,000 loan at 8% interest for a term of 30 years ¥ Steps Keys Display ¥ Clear Calculator on/C on, C 0.00 ¥ Enter Loan Amt 200,000.00 ¥ Enter Term 30.00 ¥ Enter Interest 8.00% ¥ Find Payment ¥ 1,467.53

Goals of Quality Control

The goals of quality control in loan production include the following: • Verify the existence and accuracy of information • Evaluate the quality of originations from mortgage loan originators, mortgage brokers, and correspondents • Identify ineffective, inconsistent or ambiguous procedures • Uncover single and/or recurring errors • Pinpoint communication deficiencies • Ensure compliance with investor/insurer requirements • Keep pace with changes in the industry • Identify training deficiencies

Low or No Documentation Loans

This type of loan is only for borrowers who have trouble verifying all of their income. These usually include self-employed borrowers, commissioned professionals, or service-industry professionals (bartenders, waitresses, hair stylists, etc.) who rely on tips for a substantial part of their income. The mortgage lender does not require proof of income and assets. No ratios (debt-to-income or housing-to-income) are considered. The interest rate can be significantly higher because the mortgage lender is assuming a higher risk of default. A larger down payment also may be required, and the borrower's credit score usually must be very high.

Define and Describe Unlerlying ARM Indices:

Treasury — this is the average yield on U.S. Treasury securities of all maturities, adjusted to a common maturity of 1 year. It is updated monthly after the Federal Reserve releases the information on the first Monday of each month. LIBOR — London Interbank Offered Rate. This is based on the rates that contributor banks in London offer each other for inter-bank deposits. Because deposits placed in a bank basically represent a loan of those funds to the bank by the depositor, so the rate paid on the deposit can be interpreted as an interest rate for the loan of the funds. Complex calculations are performed to take into account the variability of time, maturity and exchange rates. COFI — Cost of Funds Index. This index is based upon the cost of funds of the 11th District of the Federal Home Loan Bank. Prime rate — the rate commercial banks charge their most credit worthy borrowers for short term loans. Prime is often the yardstick for interest rate trends and is often the baseline for interest rates charged on high risk loans. MTA — Monthly Treasury average; the 12-month average of the monthly average yields of U.S. Treasury securities, adjusted to a constant maturity of I year. In other words, this average is calculated by averaging the 12 most recent values of the I-year CMT. Because it is a rolling average, this index is more stable than the I-year Treasury index, which is simply a snapshot of the indexes value on one given month each year. Some view this index as more stable and predictable than other indices.

Automated Valuation Models:

o Automated valuation models are statistical models that assist mortgage 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. o Drawbacks of AVMs include difficulties in statistically quantifying such things as marketability.

CAIVRS:

o FHA Connection enables processors to check a borrower's credit history with the federal government via the Credit Alert Interactive Voice Response System (CAIVRS). o FHA Connection also helps processors perform tasks like submitting reports, and correcting branch addresses and other institution data. o CAIVRS contains a list of delinquent federal debtors.

Complete the calculations necessary for a preliminary pre-qualification:

o Qualifying income o PITI o Front- and back-end ratios (housing-to-income and debt-to-income/DTl) o Required cash to close o Borrower cash available to close 3. Identify potential issues that could disqualify the loan or indicate possible quality and/or performance issues.

Assignment of Mortgage

o The assignment of mortgage is the legal instrument assigning all of the mortgage lender's rights, title, and interests in the mortgage to a permanent investor. o The mortgage lender must prepare an assignment of mortgage when the mortgage lender sells the loan to another mortgage lender or to an investor.

Section X: Information for Government Monitoring Purposes

o The last part of the application requests information on the race and gender of the applicants. o The Equal Credit Opportunity Act and the Home Mortgage Disclosure Act mandate that creditors attempt to collect certain information on all applicants who seek credit to purchase or refinance residential property (except by mail or telephone). o The federal government uses this data to monitor mortgage lenders' compliance with fair housing, equal credit opportunity, and home mortgage disclosure laws.

Schedule E - Verification of Deposit (VOD)

o The verification of deposit is used in lieu of bank statements or other cash liquidity statements. o A VOD is sent to each depository in the loan application. o VODs show cash to close as well as borrower cash liquidity. o The borrower must give authorization to send the VOD. o Often, borrowers who have more than one depository account at their bank are likely to have outstanding loans. VODs also include verification of those loans. o If the borrower has funds in multiple banks, VODs must be dated by the repositories within a similar timeframe. This is to assure the borrower has not transferred funds from one account after verification to another account prior to verification. o All liabilities are verified by the credit report, verifications, or alternative credit line sources. o On occasion, if the borrower has no traditional forms of credit, the mortgage lender will allow alternative sources of verification of satisfactory payment history, such as account statements from creditors, utility statements from cellular and phone providers and cable, water, gas, and electric companies. o The most important verification source for debt history, however, is the credit report and accompanying credit score.

¥ The amortization schedule may also show:

o interest-paid-to-date o principal-paid-to-date o remaining principal balance after each payment o total interest paid over entire term o component of finance charges on TIL disclosure

Knowledge of a Proficient Processor

o loan programs, products, and their requirements o regulatory compliance requirements o thorough understanding of loan production process and required documentation

Name three types of documents used to verify income 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

Contracts Related to Transaction

¥ A copy of the real estate sales contract (signed by the buyer, the seller, and either the real estate agents or a notary public in cases when it is "for sale by owner") ¥ The lock-in agreement (sometimes called a "lock") signed by the applicant and lender specifying the interest rate, the discount points and the number of days the lock is effective. ¥ An earnest money agreement ¥ A subordination agreement for second mortgages previously secured by the subject property that must agree to keep the second lien position open

Earnest money contract:

¥ A deposit made to bind the conditions of a sale of real estate.

Verification of Employment

¥ A verification of employment (VOE) is signed by the applicant and sent to the applicant's employer to substantiate the: o borrower's income at the time of application o the history of the borrower's income with the employer o borrower's probable income in the near future o stability of the borrower's income ¥ Copies of the applicant's pay stubs, W-2s, bank statements, and tax returns may be included and are often used as an alternative to waiting for the return of a VOE. ¥ The applicant must establish at least two years' employment history or the applicant must satisfactorily explain the lack of employment history.

Sales contract:

¥ A written agreement between buyer and seller stating terms and conditions of a sale or exchange of property.

Investor Guidelines and Commitments

¥ Agency Ñ Guidelines • Seller/servicer manual serves as overall guide Ñ Master commitments • Negotiated master commitment may modify requirements in guidelines o "A Master Agreement is an 'umbrella' document that supplements the general guidelines and requirements of the Fannie Mae Selling Guide and Servicing Guide and sets forth the additional terms under which Fannie Mae does business with lenders — whether the business relates to MBS pool or whole loan deliveries. ' ¥ Private investor commitment o Offer as agreed upon by secondary marketing, loan production, shipping and delivery, and loan administration Ñ Types ♣ Mandatory ♣ Optional

Changed Circumstances Affecting Settlement Charges

¥ An "extraordinary" event outside control of an interested party or an "unexpected" event; ¥ information creditor relied on is inaccurate or changes; ¥ new information creditor discovers after disclosure not relied on

Second Mortgages

¥ Another loan on the same property (second) ¥ Can have fixed or adjustable interest rates ¥ May have different terms than the first mortgage

Collateral analysis:

¥ Appraisal review and analysis o Ensure that appraiser is qualified o Ensure that property value substantiates the loan ¥ Loan-to-value ratio (L TV) o Determine percentage that loan represents of the property value

Review of Appraiser

¥ As an additional QC measure, the underwriter: o Cross-checks to determine that the appraiser is not included on a list Of appraisers ¥ that the company will not do business with, or... o Checks whether the appraiser is on the approved appraiser list.

Technology in Loan Production:

¥ Automated underwriting systems (AUS) ¥ Customer relationship management (CRM) systems ¥ Loan origination systems (LOS) ¥ Product and pricing engines ¥ Automated Valuation Models (AVM) ¥ CAIVRS ¥ Document management systems ¥ MISMO and Data Standardization ¥ eMortgage ¥ eSignature ¥ MERS eRegistry and eDelivery

Amortization

¥ Breakdown of each mortgage loan payment into interest and principal portions o Substantial disparate allocation of the monthly payments toward the interest during early part of the term o Example: Payment 1 might allocate more than of loan payment towards interest and only 10% toward principal balance o Over 30-year, fixed interest rate term, interest and principal portions might not even out until payment 257 or 21 years into the loan ♣ Only thereafter will a greater portion of the loan payment be applied to principal than to interest

Calculations for the income approach:

¥ Calculate the amount of rent the property is expected to generate. ¥ Subtract the rental losses from expected vacancies. ¥ Subtract operating costs.

Compensating Factors

¥ Can justify risk of higher expense/income ratios ¥ Includes: o Large down payment, low LTV o Demonstrated ability to save o Significant liquid assets and reserves for contingencies o Demonstrated excellent long-term credit use

Several supporting documents are supplied by the applicant. Name three of them.

¥ Certificate of Eligibility (COE) or DD-214 if applying for a VA loan ¥ Canceled checks for mortgages, or rental payments for the most recent 12-month period ¥ Past W-2s, current pay stubs, evidence of other income ¥ Past tax returns ¥ Financial statements (profit and loss, etc.) ¥ Bank statements (savings, checking, investments) ¥ Debt statements (account numbers, addresses, etc.) ¥ Property sales contract

Changed Circumstances Affecting Eligibility

¥ Changes to the transaction that cause fees to increase related to eligibility— ¥ Income comes in lower than initial application, ¥ Employment changes, ¥ appraised value comes in low, ¥ credit score falls, ¥ terms of sales contract change ¥ Consumer Requested Changes — product, rate, features, closing date etc. ¥ Interest Rate Dependent Changes — Float to Lock and Extensions

4 "C"s of Underwriting

¥ Collateral - property appraisal analysis ¥ Capacity - income analysis ¥ Capital (or Cash) - funds analysis credit capacity ¥ Credit- credit analysis

Shipping and Delivery Tasks

¥ Communicate regularly with secondary marketing department to Ñ Keep up-to-date about shipping/delivery deadlines Ñ Meet investors' shipping/delivery requirements • Agency investors — guidelines; master commitments • Private investors - sales commitments • Prepare loan documents for shipping in compliance with sales commitment/investor guidelines • Ship/deliver loan documents to investor according to terms of sales commitment ¥ Follow up

Best practices for efficient and effective shipping and delivery include:

¥ Communicate regularly with the secondary marketing department to ensure commitment deadlines are met. ¥ Communicate regularly with the loan production department to reduce potential for missing documents. ¥ Ensure that each loan file is complete. ¥ Ensure that each loan's security instrument has been recorded. ¥ Ensure each loans compliance with investor requirements.

Processing Tasks:

¥ Conduct initial loan file review ¥ Collect and review supporting documentation ¥ Follow underwriting guidelines for specific products and programs ¥ Prepare and submit completed loan package to underwriting for approval

Promissory Note

¥ Creates the borrower's legal obligation to repay the debt ¥ Fannie Mae and Freddie Mac have standard notes available on their websites

Regulatory Disclosures

¥ Current laws require various disclosure statements signed by the applicant, including but not limited to: o Loan estimate o Settlement cost booklet (Your Home Loan Toolkit) o Servicing disclosure statement o Adjustable rate disclosure rider, if applicable (required on ARM loans) o Any state application disclosures (if necessary) ¥ Most of these disclosures are required at application or within three business days of application.

Credit Score Patterns - Down:

¥ Delinquency rating hits report ¥ Significant balance increases ¥ Recent inquiries ¥ New accounts opened ¥ Public record items

Calculations for the cost approach:

¥ Derive a value for the lot as if it were vacant. ¥ Estimate the cost of constructing the structure using current materials. ¥ Depreciate this cost to reflect the current condition of the subject property. ¥ Add the depreciated cost to the value of the lot to produce an estimate of the value for the subject property.

Initial Escrow Statement

¥ Details specific charges that the borrower will pay into escrow each month as part of the mortgage payment ¥ Federal regulations also require an initial escrow statement for loans where escrows will be collected.

VA Loan Processing Special Requirements:

¥ Determine borrower eligibility ¥ Adhere to specific VA documentation and underwriting guidelines ¥ Use own roster of VA approved appraisers and perform special review of appraisal ¥ Check that parties to transaction are not on any government exclusionary lists ¥ As with FHA, check all parties to the transaction to ensure no one has outstanding issues with any government entity. ¥ Borrower may obtain Certificate of Eligibility personally at www.benefits.gov

Marketing and Soliciting Customers - Strategies:

¥ Direct to consumer o Direct to consumer strategies include the following: internet, radio, television, print, direct mail, and phone. Many mortgage lenders advertise by Internet, social media, radio, television, or print to reach consumers directly. Similarly, mortgage lenders have used direct mail campaigns to entice consumers to call into a telemarketing center for information on loans. ¥ Business-to-business (B2B) relationships o A mortgage loan originator obtains spot loans on an individual basis, mainly through real estate brokers. Since most real estate brokers suggest a mortgage loan company to their customers, developing a relationship with real estate professionals is extremely important for success. o This area differs from Realtor spot loans because the mortgage loan originator may serve as the primary financing agent for an entire new subdivision. In this case, the mortgage loan originator seeks to make a commitment with the actual builder or developer. The commitment is an agreement by a mortgage lender to provide long-term financing to a to-be-approved owner/occupant. In some cases, a financial institution affiliate of the mortgage lender may make a construction loan commitment, which the mortgage lender takes out when a buyer purchases the home. o Affinity relationships are marketing arrangements between mortgage lenders and individual companies, trade and professional associations, or local government organizations. This strategy offers employees or members of such companies or organizations special rates or services in exchange for the volume of loans the affinity group provides the mortgage lender. o Branches enable mortgage lenders to collaborate with individual mortgage loan originators. The mortgage lender sets up "net branches" to handle the administrative functions for the mortgage broker. The mortgage broker or mortgage loan originator pays for the service through a fee collected by the mortgage lender as loans close. This allows an independent mortgage loan originator to do what he or she does best — originate loans.

Conduct Post-Closing Follow-up

¥ Documents are recorded in public records, typically by settlement agent Ñ Deed to transfer title to borrower/buyer Ñ Security instrument to establish mortgage lender's lien position ¥ Loan package is shipped to investor Ñ Coordinate with shipping department

Income Sources:

¥ Employment o Self employed o Salaried ¥ Other income o Interest/dividends from investments o Alimony/child support o Public assistance o Retirement/pension

Required Supporting Documentation

¥ Employment information ¥ Financial information o Including a credit report, if customarily ordered at origination phase ¥ Other (sales contract, earnest money contract, etc.) o Loan production

Follow-Up

¥ Essential, since missing documents may affect: Ñ The mortgage lender's ability to ship the loans to an investor Ñ Certification of pools backing mortgage- backed securities (MBSs)

Loan Estimate (LE)

¥ Expanded triggers for disclosure ¥ Prohibits collecting fees (other than credit) prior to disclosure ¥ Initial and acceptance ¥ Additional disclosures: Total Good Faith Estimate, Interest Payment, appraisal, 5-year payment estimate ¥ Limits finance related fees to 3% ¥ Limits non-related fees to 10% ¥ Zero tolerance for finance related ... ¥ Interest Rate. Note rate used to calculate the monthly payment. ¥ Estimated Closing Costs. "Loan costs" (any expense the borrower incurs as a result of financing PLUS "other costs" (recording fees, transfer taxes, tax and insurance escrow, owners title policy). ¥ Estimated Cash to Close. Closing costs plus down payment, minus any earnest money deposit (EMD), seller, or lender credits. ¥ "In 5 Years" Comparison. Total a borrower will pay toward principal, interest, mortgage insurance plus "loan costs" over 5 years ¥ APR (Annual Percentage Rate). Interest rate that incorporates all costs associated with financing (i.e. , interest paid over the life of the loan, points, fees, mortgage insurance premiums, etc.). ¥ TIP (Total Interest Percentage). Total interest paid over the life of the loan as a percentage of the loan amount.

FHA and VA Delegated Underwriting Authority

¥ FHA direct endorsement ¥ Mortgage lenders with authority: o May underwrite and close loans without prior review by Department of Housing and Urban Development (HUD) • Does not guarantee that HUD will insure the loan o Must follow specific FHA underwriting guidelines

Affordable Housing Programs:

¥ FHA's Housing Choice Vouchers Program (Section 8) ¥ USDA Direct Housing Loans (Section 502) — "Primarily used to help low-income individuals or households purchase homes in rural areas. Funds can be used to build, repair, renovate, or relocate a home, or to purchase and prepare sites, including providing water and sewage facilities." ¥ Making Home Affordable -- The Making Home Affordable Program offers opportunities to distressed borrowers to modify or refinance their existing mortgages to make monthly payments more affordable. o Fannie Mae and Freddie Mac both participate through modification and refinance programs. ¥ Energy Efficient Mortgage (EEM) Programs o Allows borrowers to finance the cost of incorporating energy-efficient features into a new purchase mortgage or a refinance of an existing mortgage o Available for new purchase or refinance of an existing energy efficient home or the remodeling of a standard home o Need to have a certified home energy rater verify for the lender that the home is energy-efficient.

Benefits of using credit scoring

¥ Fast ¥ Independent ¥ Consistent ¥ Objective

Marketing and Soliciting Customers - Analysis:

¥ Geographic area o The mortgage loan originator must define the geographic area where he or she will originate loans. It is important that the mortgage loan originator stay within a limited area since it is difficult to adequately service a wide area. For example, if the mortgage loan originator tries to originate every loan in a broad area, poor service to the clients, unfamiliarity with the customer base and very little repeat business will result. ¥ Neighborhood o The mortgage loan originator must know the general make-up of each neighborhood and the surrounding property. He or she should be aware of the number and various types of available housing units within the area. A mortgage loan originator should keep abreast of the physical condition and market values of the different neighborhoods and monitor land suitable for residential development. ¥ Population o The mortgage loan originator should gather demographic information within the geographic area. Demographic composition includes such things as the age of the population, income levels, and education. These demographics have a direct effect on mortgage loan activity and the types of loan programs that will prove popular. ¥ Competition o The mortgage loan originator must identify and know his or her company's competition, including the competition's personnel, products, and reputation. The mortgage loan originator must strive to set himself or herself and the company above and apart from the competition.

Gifts:

¥ Gifts often are acceptable to satisfy part of the applicant's closing requirements. ¥ The donor must prove that an established relationship exists between the donor and the applicant. ¥ The donor usually must sign a letter stating that the money provided is a gift and that no repayment is required or expected. ¥ Gift funds must be verified in the applicant's or donor's account. ¥ FHA is often used as an affordable lending product, permitting gift funds in the form of a grant from a governmental instrumentality or an approved nonprofit organization. o In these programs, three and a half percent of the down payment is paid for, often including funds for payment of the remaining closing expenses. ¥ If the grant or gift is insufficient to cover all of the borrower's costs, then the processor must verify liquid assets sufficient to meet that requirement.

Expense/lncome Ratios

¥ Housing-to-income (front-end) — indicates applicant's ability to cover fixed ¥ monthly mortgage (PITI) plus when applicable: o Special assessments (example: sewage assessment) o Homeowner's association fees o Mortgage insurance ¥ Debt-to-income (back-end) — indicates applicant's ability to cover monthly housing AND other existing

Importance of Closing

¥ If closing does not take place, expenses related to origination, processing, and underwriting cannot be recovered. ¥ If a loan is not closed correctly, it may not be saleable in the secondary market.

eMortgage:

¥ In a perfect eMortgage, all documents are electronic. They may contain one of the following: o e image-only o image + some data o intelligent image linked to XML data ¥ Perfect e-mortgages are signed, packaged, shipped, stored, and accessed electronically.

Technology in Shipping and Delivery - MERS

¥ In the mid-1990s, a consortium of companies, including the MBA, formed MERS (Mortgage Electronic Registration System). ¥ Under this process, a member names MERS as nominee of the beneficiary in its security instruments (such security instruments must contain certain approved language reflecting MERS as nominee) and electronically registers the mortgage with MERS. ¥ Such electronic registration, as long as the mortgagee names MERS as nominee of the beneficiary in the mort-gage, allows the transfer of an interest in the mortgage without an assignment. ¥ MERS tracks the transfers of beneficial rights and servicing via its database system and the mortgage identification number (MIN). ¥ The advent of MERS changed the requirements for the assignment of the mortgage. If the mortgage lender delivers a MERS-registered mortgage to another MERS member and the mortgage lender named MERS as nominee of the beneficiary in the mortgage or deed of trust, then the investor will require no assignment. ¥ However, if the delivering mortgage lender named itself as beneficiary in the security instrument, then the mortgage lender must assign the mortgage to MERS. ¥ However, the use of MERS does not eliminate the need to record MERS as the nominee of the mortgage in the county land records. ¥ The mortgage lender places the MIN on the mort—age or deed of trust prior to its recording. ¥ A member may register with MERS via the Internet or an interface with its loan origination system. ¥ When the mortgage lender registers the security instrument (whether using the Internet or a loan origination system interface), MERS assigns a MIN to the mortgage. ¥ Freddie Mac, Fannie Mae, and Ginnie Mae require that the mortgage lender transmit the MIN when delivering loans or forming pools.

Complete Verifications

¥ Information from banks, employers, creditors, etc., that provide information about borrower's: o Assets and net worth ♣ Deposits (VOD) o Proof and source of cash to close ♣ Stocks, bonds, etc. ♣ Documents from sale Of Other real estate o Proof and source of cash to close o Employment/income (VOE) o Rent or mortgage (VOR/VOM) o Debts appearing on application but not on credit report

Feature Combinations

¥ Interest ¥ Payment ¥ Rate ¥ Type ¥ Amortization ¥ Payment Loan Term ¥ Frequency

Adjustable Rate Mortgage (ARM)

¥ Interest rate increases or decreases over the life of the loan ¥ Changes in interest rate are determined by: o Market conditions o Financial indices¥ The rate is determined by adding a margin (sometimes called a spread) to an index mandated by the loan documents. ¥ Interest Rate Caps ¥ ARMs generally contain two types of caps. o The first is an annual cap, which may, depending on the loan's terms, limit annual interest rate increases to a specified percentage (one or two percent is common). o The second cap relates to the maximum amount by which the interest rate can increase over the loan's life, regardless of the behavior of the underlying index. The most common is six percent.

Title Insurance Binder

¥ Issued to mortgage lender by settlement agent or title insurer o After an examination of public records o Before closing ¥ Guards the mortgage lender's lien position o Temporary title insurance coverage • Final title insurance policy is issued after closing and recording of mortgage lender's security instrument

Alimony, Child Support, and Separate Maintenance

¥ It is up to the applicant to choose whether or not to use this type of income for loan eligibility purposes. ¥ Accordingly, unless the applicant specifically requests that the mortgage lender include this income in the underwriting decision, the loan processor may not need to verify it. ¥ Alternatively, if the applicant wants this type of income included for loan qualification purposes, then the processor must verify the amount, duration, and actual receipt of the support. ¥ Court orders and divorce settlement agreements are some of the documents the loan processor may use to verify both the amount and duration of the support. ¥ As far as actual receipt, the loan processor may need to examine the recipient's depository records.

Name and describe at least two ways that title to real property can be held.

¥ Joint tenancy - co-owning tenants have equal interest and equal rights in the property, ¥ including the right of survivorship ¥ Tenancy by the entirety - husband and wife are co-owners with rights of survivorship ¥ Tenancy in common - two or more persons have undivided ownership and no right of ¥ survivorship

Interest-Only (1/0) Payment Formula

¥ Loan Amount x Interest Rate - - Interest-Only Payment 12 Months

Initial Loan File Review:

¥ Loan application ¥ Credit report verification ¥ Proof of fees paid ¥ Contracts related to transaction o Real estate sales contract o Lock-in agreement o Earnest money agreement o Subordination agreement ¥ Regulatory disclosures — ensure that required disclosures were/are issued at time of or within 3 business days of application

Loan Origination Systems

¥ Loan origination systems (LOS) are widely used in the mortgage industry, and many mortgage loan originators also benefit from the increased efficiencies of document management systems, point of sale and customer contact systems. ¥ Loan origination systems are used for: o Product and pricing (internal or interface) o Automated underwriting (internal or interface) o Processing (event and document tracking; status) o Document generation and delivery o Post-closing o Third-party originations support o Product and Pricing Engines

Three Key Qualifying Ratios

¥ Loan-to-value (LTV) ratio ¥ Housing-to-income ratio o Housing or "front-end" ¥ Debt-to-income ratio o DTI or "back-end"

MERS@ eDelivery:

¥ MERS provides an efficient tool to deliver electronic documents. MISMO standards streamline this electronic document delivery process. ¥ MERS@ eDelivery provides a secure method for distributing eMortgage packages from one MERS@ eRegistry Member to another, using the existing MERS@ Registry infrastructure and transaction security requirements. ¥ MERS@ eDeIivery leverages the backbone of the MERS@ eRegistry and is powered by MERS.

Origination Tasks:

¥ Market and solicit customers ¥ Prequalify potential borrowers ¥ Complete the loan application and collect supporting documentation ¥ Counsel customers ¥ Comply with laws and regulations ¥ Obtain fees

Prepare to Ship

¥ Match loans to the sales commitment o Shipper receives assignment from secondary marketing commitment to fill a commitment or pool o Shipper runs query to select loans ¥ Make copies of original documents for company's records o Needed for quality control and compliance audits ¥ Prepare transmittal documents ¥ Prepare list of loans in package and instructions regarding transmittal of purchase funds ¥ Prepare pool documents, have pool certified, and transmit pool documents as required ¥ In most mortgage banking companies, a shipper works on similar commitments or pool types (that is, a shipper may just ship Ginnie Mae pools). o This is advantageous because a harmonious working relationship may develop between the shipper and the investor. o In addition, the shipper becomes more efficient and organized because the shipper understands the investor's rules, regulations, and requirements. ¥ Typically, the shipper receives an assignment from the secondary marketing department to fill a commitment or pool. With the new origination systems, shipping can prepare a report (essentially a database query) detailing the loans that match secondary marketing's request. ¥ Such a query can include the loans in various states of closing — closed and warehoused, closed but not yet received, or scheduled for closing. ¥ Once the loans are selected, the shipper notes in the system those loans selected for the commitment or pool. ¥ The shipper matches the available loans with the terms of the commitment using system reports to determine that the loans included meet all terms of the commitment. ¥ In some cases this is very easy because the loan was selected for a commitment from the time of application. ¥ The shipper needs to make copies of most, if not all, of the original documents shipped to the investor. ¥ The copies allow the mortgage lender's quality assurance department to perform its after-the-fact quality control functions. ¥ Such copies also aid the mortgage lender's external auditors, who must make certain compliance tests for Ginnie Mae, Fannie Mae, and Freddie Mac during the performance of their ¥ audit. ¥ In addition, the company's regulators and insurers may wish to review loan files for compliance. ¥ The shipper also will prepare a transmittal document (which in the case of Fannie Mae and Freddie Mac is electronic). ¥ Usually, the transmittal is simply a list of the loans included in the package and instructions regarding the transmittal of purchase funds (that is, wiring instructions). ¥ If secondary marketing wants the loans placed in pools for securitization, then the shipper needs to prepare pool documents, have the pool certified (if required), and transmit certain pool documents to the custodian, conduit, or insurer (for example, in the case of Ginnie Mae securities, Ginnie Mae is informed of the pool via GinnieNET). ¥ The complexity of shipping requirements can vary greatly, depending on the specific investor and whether securitization is involved. ¥ However, shipping to one of the standardized agency programs is often simpler than shipping to private investors. ¥ One of the easiest ways to ship loans is to package them into a Ginnie Mae, Fannie Mae, or Freddie Mac pool. ¥ A conduit (which can be Freddie Mac or Fannie Mae) can place the pool of loans into a mortgage-backed security (MBS) that the conduit then sells to an investor in MBSs. ¥ Fannie Mae and Freddie Mac have made shipping practically error free through their use of shipping software — Fannie Mae's Loan Delivery and Freddie Mac's Selling System. ¥ These systems include error checks that prevent the entering of incorrect values into the system. ¥ For example, if the shipper inputs an incorrect payment for a certain term, interest rate, and loan amount, the software will not accept it. ¥ Once the shipper enters all the information and the information has been accepted and verified, the shipper can transmit it to Fannie Mae or Freddie Mac. Most loan origination systems have reduced the amount of work the shipper must perform by integrating the origination database information with the software requirements.

Management should implement quality control in processing in the following ways:

¥ Monitor the origination and processing workflow. ¥ Implement and use technology efficiently and effectively. ¥ Establish a proactive, team approach to loan approval. ¥ Establish and maintain policy & procedures. ¥ Rigorously monitor, support, and enforce regulatory compliance.

Mandatory Commitment

¥ Mortgage lender must: Ñ Deliver to investor or conduit by specified date Ñ Agreed upon dollar volume of mortgage loans (pool) yielding a specific interest rate • Conduit: Entity that issues mortgage-backed securities ¥ Mortgage lender may be required to purchase mortgages from another ¥ mortgage lender to meet commitment obligation ¥ If the mortgage lender fails to meet the deadline commitment date, a non-delivery fee is charged, generally 1% of amount of failure ¥ Another term for a mandatory delivery commitment is a "firm commitment." ¥ If the mortgage lender cannot fulfill its commitment by the expiration date (deadline), it may have to purchase mortgages from another mortgage lender to meet the obligation. The shortfall often results in a pair-off. o A "pair-off" is a hypothetical loss equal to the difference in the current market price and the commitment price times the amount of loans not delivered. ¥ If the mortgage lender delivers more than the commitment amount, it may have to pay an additional commitment fee upon delivery. However, the mortgage lender may miss the commitment within specified delivery tolerances.

Why Do Mortgage Lenders Fund Mortgage Loans?

¥ Most mortgage lenders make money by performing loan administration (servicing) duties on closed loans. ¥ In a traditional lending operation, mortgage lenders seek to create a portfolio of closed loans that will provide a stream of servicing income over the life of the loan. ¥ This stream of servicing income can be sold as an asset to investors. ¥ A typical mortgage lender's secondary market department may sell the loans created during loan production to other mortgage lenders, investors, and others (such as the GSEs). ¥ The income used in the secondary market sale is used to replenish the mortgage lender's line of credit with a warehouse lender and thereby fund new loans. Loan Production - Four Major Phases /xx • Loan production is the process of producing a closed and funded loan that then may be sold or kept in portfolio. There are four major phases of loan production. — Origination — Processing — Underwriting — Closing • Once the loan is produced, it may be shipped and delivered to an investor, or it may be retained in a mortgage lender's portfolio.

What rules surround the Loan Estimate?

¥ Must be provided before appraisal or other fees can be collected ¥ Must be issued within 3 business days of application ¥ Not required on reverse mortgages, home equity lines, or mobile homes ¥ Increases from initial Loan Estimate to Closing Disclosure if they are within tolerance or based on a qualified change of circumstance ¥ Accompanied by the Special Information Booklet, CHARM disclosure, E-Sign Disclosure, List of Settlement Providers, Affiliated Business Arrangement notice , etc. ¥ Must be provided to the borrower for review a minimum of 7 days prior to closing ¥ Creditors are bound by the Loan Estimate and may not issue revisions based on technical errors or miscalculations ¥ Creditors are bound by the Loan Estimate and may not issue revisions based on technical errors or miscalculations ¥ Cannot be issued once a Closing Disclosure has been provided to the borrower

Credit Score Patterns - No score:

¥ NO activity in past 18 months ¥ Not enough records ¥ Not enough time since accounts opened ¥ Wrong Social Security number ¥ None Of the accounts in that borrower's name

Types of no-documentation loan programs include the following:

¥ No Ratio ¥ No Income — Eliminates the need for the borrower to disclose income; however, employment, liabilities, and assets must be verified using standard or alternative documentation sources. ¥ No Income/No Assets (NINA) — Eliminates the need for the borrower to disclose income or assets. ¥ No Income/No Asset/No Employment — Expanded Alt-A product offering that eliminates the need for the borrower to disclose income, assets, and employment.

Factors Affecting the Credit Score

¥ Number of balances recently reported ¥ Trade lines o Non-traditional - rent - e utilities - memberships - medical bills - insurance o Look at average balances across all trade lines o Relationship between total balances and total credit limits on revolving trade lines o Age of oldest trade line o Number of inquiries and new accounts opened in last year o Payment history o Public records and collection items o Delinquencies noted in trade lines

Why Technology tools:

¥ Offer the consumer better access to more information. ¥ Streamline loan production. ¥ Move the mortgage industry towards a paperless environment.

When is a lender required to disclose?

¥ Once they are in receipt of an "application" ¥ An application is defined as the point at which the lender is in receipt of all of the following pieces of information : o the consumer's name, o the consumer's income, o the consumer's social security number provided in order to obtaina credit report, o the property address, o an estimate of the property value and/or sales price, and o the mortgage loan amount sought.

FHA Loan Processing Special Requirements:

¥ Order appraisal from FHA-approved list ¥ Adhere to specific FHA guidelines ¥ Check ALL PARTIES TO THE TRANSACTION through the Limited Denials of Participation (LDP) and General Services Administration (GSA) lists to ensure no one has any outstanding issues with any government entity to participate with government-insured financing

Collect and Review Supporting Documentation

¥ Order, track, and review reports not ordered at origination: o Appraisal o Credit report o Verifications

Loan production overview

¥ Origination ¥ processing ¥ Underwriting ¥ Closing ¥ Shipping and delivery

"Loan Costs":

¥ Origination Charges: fees paid to the lender such as origination fees, underwriting or application fees ¥ Services you cannot shop for: charges for services required by the lender for which the borrower cannot shop such as appraisal, credit, flood and tax service fees paid to parties other than the lender ¥ Services you can shop for: charges for services which may be required by the lender but for which the borrower can "shop" such as termite, survey, closing agent and lenders title insurance

Comply with Laws and Regulations

¥ Origination phase is heavily regulated o Prohibit discrimination in origination; enforce fair housing practices o Require mortgage lenders to disclose to borrowers • Terms and conditions of credit • Settlement process • Costs to obtain the loan ¥ Issue disclosures including: o Loan estimate, special information booklet, initial servicing disclosure, ARM disclosures o Other (authorization to view credit, underwriting findings, state-required disclosures, etc.

Section VIII (Declarations), requires the borrower and co-borrower to answer "Yes" or "No" to important declarations as they apply. Name five declarations requested in this section.

¥ Outstanding judgments ¥ Bankruptcy or foreclosure within past seven years ¥ Lawsuits in which applicant is a party ¥ Any previous foreclosure, transfer of title in lieu of foreclosure, judgments ¥ Present delinquency or default on any federal debt or any other loan, mortgage, financial obligation, bond, or loan guarantee ¥ Obligation to pay alimony, child support, or separate maintenance ¥ Down payment funds borrowed ¥ Co-maker or endorser on a note

Section VIII: Declarations

¥ Outstanding judgments ¥ Bankruptcy or foreclosure within past seven years ¥ Lawsuits in which applicant is a party ¥ Any previous foreclosure, transfer of title in lieu of foreclosure, judgments ¥ Present delinquency or default on any federal debt or any other loan, mortgage, financial obligation, bond, or loan guarantee ¥ Obligation to pay alimony, child support, or separate maintenance ¥ Down payment funds borrowed ¥ Co-maker or endorser on a note ¥ For a bankruptcy, the applicant should include: o A letter explaining why it was necessary to file bankruptcy o A full copy of the bankruptcy filing papers o A copy of the "discharge from bankruptcy" papers ¥ In addition, applicants must declare that they are US citizens or permanent resident aliens. ¥ If the applicant is a permanent resident, the mortgage loan originator should take a photocopy of the back and front of the green card. ¥ Finally, applicants are asked whether they intend to occupy the property as a primary residence, and if so, whether they have had ownership interest in a property in the past three years.

Section III: Borrower Information

¥ Personal Information (borrower and co- borrower): o Complete legal name (on SSN or green card) o Social security number o Home phone number o Date of birth ♣ Note: The Equal Credit Opportunity Act does allow lenders to request an applicant's age for credit. However, this information cannot be used to discriminate against the applicant in the evaluation of credit, as long as the borrower is of legal age to consummate the loan. o Years of school (beginning with grade one of elementary school) o The Equal Credit Opportunity Act forbids questions about the applicant's race, color, religion, or national origin. o Questions about the applicant's permanent residence and immigration status are allowed. ¥ Borrower Information: Family Status o marital status and dependents. ♣ however, only the terms "married," "unmarried" (which includes: single, divorced, and widowed persons), and "separated" may be used. • Moreover, the information cannot be used in evaluating eligibility for the loan. It is collected only to monitor compliance with ECOA. ♣ Note that information requested about a spouse or former spouse is allowed only when: • The spouse will be contractually liable for repaying the mortgage; • The applicant is relying on the spouse's income for repaying the mortgage; • The applicant resides in a community property state; • The property upon which the applicant is relying as a basis for repaying the mortgage is located in a community property state; or • The applicant is relying on alimony, child support, or separate maintenance payments as a basis for repaying the mortgage. o Dependents ♣ The ECOA prohibits questions about the applicant's childbearing, childrearing, or birth control practices or intentions. ♣ However, the number and ages of the applicant's dependents, if any, may be requested as they relate to the financial obligations of the applicant. ♣ A dependent is someone who relies completely on the applicant for more than half of his or her support. o Types of Supporting Documentation ♣ Certificate of Eligibility (COE) and DD-214 if applying for a VA loan ♣ Canceled checks for mortgages or rental payments for the most recent 12-month period ♣ Past W-2s, current paystubs, evidence of other income ♣ Past tax returns (for self-employed borrowers or borrowers who derived income from interest or rental properties) * ♣ Bank statements (savings, checking, investments) ♣ Property sales contract (for new purchase contracts) ♣ * Tax information may be collected using the Tax Information Authorization IRS Form 8821. Alternately, the Request for Transcript of Tax Return is IRS Form 4506-T.

Housing and Debt Ratios

¥ Philosophy ¥ Calculation of income o Stable Gross Monthly Income (GMI): the total income before deductions • Stable income o Received for 2 years o Expected to continue for 3 years • GMI is the denominator for ratios

• Types of Second Mortgages:

¥ Piggybacks— close simultaneously with first mortgage (e.g., 80/10/10, 80/15/5) ¥ Home Equity Lines of Credit (HELOCs) — special line of credit

Security Instrument

¥ Pledge of property as security for the loan ¥ Can be one of the following (depending on state where property is located): o Mortgage o Deed of trust o Security deed ¥ The mortgage lender always records the mortgage or deed of trust in the county where the property is located because it establishes the mortgage lender's lien rights.

Closing Tasks

¥ Prepare for closing o Schedule loan closing with settlement agent o Review mortgage lender's title insurance binder, survey, hazard insurance policy ¥ Prepare, assemble, and review documents required to be signed by borrower at closing o Verify that closing conditions are met o Calculate interest charges ¥ Deliver loan package and funds to settlement agent ¥ Conduct post-closing follow-up

Survey

¥ Prepared by registered land surveyor ¥ Shows dimensions and location of land with reference to known ¥ points/markers o Including legal improvements, illegal improvements (encroachments), etc.

Standard Closing Documents

¥ Promissory note ¥ Riders and/or addendums to note ¥ Security instrument (mortgage or deed of trust) ¥ Closing disclosure (replaces final TIL and HUD Settlement Statement) ¥ Initial escrow statement

Hazard Insurance Policy

¥ Provides compensation to the insured in case of property loss or damage ¥ Required by mortgage lender to protect its collateral (the property)

Appraiser Independence Requirements

¥ Replaced the Home Valuation Code of Conduct (HVCC) ¥ AIR required for all conventional single-family loans originated on or after October 15, 2010. ¥ Highlights: o Appraiser must be state licensed/certified o Prohibits mortgage lenders and other third parties from influencing appraiser o Borrowers must be given a free copy of the appraisal no less than three days prior to closing (borrower may pay for appraisal but not for copy) o Sets restrictions on the selection, retention, and compensation of the appraiser

Closing Disclosure

¥ Required by RESPA and TILA ¥ Provides borrower and seller with full disclosure of closing and settlement costs

The following represent basic functions typically performed by the processor:

¥ Review the loan file received from the mortgage loan originator. ¥ Issue disclosures as required. ¥ Obtain required documentation, such as: verifications, the credit report, appraisal, and any other follow-up documentation. ¥ Ensure that required insurance2 is in place. ¥ Review loan file documents for accuracy and completeness. ¥ Update all data obtained from various verifications, credit documents, and the appraisal in the loan origination system (LOS). ¥ Submit completed loan file to underwriter.

The role of a processor may include, but is not limited to:

¥ Reviewing the loan application ¥ Verifying the data provided at the time of the initial interview ¥ Compiling and inputting the data into the loan origination system ¥ Ensuring all items required for validation by the automated underwriting findings report are in the file ¥ Submitting a complete loan application to underwriting for the final loan decision ¥ Preparing the approved loan for closing

Methods to Estimate Value

¥ Sales approach o Sales prices of comparable properties o Most common for residential, single-family properties ¥ Cost approach o Replacement cost for unique properties ¥ Income approach o Most common for investment properties

Calculations for the sales approach:

¥ Select at least three comparable properties that have sold recently and are similar to the subject property in terms of size, features, and location. ¥ Make adjustments for any dissimilar features between the comparable properties and the subject property. ¥ Designate a value for the subject property using the adjusted values of the comparables.

Shipping and Delivery: Function and Goals

¥ Shipping and delivering loans to investors allows mortgage lender to: Ñ Meet sales commitments negotiated by secondary marketing Ñ Remove loans from its warehouse ♣ Note for closed, shipped loan is no longer collateral for warehouse line of credit Ñ Make new mortgage loans • Closed, shipped loans make warehouse credit available to fund new loans

Amortization Schedule

¥ Shows loan payments in chronological order • First payment is assumed to take place one full payment period after closing/date of note o Example: Closing/date of note is September 15. First loan payment is due on November 1. ¥ Last payment completely pays off loan balance o Often is slightly different from other payments

Calculate the Monthly Mortgage Payment Practice Solution

¥ Solution: Calculate the Monthly Mortgage Payment ¥ Steps Keys Display ¥ Clear Calculator 0.00 ¥ Enter Term 30.00 ¥ Enter Interest 6.25% ¥ Enter Sales Price ¥ Enter Down Pmt % 5.00% ¥ Enter Tax 1.25% ¥ Enter Insurance 80000 ¥ Enter Mortgage Ins 0.50% o Find Loan Amount 213,750.00 o Find P&l Payment p+1 1,316.10 o Find PITI Payment PITI 1 ,706.20 o Find 1/0 Payment 1/0 1,113.28

Determine If Loan Meets Underwriting Guidelines

¥ Sources of guidelines: o Investor and agency guidelines o Internal lending guidelines o Regulatory and legal requirements • Including fair lending laws o Mortgage insurance company guidelines ¥ Take note of any special requirements o Example: FHA and VA requirements can differ from conventional ¥ Agencies delegate authority to approved mortgage lenders to decide whether loan meets requirements (delegated underwriting)

eSignature

¥ State and Federal legislation allows electronic signatures or documents to satisfy most existing legal requirements for written signatures, disclosures, or records: ¥ UETA: Uniform Electronic Transactions Act (1999) state model law, adopted by nearly all states ¥ now ¥ ESIGN: Electronic Signatures In Global And National Commerce Act (2000) (Public Law 106-229, ¥ 15 U.S.C. 7001 et seq.) national baseline law, effective Oct. I, 2000 ¥ ESIGN was enacted by Clinton administration because UETA adoption was relatively slow. This provided national infrastructure for e-sigs. ¥ Benefits include: ¥ eMortgages are expected to give mortgage lenders a competitive advantage. ¥ faster execution = lower risk

Types of low-document loan programs include the following:

¥ Stated Income (Stated/Verified) — Eliminates the need to verify a borrower's income; however, employment, liabilities, and assets must be verified using standard or alternative documentation sources. ¥ Stated Assets (SISA) — Eliminates the need to verify the borrower's assets; however, employment, liabilities, and income must be verified using standard or alternative documentation sources.

Alt-A borrowers possess common credit characteristics including the following:

¥ Steady employment ¥ Complex income sources/rapid income growth ¥ Strong credit scores ¥ Accumulated wealth

Considerations for Self-Employed Borrowers

¥ Tax returns should be professionally prepared o Call preparer to verify —fax first 2 pages Of return o Verify preparer's business via directory assistance ¥ Collect borrower-signed IRS Form 4506 before closing o Verify with IRS data on borrower-provided tax return • Can be done directly or through a vendor ¥ Verify borrower's company through directory assistance

Reverse Mortgages

¥ Tax-exempt loan that allows homeowners age 62 and older to convert home equity into cash ¥ Requires the owner to pay taxes and insurance as well as 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 sells the house or dies ¥ May be called due and payable if certain conditions are not met o E.g. Additionally, if the borrower(s) moves out of the home for 12 consecutive months, the loan may also be due and payable. ¥ The only reverse mortgage insured by the U.S. federal government is FHA's Home Equity Conversion Mortgage (HECM), Insured by HUD

"Other Costs":

¥ Taxes & Government Fees: recording fees and other taxes and transfer taxes ¥ Prepaids: prepaid homeowners and mortgage insurance, taxes and interest ¥ Escrows: amounts collected for the future payment of tax and insurance bills ¥ Other: charges for services not required by the lender

MERS@ eRegistry:

¥ The MERS eRegistry is a tool for managing electronic documents. It is the system of record that identifies who is in control of the electronic note. ¥ The eRegistry points to the location of the authoritative copy of the eNote, stored by a custodian in a secure electronic vault. ¥ The MERS@ eRegistry fulfills the "Safe Harbor" requirements in the state-led Uniform Electronic Transactions Act (UETA) and E-SIGN (Electronic Signatures in Global and National Commerce Act of 2000). ¥ Lenders may close eNotes and sell them into the secondary market through the MERS@ eRegistry. ¥ Fannie Mae and Freddie Mac both require the use of the MERS@ eRegistry when selling eNotes to them.

MISMO@ - Bridge to Data Standardization:

¥ The Mortgage Industry Standards Maintenance Organization (MISMO), a not-for-profit subsidiary of the Mortgage Bankers Association (MBA) and managed by MERS@, is the leading technology standards development body for both the residential and commercial industry segments. ¥ Mission -- to benefit industry participants and consumers of mortgage and investment products and services by: o Fostering an open process to develop, promote, and maintain voluntary electronic commerce procedures and standards for the mortgage industry, and Enabling mortgage lenders, investors, servicers, vendors, borrowers, and other parties to exchange real estate finance-related information and eMortgages more securely, efficiently and economically.

Data Standardization:

¥ The benefits of standardizing data include: o Promotes data consistency throughout the industry o Reduces processing costs o Increases transparency o Boosts investor confidence in mortgages as an asset class o Support regulatory compliance

Credit Report

¥ The credit report includes information about borrower's: o Payment patterns o Late payments o Foreclosures o Repossessions o Credit counseling o Bankruptcies o Tax liens o Collections o Judgments

Functions and Goals of Loan Origination

¥ The function of origination is to originate quality loans by reaching potential borrowers and helping them to obtain mortgage loans ¥ The goal of origination is produce quality, saleable loans that meet regulatory requirements and investor guidelines

Functions and Goals of Underwriting

¥ The main function of underwriting is to assess the risk of making a loan to a given borrower and to decide whether or not to make the loan. ¥ The goal of underwriting is to make solid decisions that result in quality, saleable loans that meet regulatory requirements and investor guidelines.

Explain what happens after the initial loan application is completed.

¥ The mortgage loan originator obtains verifications and supporting documentation, issues the required disclosures, and then issues a final application with changes applied.

Obtain Fees

¥ The mortgage loan originator should: o Obtain appropriate fees ¥ With the exception of a reasonable fee for a credit report, no fees may be collected until after the Loan Estimate is issued and the borrower indicates intent to proceed with the transaction o Ensure that other fees, such as the origination fee, are collected at closing

Retail production channel

¥ The retail origination channel refers to the direct origination to a consumer (business to consumer, or "B2C"). ¥ In retail lending, the servicing mortgage lender originates, processes, underwrites, and closes loans. ¥ The servicing mortgage lender can either sell the closed loans to investors or keep the loans in portfolio, but generally retains the servicing rights. ¥ Compared to correspondent lending, retail production costs more but results in more income for the servicing mortgage lender.

Wholesale production channel

¥ The term "wholesaler" applies to a mortgage lender that neither solicits mortgage applications nor deals with the applicant but, rather, purchases and services loans obtained only from other specialists (correspondent or broker) after they have originated the loan (Unlike correspondents, mortgage brokers do not fund the loans at closing). ¥ Note that some mortgage lenders do both — purchase wholesale and originate retail. ¥ Because wholesalers purchase rather than originate loans, wholesalers retain geographic flexibility. ¥ Unlike a retail shop, whose sphere of operations is circumscribed by the physical limits of its sales force and the location of its branch offices, a wholesale operation can direct its purchasing power into the most profitable markets while maintaining the flexibility to withdraw quickly from markets without incurring large expenses. ¥ In addition, the wholesaler avoids the fixed costs of a brick-and-mortar, retail branch network. ¥ Compared to retail lending, correspondent lending costs less but results in less income. ¥ Besides just setting the price of the loan (the interest rate and points required to close); the wholesaler may even perform the underwriting and/or closing function (especially when the loan is table funded). ¥ In addition, after closing, the wholesaler will perform post-closing, shipping, and quality control review functions. (generally, loan correspondents perform all of the listed functions).

Property Characteristics and Related Information

¥ The underwriter reviews: o Property description o Neighborhood description and analysis ♣ Market conditions o Site ♣ Adverse site conditions o Improvements and features ♣ Condition ♣ Insurability

Bi-weekly loan payment

¥ This is a variation of the 30 year mortgage; requires 26 payments per year (a payment every 2 weeks), as opposed to a monthly payment. Each payment is only half the size of the required regular mortgage payment. • substantial decrease in total interest costs • quicker loan amortization • shortens loan term to approximately 24 years • offers attractive qualities of both 15 and 30 year mortgages ¥ appeals to budget conscious borrowers that want to pay mortgage from each bi-weekly paycheck

Credit Score Patterns - Up:

¥ Time ¥ Past due amounts are paid off ¥ Currently delinquent trade line no longer appears ¥ Significant decreases in outstanding balances

Debt-to-Income Ratio - "Back-End"

¥ Total monthly debts divided by applicant's gross monthly income ¥ Calculates the % of gross monthly income to total monthly indebtedness ¥ Debts: o Monthly housing expenses (from front-end ratio calculation)+ o Other obligations o Fannie Mae and Freddie Mac generally recommend total debt-to-income ratio not exceed 36%. o For FHA loans, the ratio can equal up to 43%.

Housing-to-Income Ratio - "Front-End"

¥ Total monthly housing expense divided by applicant's gross monthly income ¥ Calculates % of gross monthly income paid for housing expenses ¥ Monthly housing expense includes: o Mortgage payment (PITI) o Mortgage insurance o Special assessments (sewer, etc.) o Homeowner association (HOA) or condominium association (condo) dues, if any

Indicate whether the following statement is true or false.

¥ True: If the applicant does not furnish ethnicity, race, or sex, under Federal regulations, the mortgage lender is required to note the information on the basis of visual observation and surname, if the applicant was present.

Underwriting Guidelines

¥ Underlying principles and procedures are same o GSEs: Fannie Mae and Freddie Mac have requirements o Example: Fannie Mae and Freddie Mac require use of Uniform Underwriting and Transmittal Summary o Non-GSE investors' requirements can vary o Government loans (FHA and VA) have special requirements

Appraisal Review and Analysis

¥ Underwriter assesses: o Approach to estimated value o Appraiser's considerations • Property characteristics • Other property-related information o Comments, analysis, and additional information

Automated Underwriting Systems (AUS)

¥ Underwriting involves analyzing the risk of a borrower not repaying a loan. Much of this analysis involves mathematical formulas that can be coded and programmed into software to deliver automated underwriting decisions. ¥ With an AUS: o The loan application can be taken over the Internet. o The credit report can now be run during application. This saves time by helping the mortgage o loan originator to identify a good loan fit early in the process. o Preliminary underwriting now done at application, though approval and verification of loan file information is still required. ¥ The inherent risk of AUS is that it simply crunches the numbers entered into the system—verification and validation of documents, as well as analysis of any entire loan file from end to end—are clearly out of the scope of a computerized system, which may leave open opportunities for fraud and human errors in data entry.

Appraisal

¥ Uniform Residential Appraisal Report (URAR) o Represents appraiser's opinion of value o Market adjustments (Market ConditionsAddendum) ¥ Importance to mortgage lender/investor

Loan Application MBa

¥ Uniform Residential Loan Application (URLA) (Fannie Mae Form 1003/Freddie ¥ Mac Form 65) ¥ Complete information: o Leads to efficient closings o Decreases applicant frustration

FHA and VA Delegated Underwriting Authority

¥ VA Automatic Program ¥ Automatic mortgage lenders o May underwrite and close VA loans without VA approval ¥ May be supervised or non-supervised • Determines whether VA must approve lender's underwriters o Separates credit and appraisal decisions ¥ Credit decision by "Automatic Approver" and Notice of Value (NOV) must be sent to Veteran separately

Private Investor Commitment Process:

¥ When the mortgage lender negotiates a new commitment with a private investor (that is, one other than the GSEs/agencies), communication between the secondary marketing staff and the shipper is essential. For this and other reasons, some companies have the shipping staff report to the secondary marketing department. ¥ Management representatives from secondary marketing, loan production, shipping and delivery, and loan administration (generically referred to as servicing) review and agree on the commitment offer. ¥ Once accepted, both the mortgage lender and the investor sign the commitment letter. ¥ Secondary marketing then informs the company of the commitment letter requirements.

There are three basic types of security instruments:

¥ Which security instrument is used depends on the state in which the property is located. ¥ Mortgage o A mortgage has two parties: the mortgage lender and the borrower. o In a mortgage, the borrower pledges the property as security for repayment of the note. Foreclosure generally requires a court proceeding. ¥ Deed of Trust o A deed of trust has three parties: the mortgage lender, the borrower, and the trustee. o The property is pledged or conveyed to the trustee for the benefit of the mortgage lender to secure repayment of the note. ♣ For the mortgage lender, an advantage of the deed of trust over a mortgage is that in many states, in case of default, the deed of trust can be foreclosed by a trustee's sale without a court proceeding. ¥ Security Deed o A security deed has two parties: the mortgage lender and the borrower. o Property is conveyed to the mortgage lender by the borrower as a deed passing title and not as just a mortgage to secure repayment of the note. o Foreclosure is generally by a private sale, conducted pursuant to a power-of-sale provision contained in the security deed. (The security deed is used in Georgia.)

Pre-Qualifying Process:

¥ While taking the loan application, typically the mortgage loan originator prequalifies the applicant based on the applicant's income and borrowing needs. ¥ This step determines if the applicant can actually afford the property.

Wholesaler business model:

¥ Wholesalers may purchase on a whole loan basis, servicing released (singly — which is generally how mortgage brokers sell loans). ¥ However, from correspondents, wholesalers may purchase groups of loans in bulk, servicing released, or they may purchase loans on a flow basis (loans or pools of loans are sold under a commitment as closed or accumulated) immediately after closing. ¥ In many cases, the wholesaler may "table fund" loans on a whole loan basis, which means that the closing is funded directly by the wholesale lender in his or her name, with no money paid out by the mortgage broker or originating mortgage lender. The wholesaler generally pays the mortgage loan originator for the value of the loan (based on a committed price), plus the value of the servicing rights, called a "servicing-released premium," and, if the mortgage broker closes the loan at an interest rate higher than market, a yield spread premium. (Note that a yield spread premium is a credit to the borrower.) ¥ Most wholesale lenders require that mortgage brokers or correspondents submit an application, financial statements, resumes of the key personnel of the company, and references from other investors in order to become approved as a mortgage broker or correspondent. ¥ The director of wholesale operations and his or her sales representatives focus their efforts on developing new accounts and managing existing accounts — both in order to maximize the volume of loans produced through this channel. ¥ A wholesale operation usually includes: o Underwriters and quality control professionals. o Secondary marketing, among other things, prices and locks loans for purchase from mortgage brokers or correspondents and prepares the daily price sheet. o The sales representatives or customer service employees handle daily questions and problems with pricing policies, delivery, closing, and/or loan program guidelines. ¥ The keys to a profitable wholesale operation include controlling fraud losses and preventing churning, while maintaining a high level of "value-added" service to the customer. The benefits of the wholesale production method include: /xx ¥ the ability to generate large volumes of loans quickly ¥ the ability to achieve a geographic diversity in the servicing portfolio ¥ the ability to reduce overall loan origination costs

Credit

¥ Willingness to repay the loan ¥ Credit bureau risk score ¥ Credit history — Summary of the information on the credit bureau file o Level of indebtedness o Rank orders consumers according o Delinquencies to risk o Types Of credit available — Typically a single 3-digit number o Slow pays o Inquiries o Bankruptcy o Foreclosure

The mortgage loan originator must keep abreast of:

¥ changes in investor loan requirements, ¥ company loan products, ¥ origination technology, ¥ consumer law mandates, and ¥ sales techniques.

The mortgage loan originator should let the applicant know that they should bring the following to the initial application interview:

¥ copy of an accepted earnest money contract (if a purchaser) ¥ estimated proceeds from the sale of another property ¥ residential addresses for the previous two years ¥ names and addresses of employers for the past two years, including W-2s, 1099s, etc. ¥ last three pay stubs, showing gross monthly salary (unless self-employed) ¥ last three statements for all checking, savings, investments, IRAs, etc., as well as account names, ¥ addresses, account numbers, balances, and monthly payments on all open charge accounts and credit lines ¥ addresses, loan information, and lease agreements on all open charge accounts and credit lines ¥ estimated total value of all personal property ¥ two years of individual tax returns ¥ two years of corporate or partnership information forms (known as K-ls) and tax returns, if self- employed ¥ prior year and year-to-date profit and loss statement and prior year and current year balance sheet for self-employed individuals ¥ alimony/child support documentation ¥ gift letter documentation ¥ if the loan is for a condominium, any condominium documentation

Traditionally, loan origination has involved some or all of the following:

¥ developing a marketing plan and soliciting clients ¥ prequalifying potential borrowers ¥ obtaining a completed, signed, dated loan application and supporting documentation ¥ counseling borrowers ¥ providing required disclosures ¥ obtaining fees ¥ At the end of the origination process, the mortgage loan originator passes the loan file to the processor.

The commitment letter generally contains the following components:

¥ dollar amount of the commitment ¥ commitment fee ¥ commitment term ¥ acceptable interest rates ¥ acceptable geographic areas ¥ acceptable product types and loan terms ¥ underwriting guidelines (L TVs, front-end, and back-end ratios) ¥ appraisal guidelines ¥ required delivery and shipping documentation ¥ special documentation requirements ¥ servicing rights o (whether retained by the mortgage lender or released to the investor — called 'servicing-retained" and "servicing-released" sales, respectively)

The disadvantages of the wholesale method include:

¥ greater risk of losses due to fraud ¥ price competition (an extremely competitive market) ¥ potential higher prepayment risk (resulting from "broker churning")

Financial Information

¥ last three statements for all checking, savings, investments, IRAs, etc., as well as account names, addresses, account numbers, balances, and monthly payments on all open charge accounts and credit lines ¥ addresses, loan information, and lease agreements on all open charge accounts and credit lines ¥ estimated total value of all personal property ¥ two years of individual tax returns ¥ alimony/child support documentation ¥ Other ¥ a copy of the sales contract and an accepted earnest money contract (if a new purchase)

Knowledge areas that a successful mortgage loan originator needs:

¥ loan production process and mortgage lending cycle ¥ available loan programs, products and financing tools, including affordable housing initiatives ¥ laws and regulations

Pre-qualifying by using the following ratios:

¥ loan-to-value ratio ¥ housing-to-income ratio ¥ debt-to-income ratio

The major responsibilities of the shipper generally include:

¥ matching loans with specific commitments ¥ checking the loan files for missing documents ¥ making document copies ¥ preparing transmittal documents ¥ coordinating the release of warehousing documents with the warehousing bank ¥ inputting data into Fannie Mae's Loan Delivery, Freddie Mac's Selling System, and Ginnie Mae's GinnieNET ¥ ensuring that loans are registered with MERS (Mortgage Electronic Registration System), if applicable ¥ obtaining recorded mortgages ¥ obtaining pool certification ¥ obtaining mortgage insurance certificates on closed FHA loans ¥ shipping the loans to document custodians and the investor ¥ following up on missing documentation ¥ Shipping, based on such schedules, should set up calendars and schedules to meet pooling requirements. o Knowledge of commitments and closing volume allows shipping management to schedule overtime if needed. o In addition, knowledge of commitments and loan volume allows the shipping department to employ enough people to handle the mortgage lender's delivery requirements.

Employment Information

¥ names and addresses of employers for the past two years, including W-2s, 1099s, etc. ¥ last three pay stubs, showing gross monthly salary (unless self- employed) ¥ two years of corporate or partnership information forms (known as K-ls) and tax returns (if self- employed) ¥ prior year and year-to-date profit and loss statement and prior year and current year balance sheet (if self-employed)

The two basic types of investor purchase commitments include:

¥ optional delivery commitments ¥ mandatory delivery commitment ¥ In reality, loans may be sold on a mandatory basis, on a partially mandatory and partially optional basis, on an optional basis, or as otherwise specified in the master commitment.

The following neighborhood factors influence both the present and future value of the appraised property:

¥ population growth trends ¥ neighborhood development trends ¥ the relative portions of developed and undeveloped land ¥ the proportion of owner-occupied versus tenant occupied property ¥ neighborhood amenities and access to shopping and other essential public services (schools, fire departments, medical care, etc.) ¥ transportation access, availability, and sufficiency ¥ the age and quality of construction of neighborhood housing ¥ adverse neighborhood influences that may affect marketability, including such things as the age of the surrounding properties, the state of repair of neighborhood properties, and contiguous undesirable property (i.e., manufacturing facilities or commercial buildings)

Shipping generally involves:

¥ preparation and delivery of loan documents to an investor according to the terms of a purchase commitment ¥ preparation and certification of "when issued" or "to be announced" (TBA) pools for sale by Wall Street, conduits, or investors/GSEs ¥ In both of these areas, the shipper must make certain that the mortgage lender fulfills the delivery and sale commitments of the investor.

There are two common production channels:

¥ retail ¥ wholesale

Some of the possible sources of income include:

¥ salaries of the applicant and/or co-applicant ¥ overtime ¥ part-time and second job income ¥ bonuses and commission ¥ interest and dividends ¥ annuities ¥ investments (such as real estate) ¥ income from trusts or estates ¥ self-employment income from partnerships or Subchapter S corporations ¥ welfare ¥ alimony and child support

According to HUD, damage or defective property conditions include such things as:

¥ shoddy construction ¥ poor workmanship ¥ foundation settlement ¥ excessive dampness ¥ leakage ¥ decay ¥ termite damage

Uniform Residential Appraisal Report

¥ subject (property address, borrower, description, etc.) ¥ contract ¥ neighborhood ¥ site ¥ improvements ¥ sales comparison approach ¥ reconciliation ¥ additional comments ¥ cost approach ¥ income approach ¥ planned unit development (PUD) information

The URLA contains information related to the following categories:

¥ type of mortgage and terms of loan ¥ property information and purpose of loan ¥ borrower information ¥ employment information ¥ income and housing expenses ¥ assets and liabilities ¥ details of transaction ¥ The URLA also contains a declarations section and an acknowledgement and agreement section to be completed by the borrower, ¥ and information for government monitoring purposes section to be completed by the borrower and the mortgage loan originator.

VA Residual income:

Ñ VA defines residual income as net effective income (gross income less taxes, social security, and defined deductions) less monthly shelter expense. Ñ VA has calculated guidelines for residual income based on income, family size, and location. Discount Points /xx ¥ Interest prepaid by borrower at closing o Quoted as a percentage of loan amount Ñ One point equals one percent of the loan amount; two points equals two percent of the loan amount, etc. Ñ Reduce "market" interest rate to be charged for life of loan, as stated on the promissory note (note rate) Ñ "Market" rate means rate without considering any discounts Ñ Reduced interest rate will affect investor's yield ¥ On average, consider that for every 2 discount points paid, the note rate is reduced by 1%

Overview of Loan Features

— Interest rate — Payment types — Payment frequency — Loan amortization — Loan term • Assortment of features may vary with market conditions, borrower needs, and investor appetite

Payment-Option ARM

— Typically4 options: • Minimum payment that does not cover interest ¥ Interest-only payment that doesn't reduce the loan balance ¥ Payment Of interest and principal (30 years) ¥ payment of interest and principal (15 years) — After option period, mortgage payments may increase (sometimes before period ends) = Neg Am — Intended for borrowers that want flexibility and may have an income that is uneven over the year

Section VI: Assets and Liabilities

• A credit report will be ordered to determine how the applicant has handled debt in the past. • Jointly/Not Jointly Status

Common Features of Adjustable Rate Mortgages (ARMs)

• ARMs — Terms: 6 month, 1/1, 5/1, 7/1, 10/1, etc. — Often offers a lower initial rate than a fixed rate — Fixed for an initial period Of time, then adjusts periodically — Fading out 2/28 and 3/27, etc.

Private Mortgage Insurance Documents

• All documents required by a mortgage insurance company to issue insurance, as well as a copy of their commitment, should be in the loan file.

Negative Amortization

• Borrower payments are less than the accrued interest • Difference is added to the loan balance • Balance of the loan increases since payments do not cover even the monthly interest • Per Dodd-Frank and current regulatory guidance, these loans are ineligible for origination at this time

Mortgage Loan Escrow

• Borrowers must receive an itemized statement at closing clearly showing the estimated taxes, insurance premiums, and other charges that the mortgage lender anticipates paying from the escrow account during the first 12 months and the anticipated dates the mortgage lender will make such payments. • Thereafter, on an annual basis, the mortgage lender is required to notify the borrower of any shortage of funds in the escrow account and the amount of the borrower's current monthly payment, the portion of the monthly payment being placed in the escrow account, and the total amount paid into the escrow account during the period. • The mortgage lender also must separately identify the payments the mortgage lender made during the period, as well as the remaining balance.

Alternative A Products

• Borrowers with "A" credit, who want or need expanded alternative underwriting criteria • Considered to be higher risk loans since they rely on alternative documentation such as: ¥ Stated income ¥ Stated assets ¥ NO documentation ¥ NO ratio options ¥ 100% LTV

Types of Conventional Loans

• Conforming loans — Meet requirements for purchase by the GSEs (Fannie Mae and Freddie Mac) • Loan limit requirement • Solid borrower credit • Standard documentation • Non-conforming loans — Do not meet requirements for purchase by Fannie Mae and Freddie Mac — Examples include: jumbo (refers to loan amount) nonconforming, subprime, and Alt-A loans — Often have higher interest rates

Erroneous Information:

• Consumers have the right, under the Fair Credit Reporting Act, to dispute the completeness and accuracy of information in their credit file. • Credit reporting agencies are required to reinvestigate and record the current status of the disputed items within a "reasonable period of time," unless it believes the dispute is "frivolous or irrelevant." • Disputed items that cannot be verified must be deleted. • If a consumer's report contains erroneous information, the credit reporting agency must correct it. • If an item is incomplete, the credit reporting agency must complete it. • If a consumer wishes to provide an explanation for an item (such as an account that was paid late due to the loss of job, military call-up, or unexpected medical bills), he or she may send a brief statement to the appropriate credit reporting agency. The information is placed on the credit profile and is disclosed each time the credit profile is accessed.

Examples of functions included in the production operations area include:

• Coordination and communication with the prospective borrower, real estate agent, builder, attorney, mortgage insurance company, and internal departments • Selection and management of vendors, including appraisers, credit bureaus, title companies, settlement attorneys, document prep service, hazard insurance companies, etc. • Scheduling of and preparing of documents for closings • Review of the title binder, survey (legally identifying the property and any encroachments or easements), insurance, commitment conditions • Funding of loans for settlement

Additional Closing Documents

• Depends upon specifications of the mortgage lender and type of mortgage ¥ . Examples: o Adjustable rate mortgage (ARM) rider attached to security instrument - The borrower acknowledges that the loan is an adjustable rate mortgage and that the interest rate could increase or decrease. o Closing instructions ¥ Right of rescission o For refinance or home equity transactions (required under TILA)

Retail Production Structures:

• Factors governing production process — Size — Workforce skills — Other factors • Options — All functions decentralized in branches — Decentralized/centralized/regionalized origination, processing, underwriting, and/or closing — Outsourcing of certain functions • Outsource (US) vs. offshore (outside LIS)

Feature Combinations

• Fixed rate mortgages — Amortizations: 10, 15, 20, 25, 30, or 40 years — Partial prepayment shortens the term, but does not reduce the payment — Usually, payment combines principal and interest — Interest-only payments for the first few years are possible • Most common: 30-year, 15-year, and bi-weekly

Complying with Requirements

• GSE/Agency investors • Less complex because Of guidelines and master commitment • Easiest way to ship is to package into agency pool • Shipping software: • Loan Delivery (Fannie Mae) • Selling System (Freddie Mac) • Private investors • Can be time-consuming and complex • File generally must be in a precise, investor-specific order • Shipper usually makes copies and ships original

The mortgage lender's origination QC quality control checklist:

• Have developed relationships with area builders and real estate agents/brokers, and know entities with which the company does business • Know the loan products offered by the company and applicable borrower eligibility requirements • Know requirements of agencies, investors and insurers with which the company does business • Know state and local programs available to assist homebuyers, particularly first-time homebuyers and Iow- and moderate- income homebuyers • Be familiar with federal and state consumer credit statutes, such as the Equal Credit Opportunity Act, Fair Credit Reporting Act, Right to Financial Privacy Act, Real Estate Settlement Procedures Act and Truth in Lending Act • Have an understanding of the Community Reinvestment Act and the Home Mortgage Disclosure Act • Do not engage in discriminatory lending practices • Test for compliance with policies & procedures

Shipping

• If an investor is purchasing whole loans, shipper may send documents directly to the investor • If mortgage lender has pledged the loans as collateral, the warehouse bank may send the notes • If secondary marketing has pooled the loans, shipper may send documents to a pool custodian • Of course, the mortgage lender's shipper must ensure that all this occurs before a commitment expires or the mortgage lender misses a pool delivery date.

Percolation Test

• If the property has or will need a septic tank, the loan closer must be certain that suitable results from a percolation ("perc") test are in the file.

Condominium Documents

• If the property is a condominium unit, the loan closer must obtain the condominium declaration binding all homeowners within the condominium.

Homeowners Association Agreement

• If the property is subject to a homeowners association, the loan closer must obtain association agreement that will be binding on the borrower/buyer.

Almost all subprime mortgages are made to borrowers with one or more of the following:

• Impaired or limited credit histories • High debt relative to their income • Variable or hard to document income or lack of reserves Government Loan Programs /xx • Offer government insurance or a government guarantee that protects the mortgage lender against loss due to borrower default — Department of Veterans Affairs (VA) — Federal Housing Administration (FHA) — USDA Rural Housing

The Complete Appraisal Report

• In determining the value of the property, the appraiser considers the site, any amenities, and the physical condition of the property. • The final appraisal presents the reader with a visual picture of the neighborhood, site, and improvements of the subject property. • The appraisal report used for most single family homes is the Uniform Residential Appraisal Report (URAR). • Appraisals include the following items with each report: o Two full sets of color photographs of the subject property (front, rear, street scene) o Two sets of color photographs of each of the three comparable sales o Room sketch and floor plan o Location map, identifying the subject and all comparable sales o FEMA 10-digit flood map identification number (if the property is located in a flood zone) o The Appraisal and the LTV

Ability to repay the loan -- The underwriter analyzes:

• Income sources o Employment o Other income • Assets • Expense/income ratios • Compensating factors

Fixed-Rate Mortgage

• Interest rate is set at the inception of the loan • Rate does not change for the life of the loan

Optional Commitment

• Investor must: o Buy a specified dollar volume of mortgage loans from mortgage lender at specified yield • Mortgage lender: o Not required to deliver mortgage loans o Uses optional commitment as hedge to protect loans from dramatic changes in interest rates • An optional delivery commitment (sometimes called a standby) is an agreement that requires the investor to buy a specified dollar volume of mortgages at a specified yield. o However, the commitment does not require the mortgage lender to deliver the loans. In other words, an optional commitment gives the mortgage lender the option of selling the loan(s) to the investor only if the mortgage lender cannot find a better price. ♣ In stock terms, this relates to option. In this case, a "put option" is similar. o The secondary marketing department primarily uses optional commitments as a hedge to protect loans from dramatic changes in interest rates. o Because of the risks involved, the buyers may price the commitments out of the market.

QM: "GSE-EIigible" or Temporary Alternative QM

• 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) ¥ I-IUD, VA Department 01 Agriculture or Rural Housing Service (sunsets when agency rules take effect or 7 years)

Section: VII: Details of Transaction

• Line items a through h calculate costs associated with the transaction that will be included in the loan amount and/or that the borrower will be responsible for: o Purchase Price o Alterations, improvements, repairs o Land (if acquired separately) o Refinance (incl. debts to be paid off) o Estimated prepaid items o Estimated closing costs o PMI, MIP, Funding Fee o Discount (if Borrower will pay) o Total costs (add items a through h) o Line items j, k and I record credits that reduce the total cost; o k. Borrower's closing costs paid by Seller o m. Loan amount (exclude PMI, MIP, Funding Fee financed) o n. PMI, MIP Funding Fee financed o o. Loan amount (add m & n) o p. Cash from/to Borrower (subtract j, k, I & o from i)

Termite Certification

• Many mortgage lenders require a certificate showing that there is no active termite infestation. In addition, an insurer may require a builder warranty regarding termite infestation for one year after closing.

Role of Loan Production Staff:

• Meet quality control standards: o Company o Investor o Agency • Uncover "unwritten" information to establish more realistic assessments of prospective • borrowers • Understand how quality control should function in each loan production phase • Employ Quality Control Measures

Benefits of Effective, Rapid Shipping:

• Meeting these objectives allows the company to improve its bottom line. • Effective shipping allows secondary marketing to place loans in pools quickly and avoid the risk that the market will move adversely to the mortgage lender's interest rate position. • In the alternative, rapid delivery may allow the mortgage lender to put the loans in a current pool and avoid the so-called price drop (the price drops for each month of future delivery). • Rapid delivery may also allow secondary marketing to avoid pair-offs resulting from the failure to meet mandatory delivery commitments. • Since FHA does not insure FHA loans at closing, the mortgage lender must obtain a mortgage insurance certificate as soon as possible after closing. Not obtaining FHA insurance may cause the mortgage lender to bear the default risk of the loan and may create a loan that is not saleable in the secondary market. • Rapid delivery may reduce the mortgage lender's interest expense. o Warehousing loans require the payment of interest, which the mortgage lender can lessen by shipping the loan quickly. • Rapid delivery allows the mortgage lender to maximize its warehouse line availability

Conventional Loans

• Not insured or guaranteed by the federal government • 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

United States Department of Agriculture (USDA) Loans

• Offered and guaranteed by the Rural Housing Service within the USDA ¥ Protect mortgage lenders who make these loans on residential properties located in rural areas • The LTV's on RHS-guaranteed and direct loans can be up to 100% and repayment terms of up to 38 years are offered. • Income guidelines (the ceiling is usually 115% of the median income for the area in which the property is located) in order to qualify for RHS programs.

Interest Rate

• Percentage paid for the use of money, usually expressed as an annual percentage — Cap: Limit on interest rate increases and/or decreases during each interest rate adjustment (periodic cap) or over the term (life cap) of the mortgage Popular interest rate indices: /xx ¥ Treasury, ¥ LIBOR, ¥ COFI, ¥ Prime, ¥ MTA /xx Payment Types /xx ¥ Fixed-rate mortgage ¥ Adjustable-rate mortgage (ARM) — payment is recalculated at intervals set in the note and is based upon the value of the underlying index ¥ Hybrid ARM (3/1, 5/1, 7/1, etc.) — fixed for the first number, adjusts annually for the remainder of the loan ¥ Temporary buydown — temporary external account contributes a portion of the payment in the first few years of the loan ¥ Less common payment types (but still in existence) today are the graduated payment mortgage (GPM) and growing equity mortgage (GEM).

Balloon

• Periodic installments of principal and interest that do not fully amortize the loan ¥ The monthly payments usually are amortized over a fixed period with a balloon payment due in typically 3, 5, 7, or 10 years. • Borrower is 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 ¥ In some balloon loans, the note allows for use of a predetermined interest rate index in conjunction with an extension option at the end of the balloon period. Other balloon loans, however, require that the borrower pay off the loan upon maturity. This financing tool is usually offered to the applicant who expects to sell or refinance the property within a specified period of time. Some balloon loan notes include a reset option, giving the mortgagor the choice either to pay the unpaid principal balance in full or to exercise the option to modify and extend the loan term.

Fully Amortizing

• Periodic payments of principal and interest (P&I) • Calculated to fulfill the obligation (i.e., payoff the loan) completely at maturity (i.e., end of loan term) • Because principal is paid, the outstanding balance of the loan declines over time • May be in place for the life of the loan or it may follow a short interest-only period

Closing overview

• Prepare for Closing • Deliver loan package and funds to settlement agent • Conduct post-closing follow-up

Mortgage Lending Cycle

• Production is possible through funds from mortgage lenders and secondary market investors • Mortgage lenders rely on two assets created during loan production: — Stream of loan payments — Servicing rights • Since loan production is made possible through funds from mortgage lenders and sale of loans to investors, mortgage loan originators must follow mortgage lender/investor guidelines when originating loans

Quality Control

• Quality control is a system of internal controls that provides management with an opportunity to examine and, if necessary, adjust its policies and procedures. It is vital in loan production.

Section V: Combined Monthly Housing Expense Information

• Rent, mortgage, financing, hazard insurance, flood insurance (if applicable), real estate taxes, mortgage insurance, and other combined housing expense information is reported here.

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 payments are required (typically up to 10 years)

There are 10 basic sections to the URLA:

• Section I Type of Mortgage and Terms of Loan o -Loan program, amount, rate, term • Section II Property Information and Purpose of Loan o -Property address and sales price, purpose of loan (new purchase or refinance), how the title will be held ♣ individual, joint tenancy, tenancy in common, or tenancy by entirety. ♣ such as fee simple and leasehold estates • Section Ill Borrower Information o -Applicant's address, phone number, and SSN - must include address information for at least the last two years • Section IV Employment Information o -Applicant's employer, address, and phone number for at least the last two years • Section V Monthly Income and Combined Housing Expense Information o -Applicant's income (primary, rental, interest, and other) and present and proposed housing expenses • Section VI Assets and Liabilities and Schedule of Real Estate Owned o -Applicant's assets (cash, stocks, real estate, and businesses) and liabilities (credit cards, consumer, and real estate loans) • Section VII Details of Transaction o -Purchase price, refinance, mortgage insurance, closing costs, etc. • Section VIII Declarations o -Judgments, bankruptcies, foreclosures, lawsuits, etc. • Section IX Acknowledgement and Agreement o -Applicant's signature • Section X Information for Government Monitoring Purpose o -Applicant race/national origin/gender, interviewer information

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 buy-down funds are paid out — Payments revert to those stated in the note once buy-down period has ended

Right of Rescission

• The Truth-in-Lending Act provides that borrowers in certain refinance transactions have the right to rescind the transaction by midnight of the third business day following closing. • The mortgage lender must make the applicant aware of this right as mandated under Regulation Z.

Flood Insurance

• The borrower must receive a statement indicating whether or not the property is in a flood plain and if flood insurance is available. • If flood insurance is required, the loan closer must obtain a flood insurance policy before the loan closes.

Loan Term

• The period of time between the commencement date and termination date of a note, mortgage, legal document or other contract. • Example: 10 year term, 30 year amortization, fixed interest rate — Would be treated like a 30-year fixed mortgage, with a balloon payment due at the end of 10 years

Qualified Mortgage (QM)

• There are four types of Qualified Mortgages under the rule. — General and Temporary QM definitions can be originated by all creditors. — Small Creditor and Balloon-Payment QMs can only be originated by small creditors. • The QM requirements generally focus on prohibiting certain risky features and practices, such as negative amortization and interest-only periods and loan terms longer than 30 years. • In addition, for all types of QMs, points, and fees generally may not exceed 3 percent of the total loan amount, but higher thresholds are provided for loans below $105,158.

Hybrid ARMs

• Two types — Begin at fixed-rate, convert to an ARM — Begin as an ARM, convert to fixed rate • Increase in rate is capped at a specific amount

Asset Verifications and the Verification of Deposit

• Verification of funds is typically completed through the review of checking or savings account statements, passbook records, and other liquid asset accounts. • Borrowers must demonstrate a pattern of savings and also prove that money is not borrowed. • This is typically substantiated by a two-month deposit history, account transfers, receipt or gift fund, and other records. • Generally, mortgage lenders verify only those funds that will be liquidated for closing unless the borrower will rely on dividend income. o Stocks, bonds or liquid assets that are not needed for funds to close need not be verified. However, some jumbo investors require verification of all stocks, bonds, and investment accounts. • Supporting Documents • A list of supporting documents often submitted by the borrower to verify funds includes: o Copy of canceled earnest money check or receipt o Checking or savings account statements for past two months o Passbook records showing names and account numbers o Gift letters and gift verifications o Deposit slips to show that gift or other deposits were made (depends on mortgage lender and program) o Retirement account statements o Stock and investment account statements o Pending real estate sales contracts o Bill of sale (to prove recent asset liquidation) o Account transfer record (when funds are moved)

Origination Quality Measures:

• develop relationships with area builders and real estate agents/brokers, and know entities with which the company does business. • know the loan products available and applicable borrower eligibility requirements. • know state and local programs available to assist homebuyers, particularly first-time homebuyers and Iow- and moderate- income homebuyers. • be familiar with federal and state consumer credit statutes, such as the Equal Credit Opportunity Act, Fair Credit Reporting Act, Right to Financial Privacy Act, Real Estate Settlement Procedures Act, Truth in Lending Act and Dodd-Frank Act. • Understand fair lending laws such as the Community Reinvestment Act and Home Mortgage Disclosure Act. • Do not engage in discriminatory lending practices or predatory lending. • Monitor compliance with policy and procedures.

These delivery and loan terms vary from investor to investor, even from commitment to Commitment, and include the following factors:

• interest rate • loan term • property type • loan type • geographic location • mortgage limits (minimum and maximum loan amounts) • required mortgage insurance • specific mortgage documents • LTV

Common closing problems include:

• undisclosed liens • last minute changes to loan terms, power of attorney, documentation • incomplete documentation ¥ errors on settlement statements • title work not completed on time • out-of-town buyer, seller, third party

Monthly Income Information

♣ Mortgage lenders define monthly income as a borrower's gross monthly income from primary employment earnings plus recognizable secondary income. ♣ Included in this is income from: ♣ Base salary of the applicant and any co-applicants (including self-employment income) ♣ Average overtime pay (must verify two years' continuation) ♣ Bonuses and commissions (must verify two years' continuation) ¥ Dividends and interest ♣ Other acceptable sources of income may include: ♣ Part-time and second job income (with some programs - must demonstrate a history) ♣ Welfare or Social Security receipts (must verify three years' continuation) ♣ Alimony or child support (must verify three years' continuation) ♣ Net rental income (can usually only use 75% of gross rental income minus mortgage payment ♣ [PITI + HOA]) o The source of "other" income must be described

Monthly Income Information Verifications and Supporting Documentation

♣ Paycheck Stubs and W-2 Form ♣ Some mortgage lenders may require full federal tax returns ♣ The paychecks must normally be within a 30-day period and must show year-to-date earnings. ♣ If applicants are relying on income from other sources, such as rental property, social security, child support, dividends and interest from investments, or disability payments, they must provide adequate proof of the source. Appropriate documents could include tax returns, canceled checks, copies of leases, certification of benefits, divorce decrees, and similar evidence. ♣ Verification of Employment o A request for verification of employment (VOE) form may be used in lieu of W-2s and paychecks. o The form is typically sent to either the HR or the payroll department. o Self-Employed Applicants ♣ Self-employed applicants typically must supply additional documentation. Mortgage lenders typically look at the profitability and cash flow of the business in addition to individual income. ♣ Self-employed borrowers are typically required to supply: • Two years' full tax returns (both individual and business if the business is a corporation, S corporation, or partnership) • Two years' financial statements • A corporate profit and loss statement for the current year to date (Note that sole proprietors do not file corporate returns but do file Schedule C.) • On full doc loans, borrowers may be asked to sign an IRS Form 4506 or 8821, which gives the mortgage lender the right to pull tax returns.

Section IV: Employment Information and Income and Housing Expense Information

♣ Section IV requests at least two current years' employment history. ♣ Applicants must disclose: o Employer's name and complete address o Self-employment status (applicants who own 25% or greater interest in the business that o employs them are considered self-employed) o Number of years employed by this employer o Number of years employed in this line of work o Job title or position, length of time on the job o Business phone number ♣ If less than two years on the job or currently employed in more than one position, applicants must complete the remainder of this section, including dates and monthly income where applicable. ♣ If there is a gap in the applicant's employment record due to illness, layoff, or any other reason, a written explanation should be provided.