The Community Home Lenders Association is concerned, not only about the tightening of underwriting criteria in the automated underwriting systems of government-sponsored agencies, but also the lack of transparency regarding these changes.
In a letter sent to Hugh Frater, CEO of Fannie Mae, and Mark Grier, interim CEO of Freddie Mac, the organization says members have made the same loan through their respective AUS in recent months. After the first execution, the loan was given an ‘accept’, but the second time, even when the borrower’s credit scores, financial capacity, and loan terms remain exactly the same, the loan is now on hold. .
“We see no evidence that the credit union tightening is justified at this time by the underlying loan risk, particularly in light of the continued profitability of GSEs,” the unsigned letter said.
This letter to heads of government-sponsored companies follows a sent in march to Secretary of the Treasury Janet Yellen and Director of the Federal Housing Finance Agency Mark Calabria.
The final letter asks if the AUS change has been made due to the GSE risk-taking revisions implemented in the January revisions preferred share purchase agreements, in particular a 3% limit on refinancing acquisitions or a 6% limit on single-family home acquisitions over a 52-week period that include at least two of the following conditions: on a 90% loan to value ratio; a total debt ratio greater than 45%; or a credit score below 680.
Both Fannie Mae and Freddie Mac make adjustments to the AUS based on factors such as changes in risk tolerance at any given time.
A March update to Fannie Mae’s Desktop Underwriter adjusted the way DTI is viewed. Instead of the actual number, the program will now take into account the composition of that debt, including revolving debt and student loan debt. The review considers those with a higher amount of revolving debt to be less risky. Borrowers with student debt are considered less risky than those with only revolving debt.
A second change removed the option of identifying the borrower as self-employed as a risk factor and replaced it with variable income. Thus, a borrower who has a higher percentage of variable income such as bonuses, overtime, commissions and the like, will be treated by DU as being more risky.
Among the CHLA members who got loan files caught in the UA changes are Draper & Kramer Mortgage based in Mountain Lakes, NJ.
The company handled a borrower’s case on the old version of UA and received an approved qualifying conclusion from the system, said Tim Shultz, senior vice president of national sales administration at Draper & Kramer.
This borrower had a credit score of 714, an hourly wage position, no variable income with 21% mortgage DTI and 38% total DTI ratios and three months of reserves. The borrower has been approved for the Home Ready program.
But when the loan closed soon, Draper & Kramer relaunched the case via DU. It does this as a normal practice, as there may be differences in income or other variables. Even if there is no change, most lenders are re-racing to make sure everything still matches the final underwriting, Shultz said.
The main change in this particular case was a reduction in the total DTI to 33%, as part of the revolving debt was offset and the borrower was able to save enough to add another month to their reserves. But when the file went through the updated AU, it came back with caution, Shultz said.
Fortunately, the company was able to rerun the loan and issue it using the original results.
This isn’t the only time this change has happened and it has also happened with loans managed by Freddie Mac’s loan product advisor, Shultz said.
Consequently, the CHLA is looking for more transparency on the part of the GSEs for their developments. “We’re the ones making the loans; Fannie and Freddie, they’re the ones who securitize them,” Shultz said. “Let’s work together here so that we all know our intention and our purpose.”
Representatives for Fannie Mae and Freddie Mac did not comment on the deadline.