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Fannie Mae Changes Automated Underwriting December 12, 2009

Fannie Mae DU 8.0 Changes Will Effect Your Borrowers

© 2009 Fannie Mae. Trademarks of Fannie Mae. DODU 1109 1
Desktop Originator/Desktop Underwriter Release Notes
DU Version 8.0
September 22, 2009
Updated November 13, 2009
During the weekend of December 12, 2009, Fannie Mae will implement Desktop Underwriter® (DU®) Version 8.0. This release will include changes to the DU credit risk assessment and a number of eligibility guidelines. In addition, this release will support the policy changes described in the following Selling Guide Announcements, as well as other changes described below:

Announcement 08-16, Bankruptcy, Foreclosure, and Conversion of Principal Residence Policy Changes; and Revised Property Value Representation and Warranty Requirements

Announcement 09-02, Updates to Multiple Mortgages to the Same Borrower Policy, Reserve Requirements, Reserves Definition, and Form 3170

Announcement 09-08R, Temporary High-Cost Area Loan Limits and Revised Eligibility Requirements for High-Balance Mortgage Loans

Announcement 09-19, Miscellaneous Underwriting, Eligibility, and Property-Related Updates

Announcement 09-28, Retirement of HomeStyle® Construction-to-Permanent

Announcement 09-29, Updates to Minimum Credit Scores, Mortgage Insurance, Pricing for Certain Desktop Underwriter® Loans, Biweekly Loans, and Special Feature Codes
The changes included in this release will apply to new loan casefiles submitted to DU on or after the weekend of December 12, 2009. Loan casefiles created in DU Version 7.1 and resubmitted after the weekend of December 12 will continue to be underwritten through DU Version 7.1.
These release notes have been updated to indicate that the 2010 high-cost area loan limits, as specified in Announcement 09-34, will be implemented with DU Version 8.0. Refer to the High-Balance Mortgage Loans section on page 5 of these release notes.
Changes to DU’s Credit Risk Assessment
As part of normal business operations, Fannie Mae regularly reviews DU to fine-tune its credit risk assessment based on new data and loan performance information to ensure the credit risk assessment supports sustainable homeownership options for borrowers. As a result, the DU Version 8.0 release will include an update to the DU credit risk assessment.
These changes are intended to help Fannie Mae and its customers better manage default risk in this market and to provide reasonable, prudent, and sustainable homeownership options to borrowers. Customers may see some loan casefiles receive a more conservative recommendation, while others may receive improved recommendations when compared to similar loan casefiles submitted to DU Version 7.1.
DU Version 8.0 will evaluate loan casefiles using the same risk factors currently evaluated in DU Version 7.1. For more information regarding the risk factors evaluated by DU, please refer to the Fannie Mae Selling Guide, B3-2-02, Risk Factors Evaluated by DU.
© 2009 Fannie Mae. Trademarks of Fannie Mae. DODU 1109 2
Delivery Eligibility Updates
Total Expense Ratio
With this release, the maximum allowable total expense ratio in DU will be revised to 45 percent, with flexibilities offered up to 50 percent for certain loan casefiles with strong compensating factors.
If current debts exceed the maximum allowable total expense ratio, the loan casefile will receive an Ineligible recommendation. DU will no longer return a Refer recommendation on loan casefiles that would have otherwise received an Approve recommendation but had exceeded the maximum allowable total expense ratio.
DU Refi Plus™ loan casefiles submitted to DU Version 8.0 will continue to be subject to the maximum allowable total expense ratio currently applied to DU Version 7.1 DU Refi Plus loan casefiles.
Minimum Credit Score Requirement
As stated in Announcement 09-29, Fannie Mae is modifying the minimum “representative” credit score requirement for all loans delivered to Fannie Mae to 620. With the exception of DU Refi Plus, loan casefiles that are underwritten through DU Version 8.0 with a minimum representative credit score below 620 will receive an Ineligible recommendation.
Refer to Announcement 09-29 for information regarding the delivery deadlines for DU Version 7.1 and Version 7.0 loans underwritten according to the previous minimum representative credit score requirement.
Foreclosures
In support of Announcement 08-16, DU will be updated to include the following requirements for borrowers with foreclosure completion dates of more than 5 years, but within 7 years from the credit report date:

The purchase of a principal residence will be permitted with a minimum down payment of 10 percent and minimum representative credit score of 680.

The purchase of a second home or investment property will not be permitted.

Cash-out refinances will not be permitted for any occupancy type.
Loan casefiles that do not comply with the guidelines above will receive an Ineligible recommendation.
Note: Limited cash-out refinance transactions will continue to be allowed for all occupancy types pursuant to eligibility requirements in effect at the time the loan casefile is underwritten through DU.
Deed-in-Lieu of Foreclosure
DU will be updated to incorporate the policy specified in Announcement 08-16 regarding prior deed-in-lieu of foreclosure actions. If a deed-in-lieu of foreclosure is reported within 4 years of the credit report date, the loan casefile will receive a Refer with Caution/IV recommendation.
DU will determine if a mortgage tradeline is a deed-in-lieu of foreclosure by using specific Remarks Codes that would be present in the credit report data and associated to the tradeline.
DU Version 8.0 will also include the following requirement that applies to borrowers with prior deed-in-lieu of foreclosure actions more than 4 years, but within 7 years from the credit report date.

Principal residence, purchase transactions submitted to DU with an LTV or CTLV greater than 90 percent where a borrower on the loan casefile has a deed-in-lieu of foreclosure action that was completed more than 4 years, but within 7 years from the credit report date will receive an Ineligible recommendation.
© 2009 Fannie Mae. Trademarks of Fannie Mae. DODU 1109 3
Note: Limited cash-out and cash-out refinance transactions will continue to be allowed for all occupancy types pursuant to eligibility requirements in effect at the time the loan casefile is underwritten through DU.
Bankruptcies
DU will be updated to include the following bankruptcy guidelines specified in Announcement 08-16:

Loan casefiles where DU identifies a Chapter 13 bankruptcy that was discharged within the last 24 months; dismissed within the last 48 months; or filed but neither discharged nor dismissed within the last 48 months will receive a Refer with Caution/IV recommendation.

Loan casefiles where DU identifies a non-Chapter 13 bankruptcy that was filed, discharged, or dismissed within the last 48 months will receive a Refer with Caution/IV recommendation.
DU is not able to determine if multiple bankruptcy filings have occurred, due to the manner in which bankruptcies are reported in the credit report. As a result, DU will issue a message when it appears that there may have been multiple bankruptcy filings. This message will list each of the bankruptcies seen on the credit report, and will instruct customers to ensure the loan casefile meets the criteria for underwriting loan casefiles with multiple bankruptcies specified in the Selling Guide.
Expanded Approval® (EA) Enhancements
DU Version 8.0 will no longer issue EA-II and EA-III recommendations, except on those loan casefiles that were underwritten as DU Refi Plus. EA-I recommendations will continue to be available through DU Version 8.0.
With this release, the following transactions that receive an EA recommendation will be eligible for delivery to Fannie Mae:

Loans subject to financed mortgage insurance

6-month ARMs, 1-year ARMs, 3-year ARMs , and 5/1 ARMs with 5/2/5 caps

Interest-only mortgage loans

Balloon mortgages
High-balance mortgage loans will be ineligible with any EA recommendation.
New Special Feature Code
As stated in Announcement 09-29, the special feature code (SFC) that is currently used when delivering a mortgage loan that received an EA recommendation (SFC 716) will be replaced with a new special feature code, SFC 062. Except for MyCommunityMortgage® loans, the lender must deliver all DU Version 8.0 mortgage loans that receive an EA-I recommendation with a SFC 062. DU Version 8.0 DU Refi Plus mortgages that receive an EA-II or EA-III recommendation must also be delivered with Special Feature Code 062.
DU Version 7.0 and 7.1 loans that received an EA recommendation must continue to be delivered with SFC 716. Refer to Announcement 09-29 for information regarding the delivery deadlines for DU Version 7.1 and Version 7.0 loans that received an EA recommendation.
© 2009 Fannie Mae. Trademarks of Fannie Mae. DODU 1109 4
Revised Mortgage Insurance (MI) Coverage Level Requirements
As stated in Announcement 09-29, loans with a loan-to-value (LTV) ratio greater than 80 percent will now be subject to the following simplified MI coverage requirements.
Simplified Mortgage Insurance Options
Reduced MI and Lower-Cost MI will no longer be offered with DU Version 8.0; in addition, the separate, higher coverage requirements for mortgage loans secured by manufactured homes will no longer be issued.
Refer to Announcement 09-29 for information regarding the delivery deadlines for DU Version 7.1 and Version 7.0 loans where Reduced MI or Lower-Cost MI has been obtained.
New Minimum Mortgage Insurance Coverage Levels
Fannie Mae is expanding the availability of minimum mortgage insurance coverage levels, and when the minimum coverage level option is chosen, a loan-level price adjustment (LLPA) will be assessed. DU Version 8.0 will issue the following MI coverage level requirements, indicating when the MI loan-level price adjustment will apply.
Mortgage Insurance Coverage
LTV Range
Mortgage Type
80.01 – 85.00%
85.01 – 90.00%
90.01 – 95.00%
95.01-97.00%
16%
+ MI LLPA
18%
+ MI LLPA
Fully-amortizing fixed-rate, term <= 20 years
6%
12%
25%
35%
6%
+ MI LLPA
12%
+ MI LLPA
16%
+ MI LLPA
18%
+ MI LLPA
 Fully-amortizing fixed-rate, term > 20 years
 ARMs
 Interest-only
 Balloons
 Manufactured Homes
12%
25%
30%
35%
MyCommunityMortgage
6%
12%
16%
18%
Note: As stated in Announcement 09-29, the new minimum coverage level option can be manually applied to DU Version 7.0 and Version 7.1 loan casefiles. In addition under DU Refi Plus, lenders will continue to have the option of obtaining the level of mortgage insurance in effect on the existing loan being refinanced, or the level of mortgage insurance coverage that does not require the minimum MI LLPA.
Changes to Financed Mortgage Insurance Requirements
With the exception of the transactions noted below, loan casefiles at all LTV ratios will now be permitted to have the MI financed using either a single premium plan that is paid at one time upfront, or a split premium plan that has both an upfront and monthly component.
Two- to four-unit properties, investment properties, and cash-out refinance transactions will continue to receive an Ineligible recommendation if financed MI is entered on the loan application.
DU Version 8.0 will also reflect the modifications made to the names of special features codes 281, 283, and 574 to remove references to “single premium” or “split premium.”
© 2009 Fannie Mae. Trademarks of Fannie Mae. DODU 1109 5
MyCommunityMortgage Special Feature Code Changes
As stated in Announcement 09-29, SFC 460 will be the only SFC required on MyCommunityMortgage (MCM®) loans, and the SFCs that identified specific MCM mortgage loan options or features will be retired. As a result, SFCs 480, 519 and 612 will not be issued on MCM loan casefiles underwritten with DU Version 8.0.
Refer to Announcement 09-29 for information regarding the delivery deadlines for DU Version 7.1 and Version 7.0 loans using the previous MCM SFCs.
High-Balance Mortgage Loans
DU Version 8.0 will be updated to implement the eligibility guidelines and Field Review requirements specified in Announcement 09-08R.
Refer to Announcement 09-29 for information regarding the delivery deadlines for DU Version 7.1 and Version 7.0 loans underwritten according to the previous high-balance mortgage loan requirements.
DU will also be updated to reflect the 2010 high-cost area loan limits.
The Desktop Underwriter Maximum Allowable LTV Ratios chart and the Desktop Underwriter Expanded Approval (EA) Eligibility chart have been updated to include these changes. These can be found in the Eligibility Matrix on eFannieMae.com on the Single-Family Reference Materials page.
New and Updated Underwriting and Eligibility Policies
DU Version 8.0 will include the following underwriting and eligibility polices specified in Announcement 09-19.
Age of Credit Documents
The DU documentation expiration will be updated to reflect a credit report expiration of 90 days from the date of the credit report for purchase and refinance transactions, and 120 days from the date of the credit report for construction and construction-to-permanent transactions.
Construction-to-Permanent Financing – Single-Closing Transaction
The following message will be issued on construction transactions to remind customers of the requirements that must be applied to single-closing transactions when the credit and appraisal documents are dated more than four months from the time of the conversion to permanent financing:
If the credit and appraisal documents are dated more than four months, but not exceeding 18 months old at the time of the conversion to permanent financing, the loan casefile is only eligible for delivery if the LTV, CLTV, and HCLTV do not exceed 70 percent and the loan casefile received an Approve/Eligible recommendation. Special feature code 151 must also be provided at delivery.
Home Equity Lines of Credit
DU will be updated to allow home equity lines of credit on Flexible mortgages and MCM loan casefiles.
IRS Form 4506-T
DU will issue a Verification message on all DU loan casefiles requiring that a completed and signed Form 4506-T is obtained for all borrowers at both application and closing.
© 2009 Fannie Mae. Trademarks of Fannie Mae. DODU 1109 6
Trailing Secondary Wage Earner Income
Since the Selling Guide no longer permits consideration of a trailing secondary wage earner’s anticipated income, loan casefiles using this type of income will receive an Ineligible recommendation and customers will be instructed to remove the income and resubmit the loan casefile to DU.
Verbal Verification of Employment
DU will issue a Verification message on all DU loan casefiles requiring that a verbal verification of employment is performed and documented for each borrower within 10 days prior to the note date for all borrowers not using self-employment income for qualifying, and within 30 days prior to the note date for all borrowers using self-employment income for qualifying.
The existing Verification messages issued by DU that require a verbal verification of employment along with other documentation will be updated to remove the reference to the verbal verification of employment.
Verification of Stocks, Bonds, Mutual Funds, and Retirement Accounts
The Verification messages issued when stocks, bonds, or mutual funds are entered on the application will be modified to remind customers that only 70 percent of the value of the account should be entered if such funds will be used as reserves. The message will also state that if the funds will be used for the down payment or closing costs, receipt of the funds realized from the sale or liquidation of the assets must be verified, and that stock options or non-vested restricted stock may not be used for reserves.
The Verification message issued when retirement funds are entered on the application will be modified to remind customers that only 60 percent of the value of the account should be entered if such funds will be used for reserves. The message will also state that if the funds will be used for the down payment or for closing costs, receipt of the funds realized from the sale or liquidation of the assets must be verified.
Two-Unit Eligibility
DU will be updated to implement the eligibility guidelines and maximum LTV, CLTV, and HCLTV ratios permitted for mortgages secured by two-unit properties specified in Announcement 09-19. Those updated guidelines are as follows, and do not apply to DU Refi Plus loan casefiles.
Transaction Type
DU Version 7.1 Maximum
LTV/CTLV/HCLTV
DU Version 8.0 Maximum
LTV/CTLV/HCLTV
Two-Unit Principal Residence
Fully Amortizing
95%
80%
Interest-Only
90%
75%
High-balance mortgage loans
75%
75%
HomeStyle Renovation
95%
75%
MCM
97%
95%
Purchase Limited Cash-Out Refinance
MCM, high-balance mortgageloans
90%
75%
Fully Amortizing
95%
Ineligible
Construction
Interest-Only
90%
Ineligible
Cash-Out Refinance
All
85%
75%
© 2009 Fannie Mae. Trademarks of Fannie Mae. DODU 1109 7
Transaction Type DU Version 7.1 Maximum
LTV/CTLV/HCLTV
DU Version 8.0 Maximum
LTV/CTLV/HCLTV
Two-Unit Investment Property
Fully Amortizing
85%
75%
Interest-Only
85%
Ineligible
Purchase
High-balance mortgage loans
75%
65%
Construction
All
85%
Ineligible
Fully Amortizing
75%
75%
Interest-Only
75%
Ineligible
Limited Cash-Out Refinance
High-balance mortgage loans
75%
65%
Fully Amortizing
75%
70%
Interest-Only
70%
Ineligible
Cash-Out Refinance
High-balance mortgage loans
Ineligible
Ineligible
Refer to Announcement 09-29 for information regarding the delivery deadlines for DU Version 7.1 and Version 7.0 loans underwritten according to the previous maximum allowable LTV, CLTV, and HCLTV ratios and eligibility guidelines.
The Desktop Underwriter Maximum Allowable LTV Ratios chart and the Desktop Underwriter Expanded Approval (EA) Eligibility chart have been updated to include these changes. These can be found in the Eligibility Matrix on eFannieMae.com on the Single-Family Reference Materials page.
Miscellaneous
Reserves Requirements for Investment Properties and Second Homes
DU Version 8.0 will be updated to require a minimum of two months’ reserves for all second home transactions and six months’ reserves for all investment property transactions, as specified in Announcement 09-02.
Retiring HomeStyle Construction-to-Permanent
The HomeStyle Construction-to-Permanent mortgage product was retired with Announcement 09-28. DU will no longer issue a message on construction transactions stating that if the loan will be delivered as a HomeStyle Construction-to-Permanent loan, the lender must ensure that all HomeStyle Construction-to-Permanent guidelines are followed.
Retiring Biweekly Mortgages
As stated in Announcement 09-29, the biweekly mortgage product is being retired. DU Version 8.0 loan casefiles with biweekly payments, based on the payment frequency entered on the loan application, will receive an Ineligible recommendation.
Refer to Announcement 09-29 for information regarding the delivery deadlines for biweekly loans underwritten through DU Version 7.1 and Version 7.0.
Employer-Related Mortgages
Announcement 09-29 referenced the retirement of SFC 072, Employer-Related Mortgage. DU Version 8.0 will no longer issue SFC 072 on loan casefiles with Employer Assisted Housing funds entered as an Other Credit on the loan application.
© 2009 Fannie Mae. Trademarks of Fannie Mae. DODU 1109 8
Retirement of DU Version 7.0
When DU Version 8.0 is implemented, DU Version 7.0, which went into production in June 2008, will be retired. Therefore, effective the weekend of December 12, 2009, customers will no longer be able to resubmit loan casefiles to Version 7.0; however, users will continue to be able to view the online loan applications and the DU Underwriting Findings reports that were created under Version 7.0. To obtain an updated underwriting recommendation after the weekend of December 12, the user must create a new loan casefile and submit it to DU.
Modified Messages
The message issued on investment property and second home transactions reminding customers that the borrower’s entire current residence payment must be reflected in the Liabilities section of the application will be updated.
This loan has been underwritten as a second home or investment property transaction. DU captures data from Section VI L to calculate the total expense ratio. The total expense ratio will not be accurate unless the borrowers’ total monthly primary residence housing expense, which includes principal, interest, hazard insurance, real estate taxes, mortgage insurance, and homeowners’ association dues, is accounted for in the Liabilities section.
For More Information
For more information about these Release Notes or the Announcements referenced in these Release Notes, lenders may contact their Fannie Mae customer account team; and mortgage brokers should contact their DO® sponsoring wholesale lender.

Freddie Mac Announcement Regarding Loan Limits for 2010

Fannie Mae & Freddie Mac Loan Limits Extended to 2010

Freddie Mac Maximum Loan Limits Are Unchanged for 2010

On November 12, Freddie Mac announced that our base conforming loan limits will be maintained at their current 2009 levels for 2010, with the maximum loan limit for a 1-unit single-family property remaining at $417,000. The temporary high-cost loan limits for properties located in designated high-cost areas will remain unchanged for 2010 as well.

- High-Cost Loan Limits

As a reminder, the loan limits in designated high-cost areas are the higher of the temporary limits established by the Economic Stimulus Act of 2008 (maximum of $729,750 for 1-unit single-family properties) and the permanent limits established by the Housing and Economic Recovery Act of 2008 (maximum of $625,500 for 1-unit single-family properties).

Actual loan limits for a specific high-cost area may be lower than the maximum permitted loan limit. It is important that you review the 2010 loan limits permitted for a specific county, which the Federal Housing Finance Agency (FHFA) determines and makes available on its Web site <http://www.fhfa.gov/Default.aspx?Page=185>.

- Super Conforming Mortgages

The recently enacted extension of the high-cost loan limits through year-end 2010 applies to all super conforming mortgages with note dates on or after October 1, 2008, and on or before December 31, 2010. There are no changes to our super conforming mortgage requirements as a result of the extension.

- Operational Impacts

Because the 2010 loan limits are unchanged from 2009, there are no impacts to Loan Prospector or the selling system.

The Single-Family Seller/Servicer Guide (Guide) <http://www.freddiemac.com/sell/guide/> will be updated in an upcoming Guide Bulletin to reflect the extension of our current loan limits through 2010, as well as the eligible note dates for super conforming mortgages.

For More Information

- Review the 2010 base conforming loan limits <http://www.freddiemac.com/sell/selbultn/limit.htm> and the higher loan limits in designated high-cost areas <http://www.freddiemac.com/sell/selbultn/limit.htm> as permitted under ARRA.

- View the 2010 loan limits <http://www.fhfa.gov/Default.aspx?Page=185> in designated high-cost areas as published by FHFA.

- Learn more about our super conforming mortgage requirements <http://www.freddiemac.com/singlefamily/mortgages/super_conforming.html>.

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Why Buy Now…Why Rate Outweighs Price

Buying Now Could Save You $$$

Where’s The Bottom?

A lot of buyers seem to be, “waiting for the bottom” of real estate prices to hit before they purchase a home.  Waiting for the right deal is crucial, however, waiting too long, could hit your pocket book more than one might think.  An understanding of how interest rates effect payments, compared to how prices effect payments, could be that final “push” that a buyer needs to see, to get off the fence and buy that home, at the most opportune time.

Think Payment, Not Price

We have many borrowers who are approved and ready to buy.  They’re in the trenches, writing offers, but some get emotionally drained when they get outbid in their offers.  They have budgeted their maximum monthly payment and, perhaps, lowball every offer, when it’s easier to just consider a higher offer, with a lower interest rate.  Let’s look at an FHA purchase…

Do You REALLY Save?

A borrower desires their maximum monthly payment to be right around $1,500 per month.  This affords them a home at approximately $210,000 when rates are at 4.875% (with only 3.5% down).  So, they’ve sat on the fence, hoping that values would continue to come down.  If they wait a year, and speculate values to fall 10%, they could wait and hope to buy that home for $189,000.   A savings of $21,000.00.

Does It Make “Cents?”

What’s important to understand about the above mentioned strategy is that with the Government Mortgage-Backed Security Purchase Program’s funds drying up, and bond values starting to trade at higher yields, interest rates are inevitably moving up.  One year from today, it is expected that long term interest rates will be about 6.5%.    So, even if that home lost 10% in value, when you plug in the anticipated interest rate, your monthly payment increases.  So, where’s the “cents” in that?

Other Reasons To Buy Now

With the First Time Homebuyer Tax Credit drying up, as well, you have about five months left to get into escrow.  So, you could be throwing away an $8,000 gift from the Federal Government.   There’s 3.8% of that $210,000 home you could buy, today.  If you move now you have the tax benefits of interest and property taxes written off the income tax you’ll pay now, as opposed to a year from now.  And do not forget, long term rates are going up, even though short term rates may stay low.

Table Comparison:

Over the life of a loan, the difference is $18,540.00.  Not to mention the $8,000 Tax Credit and the tax write-offs for a year.  Now is Definitely the time to Buy!

Related Must Reads

Understanding FHA. Why It’s King
Reasons for Higher Rates
House Passes Tax Credit Extension

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4.875%  APR = 5.838% including 1.75% Mortgage Insurance Premium

6.5%  APR=7.508% including 1.75% Mortgage Insurance Premium

New FHA Record: 36% of Market Share