Several Significant Income-Related Underwriting Changes from Fannie

by devteam July 2nd, 2015 | Share

Highlights from the most recent update to Fannie’s Selling Guide:</p

Conversion ofrnPrincipal Residence Requirements </p

At the height of thernfinancial crisis Fannie Mae required lenders to make a manual application tornconvert a principal residence to a secondary or vacation property in order tornensure that borrowers had adequate capacity and financial reserves to managernmultiple properties.  Effectivernimmediately Fannie Mae is eliminating requirements specifically associated withrnsuch a conversions because of other policies now in place that adequatelyrnaddress credit history, rental income and financial reserves and lenders mayrnuse these in the future.  </p

 Stocks, Bonds, andrnMutual Funds </p

When a borrower isrnusing vested stocks, bonds,rnand mutual funds (includingrnretirement accounts) for down payment, closing costs, and reserves 100 percentrnof the value of the asset will be allowed in determining available reserves.  If the lender documents that the assetrnrepresents at least 20 percent more than what is needed for the downpayment andrnclosing costs no documentation of liquidation is required.  If that determination is not made then thernborrower’s actual receipt of funds from the sale or liquidation must bernobtained.  Non-vested assets may not bernused.</p

Unreimbursed Employee Business Expenses </p

For a borrower who is qualified using base pay,rnbonus, overtime, or commission income that is less than 25 percent of his or her annual employment, income unreimbursed employee businessrnexpenses and union dues and other voluntary deductions will no longer bernrequired to be analyzed or deducted from qualified income or added to monthlyrnliabilities whether or not these expenses are identified on tax returns or taxrntranscripts.  Where more than 25 percentrnof annual employment income is from commissions, unreimbursedrnemployee business expenses must be deducted from gross commission income regardless of the length of timernthat the borrower has filed that expense with the IRS.  The exception is anrnactual automobile lease or loan payment. Ifrnborrowers report an automobile allowance as part of their monthly qualifyingrnincome, the lender must determine ifrnthe automobile expenses reported on IRS Form 2106 should be deducted from income or treated as arnliability. </p

Tip Income</p

In some cases where the full amount of tip income isrnnot reported by the employer on the Form 1005, paystub and W-2 form the borrower may report additionalrntip income to the IRS usingrnForm 4137, SocialrnSecurity and MedicarernTax on Unreported Tip Income,rnwhen filing his or her tax returns. Fannie Mae will allow this tiprnincome to be used in qualifying if the lender obtains the most recent two yearsrnof federal income tax returns with Formrn4137.</p

Use of IRS W-2rnTranscripts in Lieu of W-2s         </p

When lenders verify employment income for borrowersrnwhose income is used to qualify for the mortgage loan, borrower-provided paystubs and IRS W-2 forms are onernoption that can be utilized to document the income. In lieu of W-2 forms, other documentation optionsrnare a Request for Verification of Employment (Formrn1005 or Form 1005 (S)) or the final year-to-date paystub.rnFannie Mae will also now permit an IRS “Wage and Income Transcript” (W-2 transcript) inrnlieu of the actual W-2 forms.</p

New ClosingrnDisclosure and Loan Estimate Forms           </p

Givenrnboth the pending implementation and enforcement of the new the ConsumerrnFinancial Protection Bureau (CFPB) Closing Disclosurernand Loan Estimate forms as well asrnthe temporary delay in their implementation and enforcement, a number of related changed have been made to thernSelling Guide.  First is an update to acknowledgernthat lenders will continue to deliver loans with both old and new forms for arnperiod of time.  </p

Lendersrnare required to maintain copies of the loan estimate and final settlement statement and any re-disclosures in thernmortgage loan file. Fannie Mae will not require that the borrower and sellerrn(if applicable) sign the Closing Disclosurernor Loan Estimate but obtaining those signature is still supported as a bestrnpractice, especially for the Closing Disclosure.</p

Ifrnthere are separate Closing Disclosures for the borrower and seller, the lenderrnmust retain copies of each in thernmortgage loan file and must use the ClosingrnDisclosure that is applicable to the transaction; i.e. not using the purchasernversion of the form for a refinance transaction.  There is no longer a requirements for arnseparate escrow waiver disclosure.  Otherrnreferences to items on the settlement statement have been removed and terminologyrnhas been changed throughout to reflect changes in the new forms.</p

Permit PrepaymentrnPenalties on Subordinate Liens </p

 CurrentlyrnFannie Mae requires that, when it purchases or securitizes a first mortgagernsubject to subordinate financing the subordinate financing not include prepaymentrnpenalties or restrictions in order to guard against predatory lending and/orrnsevere prepayment penalty scenarios. rnRegulatory changes have increased borrower protections in this regardrnand as a result Fannie Mae is removing this restriction. </p

Seller/ServicerrnNet Worth and Liquidity Requirements   </p

OnrnMay 20, 2015 Fannie Mae updated net worth and minimum liquidity requirementsrnfor its seller/servicers.  To reflect thesernchanges the following updates have been made to the Selling Guide.</p

All approved sellers/servicers must have andrnmaintain a Lender Adjusted Net Worth of at least $2.5 million, plus a dollar amount that represents 0.25% ofrnthe unpaid principal balance of the seller/servicer’srntotal portfolio of mortgage loans serviced. Those that are depositoryrninstitutions are required to meet the minimum regulatory capital requirements to be classified as “well capitalized” byrntheir primary regulator.</p

Allrnother entities must have a minimum Lender Adjusted Net Worth/Total Assets ratiornof 6%, or equivalent, as determinedrnby Fannie Mae. Approved non-depositoryrnsellers/servicers must have and maintain a minimum liquidity requirement based on the Agency SeriousrnDelinquency Rate, which is defined in the Guides.</p

Optional DatarnFields on Verification of Employment (Form 1005 and 1005 (S)) </p

ThernSellers Guide now specifically lists which data fields on the above referencedrnforms are optional and need not be completed. </p

Loan-level DefectrnReporting of Nonpublic Personal Information to Lenders    </p

Tornmake its loan review findings more useful to lenders, Fannie Mae intends to expand some of the reporting detail made available on specific loans.rnAs this data may includernlimited borrower nonpublicrnpersonal information (“NPI”),rnFannie Mae is updating the Selling Guide tornaddress potential compliance obligations that might arise under the Gramm-Leach-Bliley Act.</p

Tracking of FanniernMae Loan Numbers    </p

 Lendersrnare currently required to provide the Fannie Mae loan number for every mortgagernloan to their servicers but not required to provide them to document custodians.  Thernnew requirement is that lenders ensure that the document custodian receives, within 30 days of loan certification, the Fannie Mae loan numberrnfor every mortgagernloan for which the custodianrnis responsible and respond, within three business days, to any request from the custodian for thernFannie Mae loan number.  Documentrncustodians are required to have a process in place to obtain and retain thernnumber for every loan and to be able to perform reconciliations using that loanrnnumber.  Lenders are encouraged tornimplement these requirements immediately; however they will be required for allrnmortgage loans certified by Fannie Mae on and after October 1, 2015.</p

RD Section 502rnLeveraged (Blended) Programs Allowed as Community Seconds </p

Tornfurther expand access to rural housing,rnFannie Mae will now purchasernconventional first mortgagernloans under the Rural Development (RD) 502 Leveraged (Blended) Loan Programrnthat are combinedrnwith a direct, low interest rate subordinate Section 502 lien from RD. The subordinate lien will be considered eligiblernunder the Community Secondsrnprogram. The standard review of Community Seconds programs is not requiredrnbut any subordinate lien must meet all RD guidelines. As with any Community Seconds mortgage, Fannie Mae does notrnpurchase the subordinate lien.</p

The Seller Letterrnalso makes various other changes to the Selling Guide including a notificationrnof a pending change that will treat non-investment trusts as consumer credit,rnand revisions to two uniform instruments, the Texas Home Equity Affidavit andrnAgreement and Instructions for the Arizona Deed of Trust.

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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