Policy Changes and Clarifications Regarding Credit Reports at the GSEs
By Terry W. Clemans
It seems that there has been some confusion lately regarding the changes in policy on credit report life cycles and which of the credit score models are accepted by Fannie Mae and Freddie Mac. Many credit reporting agencies are getting questioned on these issues lately, so let’s look at each one.
Fannie Mae In June, Fannie Mae (Announcement 09-19 of the Selling Guide) reduced the life cycle of mortgage credit reports by 30 and 60 days, pending the type of loan. For mortgage products on existing homes, the life cycle of the credit report was reduced from 120 days to 90 days from the date the report was issued. For mortgage products on new home construction, the life cycle of the credit report was reduced from 180 days to 120 days from the date the report was issued. Please note that both of these date reductions include all types of credit documentation, not just the credit report. Employment, asset and income verification documents also have the same life cycles, depending on the type of home being financed. More information on this new Fannie Mae policy can be found online at www.efanniemae.com/sf/guides/ssg/annltrs/pdf/2009/0919.pdf.
Freddie Mac
OCTOBER 2009 O ILLINOIS
MORTGAGE PROFESSIONAL MAGAZINE
O www.NationalMortgageProfessional.com
I have not heard of any changes in the Freddie Mac credit document life cycles at this time; however, since so many policies in the industry are changing, it may be best to adopt the same timelines.
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Credit reporting agencies On the approved scoring models, many credit reporting agencies are being requested to provide some of the older, or not yet approved, credit scoring models. This can create issues if the credit report is sent to either one of the government-sponsored enterprises (GSEs) as the Web sites of Fannie Mae and Freddie Mac (www.fanniemae.com and www.freddiemac.com, respectively) clearly designate which credit scoring models mortgage originators should use. The only credit score models for GSE loan underwriting are currently the same at both agencies and are as follows: O Equifax Beacon 5.0 O TransUnion FICO Risk Score 04 O Experian/Fair Isaac Risk Model V2 More information on this can be found on the Fannie Mae website at www.efanniemae.com/sf/technology/ou/du/pdf/ducreditscoremodel.pdf, or for more information directly on this issue from Freddie Mac, log on to www.loanprospector.com/about/crc.html. There are bound to be more changes ahead as the mortgage industry works through the problems of the past, stay tuned to your lender notices and GSE updates to stay compliant. Terry W. Clemans is the executive director of the National Credit Reporting Association Inc. (NCRA). He may be reached at (630) 539-1525 or e-mail tclemans@ncrainc.org. Visit the National Credit Reporting Association Inc. (NCRA) on the Web at www.ncrainc.org.
news flash
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The UFA Default Risk Index: Defaults on newly originated loans edge higher as unemployment soars The University Financial Associates (UFA) Default Risk Index for the third quarter of 2009 rose to 237 from last quarter’s revised count of 230, but remains below the 2008 Q4 peak. After extraordinary price declines in many housing markets around the country, one might expect improvement in UFA’s forward-looking Default Risk Index. Steep increases in unemployment are almost fully offsetting the positive effects of lower, and in some areas, stabilizing, house prices. The Index illustrates the important role that local economic conditions have played in this credit cycle since loan, borrower and collateral characteristics are held constant over time in the Index. Under current economic conditions, non-prime investors and lenders should expect defaults on loans currently being originated to be 137 percent higher than the average of loans originated in the 1990s. “Plummeting house prices from overvalued levels interacting with questionable underwriting practices have been the primary driver of defaults to date in this credit cycle,” says Dennis Capozza, professor of finance with the Ross School of Business at the University of Michigan and a founding principal of UFA. “As house prices return to more sustainable levels, we are transitioning to a phase where high unemployment rates will exacerbate the level and extend the period of elevated foreclosures.” The UFA Default Risk Index measures the risk of default on newly-originated nonprime mortgages. UFA’s analysis is based on a “constant-quality” loan, that is, a loan with the same borrower, loan and collateral characteristics. The Index reflects only the changes in current and expected future economic conditions, which are much less favorable currently than in prior years. For more information, visit www.ufanet.com/nmr.htm.
MBA study: Mortgage banker production profits improved in 2008 Mortgage bankers managed to make a marginal profit of $184 per loan on every loan they originated in the second half of 2008 despite lower net warehousing income and higher production operating expenses, according to the Mortgage Bankers Association (MBA). This modest profit marks an improvement over average per-loan losses in 2006 and 2007, according to the MBA’s Annual Mortgage Bankers Performance Report. “Many independent mortgage companies and bank subsidiaries made radical changes in their product offerings in order to remain alive in 2008,” said Marina Walsh, MBA’s associate vice presi-
dent of industry analysis. “Among this group, the government share of total originations, mainly FHA loans, was 45 percent in the second half of 2008, compared to less than ten percent the year before. Small- and mid-sized mortgage bankers were able to quickly respond to changing secondary market conditions as they had the flexibility to realign their business models toward FHA business and it was a key to their profitability.” The average firm posted pre-tax net financial income of $0.7 million in 2008, compared to $0.9 million in 2007 and $6.4 million in 2006. Fifty-nine percent of the firms in the study posted pre-tax net financial profits. The remaining 41 percent, primarily firms with asset sizes less than $10 million, posted overall net financial losses. Mortgage banking production profits were 8.75 basis points, or $184, per loan. These profits were a modest improvement over the previous two years (2006-2007) in which net losses of around $50 and $560 were reported respectively. Many firms that were not profitable in production exited the market in 2007 and 2008, so the increase in profitability may be partly driven by having only the surviving firms in the survey. In 2007, loan origination and ancillary fees grew on a per-loan basis, but they did not keep pace with production operating expenses. However, in 2008, loan origination and ancillary fees continued to grow, and compensated for continued per-loan increases in production operating expenses. As a result, the “net cost to originate” fell to $2,291 per loan in 2008. The “net cost to originate” includes all origination operating expenses and commissions, minus all fee income, but excludes secondary marketing gains, capitalized servicing, servicing released premiums and warehouse interest spread. The average pull-through rate (number of loan closings to number of loan applications) was 56.6 percent. Net warehousing income, which represents the net interest spread between the mortgage rate on a loan and the interest paid on a warehouse line of credit, dropped to $148 per loan in 2008 from $175 per loan in 2007. Likewise, the average days in warehouse dropped to 15 days from 20 days in 2007, partly because the reduced availability of warehouse lines caused lenders to move loans out as quickly as possible. The change in product mix towards government loans helped improve net marketing income in 2008 because of the higher revenues associated with the government servicing assets. Net marketing income includes the gain or loss on the sale of loans in the secondary market, pricing subsidies and overages, as well as capitalized servicing and servicing released premiums. Servicing financial profits per loan dropped to an average loss of $19 per loan (or 1.24 basis points) from a $109 per loan profit in 2007. Many servicers reportcontinued on page 18