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Will NJ Borrowers be Helped by Fannie Mae’s Updated Risk Model ?

Fannie Mae’s Updated Risk Model Will Better Assess Non-Traditional Borrowers

During the weekend of September 24, 2016, Fannie Mae will implement Desktop Underwriter® (DU®) Version 10.0, which will include the changes described below.

Fannie Mae

To support our lending partners, Fannie Mae continues to make ongoing investments in our risk management tools, enabling greater confidence and efficiency in the origination process. These tools help to provide the highest probability of loan performance over time, resulting in reduced costs to service those loans. We regularly review the DU risk assessment to provide certainty and clarity that the loan meets Fannie Mae’s requirements.

The changes included in this release will apply to new loan casefiles submitted to DU on or after the implementation of DU Version 10.0. Loan casefiles created in DU Version 9.3 and resubmitted after the implementation of DU Version 10.0 will continue to be underwritten through DU Version 9.3.

The changes in this release include:

• Updated DU Risk Assessment

• Underwriting Borrowers without Traditional Credit

• Policy Changes for Borrowers with Multiple Financed Properties

• HomeReady™ Mortgage Message Updates

• Updates to Align with the Selling Guide • Retirement of DU Version 9.2

Updated DU Risk Assessment

DU Version 10.0 will include an update to the DU credit risk assessment. The updated credit risk assessment will continue to measure the likelihood of a loan becoming seriously delinquent; and is expected to have minimal to no impact on the percentage of Approve/Eligible recommendations that lenders receive today. Refer to Appendix A: Comparison of Risk Factors Evaluated by DU Versions 9.3 and 10.0 for the changes made to the risk factors with DU Version 10.0

Trended Credit Data

Credit reports currently used in mortgage lending indicate only the outstanding balance, utilization and availability of credit, and if a borrower has been on time or delinquent on existing credit accounts such as credit cards, mortgages, or student loans. DU Version 10.0 will use trended credit data in the credit risk assessment, which provides access to historical monthly data (when available) on several factors, including: balance, scheduled payment, and actual payment amount that a borrower has made on the account. Leveraging trended data in the DU risk assessment allows a smarter, more thorough analysis of the borrower’s credit history. The use of trended data is a powerful predictor of risk, and its use enhances the DU risk assessment to better support access to credit for creditworthy borrowers.

The DU Version 10.0 risk assessment will only use the trended credit data on revolving credit card accounts for the most recent 24 months’ payment history (even if more than 24 months’ worth of data is provided on the credit report). The trended credit data may be used on other types of accounts in a later version of DU.

NOTE: The use of trended credit data by DU will not impact FHA or VA loan casefiles underwritten through DU.

Underwriting Borrowers without Traditional Credit

DU Version 10.0 will include the ability to underwrite loan casefiles in which no borrowers have a credit score. This update will automate what is currently a manual process for lenders. As with all loan casefiles underwritten through DU, a three-in-file merged credit report must still be requested for all borrowers on the loan application. However, when the credit report indicates a FICO® score could not be provided for any of the borrowers due to insufficient credit, the loan casefile may be eligible to be underwritten using DU Version 10.0.

NOTE: Lenders must ensure that the credit report accurately reflects the borrower’s information, such as the name, Social Security number, and current residence address of the borrower to confirm that the lack of traditional credit was not erroneously reported because incorrect information was used to order the credit report.

Eligibility Guidelines

To ensure the overall risk assessment is appropriate for loans involving borrowers without established traditional credit, DU will apply the following additional underwriting guidelines:

• Principal residence transaction where all borrowers will occupy the property

• One-unit property (may not be a manufactured home)

• Purchase or limited cash-out refinance transaction

• Fixed-rate mortgage

• Loan amount must meet the general loan limits (may not be a high-balance mortgage loan)

• LTV, CLTV, and HCLTV ratios may be no more than 90%

• Debt-to-income ratio must be less than 40%

Loan casefiles that do not meet these guidelines will receive an “Out of Scope” recommendation.

Risk Factors Evaluated by DU

DU will consider the following factors when evaluating the overall credit risk of borrowers who lack established traditional credit histories:

• Borrower’s equity and LTV ratio

• Liquid reserves

• Debt-to-income ratio

If a loan casefile does not receive an Approve recommendation, the lender may manually underwrite and document the loan according to Fannie Mae’s nontraditional credit guidelines as specified in the Selling Guide.

Additional Documentation Requirements

DU will require the verification of at least two non-traditional credit sources for each borrower that does not have traditional credit, one of which must be housing-related. A 12 month payment history is required for each source of nontraditional credit, which must be documented in accordance with the Selling Guide.

Loan Casefiles for Borrowers with Credit Scores

With DU Version 10.0 lenders may continue to use DU to underwrite loan casefiles that include a borrower(s) with traditional credit (a credit score) and a borrower(s) without traditional credit. However, the requirement that income used in qualifying for the loan cannot come from self-employment is being removed.

There will also be a change to the requirement that the borrower(s) with the credit score must contribute more than 50% of the qualifying income. When the borrower(s) with the credit score is contributing 50% or less of the qualifying income on the loan casefile, DU will issue a message requiring the lender to document a minimum of two sources of nontraditional credit that has been active for at least 12 months for the borrower that does not have traditional credit, one of the sources being housing-related.

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Formed in 1989, Denbeaux & Denbeaux is a law firm dedicated to providing top level legal representation to its clients. The partners, Marcia Denbeaux and Joshua Denbeaux, as well as senior and associate attorneys, represent individuals and businesses in New Jersey State and Federal Courts.