May 16, 2021

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Mortgage News

Fannie Mae, Freddie Mac’s automated underwriting changes irk lenders

Not only is the Community Home Lenders Association concerned about the tightening of the underwriting criteria in the automated underwriting systems of the government sponsored agencies, but also the lack of transparency regarding these changes.

A letter to Hugh Frater, CEO of Fannie Mae and Mark Grier, acting CEO of Freddie Mac, stated that members have made the same loan through their respective AUS for the past few months. After the first pass, the loan received an “acceptance”, but the second time, even if the borrower’s creditworthiness and financial standing and loan terms remain exactly the same, the loan is now rated with caution.

“We see no evidence that the tightening of credit boxes is currently warranted by the underlying credit risk, particularly given GSE’s persistent profitability record,” the unsigned letter said.

This letter to government sponsored business leaders follows one sent in March to Treasury Secretary Janet Yellen and Mark Calabria, Director of the Federal Housing Finance Agency.

The final letter asks whether the AUS change was due to changes in risk appetite of the GSE implemented in the EU January revisions to the preferential share purchase agreements, in particular a limit of 3% for refinancing acquisitions or a limit of 6% for acquisitions of single-family homes in a period of 52 weeks for which two or more of the following conditions apply: over 90% loan to value ratio; a total leverage ratio of over 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 a given point in time.

A March update for Fannie Maes Desktop Underwriter has adjusted how the DTI is taken into account. 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 revision regards those with a higher amount of revolving debt as less risky. Borrowers with student loan debt are considered to be less risky than borrowers with only revolving debt.

A second change eliminated the possibility of identifying the borrower as self-employed as a risk factor and replaced this with a variable income. A borrower with a higher percentage of variable income such as bonus, overtime, commissions, and similar items will be treated as riskier by DU.

CHLA members who received loan records that were captured by the DU changes include Draper & Kramer Mortgage, based in Mountain Lakes, NJ

The company kept a borrower record on the old version of DU and received an approved legitimate finding 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 rates, and three months reserves. The borrower has been approved for the Home Ready program.

But when the loan was about to close, Draper & Kramer retransmitted the file through DU. This happens as usual as there may be income differences or other variables. Even if there aren’t any changes, most lenders do a fresh run to make sure everything still matches the final underwrite, 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 paid off and the borrower was able to save enough to add another month to their reserves. But as the file went through the updated DU, it came back with caution, Shultz said.

Fortunately, the company was able to rerun the loan and deliver it using the original results.

It wasn’t the only time this change has occurred, and it has also happened with loans made through Freddie Mac’s Loan Product Advisor, Shultz said.

As a result, the CHLA is asking GSEs to be more transparent about their changes. “We are the ones that make loans. Fannie and Freddie, they are the ones that certify it,” Shultz said. “Let’s work together here so that we all know our intent and purpose.”

Representatives from Fannie Mae and Freddie Mac did not provide any comments as of the reporting date.