Mortgage Processing Blog :

How To Interpret Guideline Differences Based On Where You Work

2010-04-30T19:24:00.001-04:00

Written By: Jane Harford, FHA DE Underwriter

Recently, in our office there has been an ongoing difference of interpretations based on “guidelines” and how to implement them. It is a strong lesson in how each of us when underwriting must be able to use our own vast book of experiences, dig into our bag of tricks and come out with the answers that will be able to justify an answer on each loan that has been submitted to us as FHA DE Underwriters……some FHA loans are very easy to approve and the justifications are the same practical reasons that we use on most of our HUD LT’s. You know-good stable employment, reserves and the money is coming from their own savings or excellent credit/no lates and high regard for credit (high credit scores)….those are normal, clear and satisfactory listed compensating factors.

What is much more difficult thing, when you are handed an FHA loan that is a manual review or needs to be downgraded to a manual review. Here is where the experience, ability to pick apart and put a file back together again to make a “marginal” loan approvable and saleable separates the true underwriters from the auditors…….this is where the true and best FHA DE underwriters work their hardest to ensure that what they are approving (if they do approve the loan) will be insured, sold and will not return as an early payment default, a foreclosure or a HUD PD that you will do the loan on again within 12-24 months.

I will just give you a brief background on a few of the more difficult HUD loans that I did go ahead and approve….these were done a few years back when the credit guidelines were easier and the investor overlays were not as tough. The first loan that I did approve was while working for a smaller regional lender. The borrower had 1-2 accounts that appeared on his credit report were only recently obtained….under 6 months of history that appeared on the credit report. The borrower also did not have an established housing history.

The borrower also had worked in the mechanical trades and had large dollar amounts of deductible work expenses for tools and other materials. When deducting these figures, the borrower’s qualifying income was reduced a great deal. When the file first came to me, I used the “normal” reasons to decline the loan based on my understanding of the guidelines. The Borrower’s non traditional credit history was stellar, but not 24 months old. It was a cell phone, auto insurance, tool payments and one other thing.

Also, the funds for closing were coming from his tax refund for that year-no established savings pattern…..when ticking off all of the facts, there was no reason to approve this file. In sitting down with my supervisors, we sat down and went through the reasons that we could/should make the loan. The loan officer was willing to work closely with the borrower to ensure that the mortgage payments were going to be made on a timely basis. As far as I know, the loan never went into any kind of default and the borrower became a successful home owner that was happy to be paying a mortgage versus rent.

That was then-obviously many things have changed drastically in our lending world since then…..that kind of loan would not be made now. The pendulum has swung back to the ultra conservative side and won’t move from there for quite a while. However, I do feel that those cases that do merit a second or closer review still do deserve our efforts to be reviewed closely and carefully to see if there is any way to be able to take the raw facts and work with them to turn the file into an approvable loan that is insurable, saleable and will not become an EPD or loss to HUD and the lenders.

Part of the back and forth in the office these past few weeks has to do with when and how to downgrade AUS approvals to manual review based on various items that appear on the credit report. It really boils down to how the file was initially taken, the level of detail shown by the loan officer and processor in working with the borrower to get all things documented, updated and packaged into a sensible box that would merit a loan approval without question. I think it can be best understood in this manner-if there is an item that is disputed on a credit report, is it best to leave it alone or is it best to deal with the borrower to document that it is paid/dealt with and provide the updated facts/information and corrected credit supplement to show that the issue is really no longer an issue? In doing research to try and better understand this set of circumstances, it was discovered that each HUD HOC often has its own interpretation of how the grey areas are to be handled.

So, what is important in the Atlanta HOC may not be looked at in the same way as in the Santa Ana HOC…which makes the ability to get clear answers on a national basis impossible. What it boils down to is getting the best answers on a regional basis for each HUD HOC in which the company does business. It does become more difficult if the company operates on a national basis.

Bottom line-each file still needs to be reviewed on its own merits, looking at the good, bad and ugly of the actual borrowers, their past and what their future may look like. One thing I have always loved about this business is that each file you work on is the story of someone new-even though the methods for each loan are the same, each borrower or family is new and different. That is the one bottom line reason that underwriting properly still takes time and each loan has to be reviewed on its own merits….Thus, automated underwriting helps to make a decision, but it does not make the actual decision-that is still left to a human being. I hope that this stays on as a human based decision for a long time to come.

As always, happy fraud free underwriting to you all!

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

FHA Well and Septic Guidelines Including Variances

2010-04-23T10:31:00.000-04:00

Written By: Jane Harford, FHA DE Underwriter

Now, the days are longer, spring is in the air and home sales are increasing due to lower interest rates, better housing prices and the fact that the homebuyer credit is going away at the end of this month, it is time to take a quick review at FHA’s well and septic guidelines, including Waivers on properties that do not meet the regulations.

HUD does require that all properties are connected to public water and sewer whenever possible. The full regulations are published in Mortgagee Letter 2005-48. But it is always good to remember that individual water supply systems (wells) and septic systems are acceptable under HUD regulations if the cost of connecting to public or community water and sewer systems is excessive. (Generally over 3% of the cost of a home purchase is the bench Mark used by lenders).

If the costs exceed that benchmark, the DE underwriter has the option to not enforce the condition to hook up to public water/sewer systems. FHA will accept the state/local distance requirements for well/septic systems as long as they are not less than 75 feet between the well and septic tank drain field. The minimum from the well to a roadway or property line of anything other than a single family home can’t be less than 10 feet. These distances are regardless of the state and local requirements.

Please remember that the HUD standard requirement is 50 feet between well and septic, 100 feet from the drain field and 10 feet from the property line. Appraisers are no longer “required” to fully document the locations of well/septic systems. Each appraisal must be reviewed on it’s own merits, locations of the well/septic systems and ability to meet the local, state and health authority guidelines. If in doubt, the waiver from HUD is the safest way to ensure that the property will be insured after closing and not kicked back due to well/septic not meeting HUD’s guidelines.

CHECKLIST FOR WELL/SEPTIC WAIVERS
FHA CASE NUMBER: __________________

___1. Documentation from the local authority that the subject property is unable to connect to a public or community water/sewer system. If connection is available and the costs to the public or community systems are reasonable (3% or less of the property value), connection must be made.

___2. Professional sketch (Surveyor) showing the location of the well, septic tank, and drainfield with relation to the subject property and property line. The sketch must specify the actual distances separating the well and septic system components: well to property line, well to septic, and well to drainfield. HUD distance requirements: Well to Property Line 10 Ft, Well to Septic Tank ? 50 Ft, and Well to drainfield 100 Ft.

___3. Well test in accordance with Mortgagee Letter 95-34. This includes testing for Led, Nitrate (as Nitrogen), Nitrite (as Nitrogen), Total Nitrate/Nitrite, Total Coli forms, and Fecal Coli forms or E. coli. When coli form is present, how was the Coli form corrected?

___4. Evidence of the Local Authority’s approval that the well and separation distances between the well, property line, septic tank, and drainfield are in compliance with the local codes for the subject property. If the subject property does not meet the Local Authority’s requirements, a waiver granted by the Local Authority must also be submitted. When applicable, evidence that a well in the foundation, is acceptable and common to the area.

___5. Evidence that the system is working properly. And there is sufficient space for repair/maintenance.

___6. Holds Harmless agreement, a signed letter from the borrower acknowledging that the property does not meet current FHA/HUD regulations, and a waiver must be granted to obtain FHA insurance.

___7. Cover letter requesting waiver, FHA Case number, borrower's name, property address, reason for request; underwriter’s name, address, phone number, fax number, and email address.

Please be aware, the reviewer of your file may require additional documents to make a final determination.

**IF THE PROPERTY IS LOCATED IN THE STATE OF MICHIGAN, CIRCULAR LETTER PH-00-02 PERMITS A REDUCTION IN THE DISTANCE BETWEEN THE WELL AND DRAINFIELD FROM 100 FEET TO 50 FEET. (EXISTING CONSTRUCTION ONLY)

***ALSO, PLEASE REFER TO MORTGAGEE LETTER 2002-25 FOR FURTHER GUIDELINES FOR DISTANCES BETWEEN WELL FROM SEPTIC TANK DRAINFIELD AND WELL FROM PROPERTY LINE REDUCTIONS.

Please tab the documents in the above order, to assist with the processing. The mailing address is:

U.S. Dept of HUD
P&U Div - Technical Br
The Wanamaker Building
100 Penn Square East
Philadelphia, PA 19107-3389

You may contact Suzanne the same day your package is to arrive on 215-861-7511, to be assured it arrived to the office. It generally takes 1-2 days to be assigned to an underwriter. Once assigned, the underwriter has 2 weeks to process your request.

If you have additional questions you can submit them via email to info@fhaoutreach.com or contact us at 1-800-225-5342. Please do not respond to this email unless you need further clarification or wish to initiate a new service request.

FAQ : Are properties having a well acceptable for FHA financing?

Solution Details: Individual water supply systems (wells) may be acceptable when connection to a public or community water system is not available and there is assurance of a continuing adequate supply of safe potable water for domestic needs. A water test or inspection is required if it is mandated by the State or local jurisdiction;

As always-happy fraud free underwriting!

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Closing and Contract Fraud Schemes

2010-04-16T10:33:00.001-04:00

Written By: Jane Harford, FHA DE Underwriter

In our fifth and final chapter of how to wage and win a war on mortgage fraud, we will cover the review of a sales contract, what to look for and how to recognize any issues that may take place on the HUD1, closing papers and other documents. Reviewing these forms prior to closing and funding a loan will ensure a smooth and legally conducted closing transaction.

The sales contract and its details are often a huge key to whether or not the entire transaction will be a fully legal transaction. If there are red flags not identified here, the likelihood of this situation being fraudulent in some capacity greatly increases. From the beginning, these items should be carefully reviewed to determine if there are any questions that require further research or investigation.

-Is the contract legible? Can all pages and addendums be read easily? Are all pages of the contract provided? Are all signatures on the pages easily readable and consistent? Do all parties to transaction make sense? The full contract of sale, with all addendums signed & dated by all parties should be legible, readable and signed/dated consistently.

-Are all purchasers listed on the contract involved in the loan? Are all names from the contract on the 1003 as a loan applicant? Are the names listed correctly on both documents consistently? Are there any parties on the contract that don’t appear on the loan-if so, why?

-Does the property address shown on the contract remain consistent on the appraisal request, appraisal report, title work and HUD 1? If they are different - why?

-Do the names of seller remain consistent from the contract to the appraisal report to the title commitment to the HUD 1? If not-what are differences?
-Does the current seller occupy the property or is the property vacant or occupied by a tenant? Does the contract confirm this? Does the appraisal state the same thing? Is that consistent with the information for the loan application?

-Does the contract provide for any giveaways by the seller? Do these include such items as-vacations, plasma TV’s or mortgage payments paid by seller? Does this include large allowances for landscaping, decorating or renovation?

-Check the details of what seller is paying for real estate commission? Does the amount for commission, finder fees and any realtor bonus exceed the norm for this area? (8% would be considered to be excessive).

-Does the sales contract include any reference for bonuses paid to realtor or purchaser? Also, are there contracts missing that may include this information? There are times when addendums regarding this type of “bonus” paid may be on an addendum that is missing from contract provided to the lender/title company? Does the list of addendums on the contract show an addendum that is missing from the contract provided for review?

-Do the parties to deal seem to have any type of non arms length relationship? This might indicate a straw buyer, someone buying a relative’s property to bail out on a short sale or foreclosure? If this seems suspicious, it probably is.

Be cautious regarding this contract of sale. All parties that assist in the processing of the mortgage loan must review the contract for any potential issues that could indicate fraud, potential excessive fees or allowances paid or illegal transfer of the property or a property flip/flop.
If the transaction/loan application indicates no issues that require further research, the next step should be to prepare and conduct the closing. The lender’s closing department and the title company work hand in hand to complete a smooth closing, funding and recording of a mortgage loan.

Here are some issues/potential red flags that could be found in the review of details of closing papers, including the title commitment, HUD 1 and other documents. The following items should be carefully reviewed while completing the documents for closing of a loan.

-Do the names of all parties to the transaction match what was on the contract of sale, appraisal? Is the property address and legal description correct?

-Is there a reference to sellers not documented or mentioned on the contract?

-Is the lender name, loan #, address and all other information consistent?

-Do all parties appear to be acting in a manner that would not indicate any non arms length transaction? (No similar names, no red flag to indicate that this is a foreclosure or short sale bailout).

-Does the sales price remain consistent throughout all documents reviewed?

-Does any EMD paid, cleared and documented by lender remain constant and appear on page #1 of the HUD1?

-Are there any references for undisclosed second liens, additional escrows or large credits from seller to unknown third parties (seller’s side of HUD1).

-Does the buyer’s bottom line indicate that he does not need to pay any money at closing or that he is due to get cash back on a purchase?

-Does the HUD1 show any debts, liens, judgments, delinquent loans not previously disclosed by title commitment/policy? Are there any other red flags that would indicate that the title commitment/policy would not insure property, transaction for lender, and owner?

-Review of the title commitment/policy-does this provides commitment #, issued by an approved title insurance company? Is the commitment signed/dated by an authorized agent for the title underwriter? Does the title commitment provide for all schedules as required by sales type, loan type and property type? If not, has this been corrected or updated from the title insurer?

-Do the liens that appear on the title commitment appear in the land record that have been researched and provided to title company? Are any liens recently added, not recorded or delinquent-but no legal action taken?

-Is the title company one that is on an approved list for the lender? Is this branch of company part of a larger company or a local firm? Is there an established relationship between closing department and title agenct, settlement officer and back office staff for each company? Have any problems arisen in the past that might have the lender believe that anything on this transaction would be different than previous transactions?

-What is the title company’s track record with the lender? Have they been willing? to correct issues in the past? Does the title company conduct it’s own QC checks on title insurance companies, county recording offices for recordation of the proper loan documents/mortgages and obtaining correct property tax bill information?

These are just some of the many questions that we as the lender’s eyes and ears should be reviewing on each transaction prepared and closed. If ANY RED FLAGS occur, the preparation of the final documents should be halted until then answers are completed in a satisfactory manner or until the investigation is completed and it is determined that no illegal activity, fraudulent intent or straw buyer/bailout scheme are taking place. This will take the research staff of the lender, title of the company, title insurer and outside parties to ensure that all information is consistent, accurate and legal.

As you can see, it takes a village to close a mortgage loan. When done correctly, lots of hands do get into the pie. Thus, the greater emphasis on conducting good research on any thing that appears unusual or “funky”. It is a vigilant effort of on the part of the lenders, title companies, and title insurance companies to ensure that we only close legal and accurate loans.

In the meantime, underwrite and close fraud free loans!

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Stick to Your Guns When You Think You are Right!

2010-04-09T12:09:00.002-04:00

Written By: Jane Harford, FHA DE Underwriter

I wanted to share a story that actually happened to me recently at a new job, I recently started. I am working for a large mortgage lender that is considered to be a solid company. They have been in business for a long time, have a conservative philosophy in their mortgage underwriting guidelines and have a successful mortgage origination business that does business nationwide. They also have a well established program of in house education that all new employees are required to complete before the company will sign off on an underwriter’s lending authority.

This company does all types of mortgages-conventional loans sold to Fannie Mae primarily, FHA/VA, RD loans, construction perm and bond programs in all states in which they are licensed to lend. The company provides a very solid way of reviewing their loans which enables their underwriters to make well thought out decisions that meet the agency guidelines and the company’s credit overlays. The parent company is a well established banking corporation. The company has a well established credit review department which does incredible research to establish credit policy based on the loans sold defaults and industry trends. Overall, the defaults experienced by this company are well documented, researched and reviewed many times over after a default or repurchase takes place.

I give you this background on the company in order to have you understand that this type of large lender is very rare any more. I should also add that this lender also still services most, if not all of the loans closed by them. They have a large servicing portfolio. I haven’t worked for the likes of this kind of company in nearly 7 years. I feel that it is a good and stable employer. They are well known and not going anywhere. The parent company is doing well; it weathered the recession well and will be around for many more years.

With all of that background, I would now like to share the story……In my training on this job; I have been working closely with the other underwriters in our office. We all have much background and run questions and scenarios by each other all of the time…..this is so wonderful for me. The last few jobs I have had were with small companies that sold 100% of their loans on a correspondent basis. I was the underwriter responsible for getting the company’s HUD test cases approved by HUD in order to get the company’s full eagle in two situations. The last company I worked for did a lot of FHA wholesale business.

We underwrote the loans three times (by 3 different Underwriter’s) in order to be sure that none of us missed anything. We did well, but the loans were extremely challenging and difficult to approve and close. Anyway, back to the current employer….there were a few of us talking about the new FHA MIP calculations effective with case assignments 4/5/2010. I found the mortgagee letter on line, printed it out and we were going through the fine points of the calculations of both upfront and monthly. The loan that we were reviewing was a purchase loan. We reviewed the calculations for the UFMIP and the monthly calculations.

It appeared that the monthly calculation was not being done correctly based on the computer’s calculations. We went through it several times and I found other memos, training sites information on the calculation of the monthly MIP amount. It sat in the back of my mind that the calculation of the monthly was .5% or .55% times the base loan amount and divided by 12 to arrive at the monthly figure. That is what we have done forever……so, the underwriter conditioned to have the closing documents reflect this correct calculation. …….well, you would have thought that we asked for the loan officer’s first born child or to have the entire software system overhauled…..no, just correct the initial monthly MIP figure to match the underwriter’s calculation. I knew that the calculation was important since, HUD has kicked back files on my old jobs if that and other simple calculations were not done and shown correctly.

We asked our team lead to check into this situation further….and she escalated the question all the way up the food chain at the company’s resource center, underwriting support function and the company’s credit policy officers. The entire time we were told that the software was correct (Even though the calculations were different from our manual calculations) and that we were to use the software calculations. We were told that HUD would not kick back the file for this difference in calculation.

Three days later, we got an incredible change in the company’s pat answer. We were correct in that our calculation was the correct calculation that was supposed to appear on the HUD LT, 1003, HUD addendum and other closing forms….we were told that we are supposed to hand change that figure on these documents, even though the computer software would not be changed…..

I was totally blown away! I had given up on the company’s response to this even though I knew that our underwriting department was really right. This will be distributed to all underwriting centers this week as the “gospel” truth about the software and what corrections to make.

Talk about feeling good about what I know and sticking to my guns. This is an incredible thing that I was able to help achieve this week. Sometimes the individuals may know more than the company they work for.

Happy underwriting and please be sure that you check the monthly MIP calculations on your final FHA documents……you may also be correct!

We will return to the final blogs on mortgage fraud next week.

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Fraud Schemes & Appraisal Issues

2010-04-02T11:33:00.001-04:00

Written By: Jane Harford, FHA DE Underwriter

In our 4th week of reviewing current trends in loan fraud, we will review the basic purposes of fraud schemes and general types of fraud. We will also appraisal basics that may be changed to reflect greater value or better comparables used to push property values higher than they really are. It is prudent to be able to catch the “fraudulent” practices before loan closing so that the loan does not wind up in a default. It is prudent to be able to catch the “fraudulent” practices before loan closing so that the loan does create millions in losses for the lender, investor, agency and others.

Fraud schemes are generally broken into two types of intent:

Fraud for property – This is usually done by buyers who are interested in obtaining a property for which they do not fully qualify in one or more aspects-such as income, assets, credit score, overall credit history, purpose of the transaction, etc. In this situation, the borrowers are aware of the fraud being committed-they are active in the intent to defraud. For them, it is a means to their goal-owning this home in any way possible. They don’t think of what the consequences might be if they get caught. Often, the fraud occurs in the areas of overstatement of income, assets or intent to occupy the property.

Fraud for profit - This form of fraud scheme is more complicated to detect since the folks making $$$$ from the scheme often are the professionals who are conducting the business on these transactions-loan officer, realtors, appraisers, title agents or lawyers. As the trends are detected, they change the “methods” used to conduct the fraudulent transactions. Often, these transactions are not detectable for many months and years. By that time, the schemers have moved on and may not be able to be caught.

Either way, the honest folks that conduct their business in a legitimate way are the ones who are bearing the cost of the schemes and their losses-heavy losses per year.

Some of the many types of fraud schemes found today are:

-Occupancy intent-very common-this is as simple as the borrower’s stated intention to occupy when they plan to use the property as an investment property or are purchasing for a family member or friend that can’t qualify.

-Pre-packaged loans-loans documents that come from a third party source not normally involved in the loan paperwork, such as the realtor.The borrower has very little contact with the mortgage lender.

-Multi state lending-the parties-loan officer, borrower and property found in 2-3 different States. There is minimal control in this type of transaction since the loan officer is “out of the area”. It is best to keep the parties to transaction close to that location.

-Non arms length-parties that are involved in some way taking part in the transaction. This often occurs when a family member purchases the home of another family member to save the property or bail out the person in trouble. Often these properties do wind up in default again.

-False documents-false income, assets, collateral etc.

-Excessive seller incentives-fees, payees and high dollar amounts that are not consistent to the transaction-indicating third parties making $$$$ on a purchase. Fees usually appear on the HUD 1(not the HUD1 approved by the lender).

Builder bailouts-Builder will “do anything” to sell homes-desperate to get out of properties.

Appraisal schemes-excessive use of poor comps, inaccurate information provided by an appraiser involved in kickbacks to overstate property values, stability of the market, zoning and highest/best use of property locations.

Buy and bail-borrowers are purchasing a smaller property in the same general location. They don’t have their current property sold and don’t/can’t provide their property lease. The intent here is to move into the smaller/affordable property and bail on the existing property-defaulting on the mortgage and letting the home go into foreclosure.

There are several more general types of fraud schemes, but these are the top types of fraud schemes. We will cover these in more detail when reviewing review of contracts, closing documents, etc in the next few weeks.

The specific types of things that are often found in the body of the appraisal are as follows:

- Differences in the names of the seller from sales contract, appraisal and title work.
These all must be the same and reflect the correct information.

- Details of the sales contract must be disclosed correctly. The terms of financing, detailed closing help/any excessive allowances or credits must be reflected on the top of the appraisal page #1.

-Predominant value of the area is often lower than the property value. The zoning information is not correct and must be further explained. Many times the zoning will not allow for reconstruction of the property as it currently exists. The appraiser must coordinate that information with local zoning offices.

-The property type and details on page 1 don’t match the sales comparison grid.

-Location of the comps used is of a greater distance that is the “norm” for the type of area-urban, suburban or rural. This may indicate that the appraiser felt that they had to increase the neighborhood boundaries to support a higher value.

-Dates of the closed comps may be greater than the 90 days that is currently required by the investor and secondary market guidelines. Often, it is necessary to request additional comps after doing the due diligence to show that other comps are available in the market area-they may well decrease the property’s market value, but must be used.

-Transaction history of the subject and comps may not reflect the most recent transfers or sales-the dates that documents are recorded can sometimes take up to 6 months. Unless the UW is also reviewing the title, that information would not be available.

There are many more detailed situations that we will review in further detail in an upcoming blog. Until then, conduct good business free of fraud!

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Fraud Schemes - Part 3

2010-03-26T13:07:00.001-04:00

Written By: Jane Harford, FHA DE Underwriter

We are now into the third week of reviewing fraud schemes and mortgage loan fraud. Today we will briefly cover the ways that income/assets can be reviewed for potential fraud schemes.

When the initial 1003 comes in from the loan officer for review, the entire form is examined carefully to see if there are any “red flags” that may show us potential issues with correctly verifying the borrower’s jobs, earnings and true existence of the employer. It is the processor’s and underwriter’s job to carefully review and consider the information provided, document it and correct the loan forms to reflect what the true information is. At that time, the AUS will be rerun to determine if the borrowers still qualify with the changes (if any) that have been made.

The assets disclosed on the initial 1003 also must be carefully considered and reviewed. The information is usually taken directly from copies of bank statements. Processing/UW look at those statements to determine if the assets disclosed are true and accurate. If the assets have been determined to be correct, the final 1003 is updated to reflect the changes (if any). Once again, the AUS findings are updated to determine that the file is still a workable loan.

Often when the changes are made, loan approval may become a problem. When the verified information is updated and compared to the initial information provided, UW and the company’s managers may determine that the information appears not to support the customer’s profile. Many questions at the time of initial application and the first review of the loan may arise. If the answers to these questions lead to issues arising that don’t make sense or follow the guidelines, it may be a case of a fraudulent loan scheme.

Here are some initial questions that can be easily assessed with regard to income/assets and intent of the loan applicants. Depending on the answers received, the file may make sense or not.

Review the overall application to determine if the borrower is purchasing a property that fits their credit/income profile-

-Is the borrower a first time buyer with minimal job history and assets?

-Is the borrower purchasing a property that is an arm’s length transaction?

-Does the employer’s company name and address exist? Can it be found via Google Search?

-Is the employer’s address a P. O Box? Is there a valid phone # and human relations dept?

-When verifying the income via written VOE, is there a true payroll department that is separate from the borrower’s direct supervisor?

-Is the form that is completed truly completed in the way that the form must be done? Are the figures on the VOE rounded?

-Do the figures on the written VOE match the year to date paystub and 2 years of w2 forms?

-Does the income level seem consistent with the borrower’s level of education & experience?

-Is the work number provided different or the same as the borrower’s phone #?

-Does the name of the person verifying the job via phone or in writing have the same last name as the borrower?

-Does the commute from the job to the new home make sense? Is it pretty close or is there a greater distance from the new home than from the current residence?

Each borrower fits into an overall credit profile that is reviewed by the underwriter.

- Does the information verified make sense and is it similar to the initial application data?

- Is the verified information provided able to be supported via third party search?
The same sets of questions are also reviewed for the assets that are disclosed.

-Do the assets provided appear to make sense when reviewed against the borrower’s income, length of time on job, debt structure and education?

-Do the statements provided look like they have been “adjusted” by someone crowding numbers into balance areas…..looking a bit more crowded once the statement is reviewed very carefully?

-Does the borrower appear to be able to save more due to minimal debts paid out? Have the accounts been opened for a while or are these newer bank accounts?

-Are the funds in the accounts seasoned for several months or are there large deposits (non payroll) that cannot be very carefully explained.

Most of the larger lenders are now doing much work on these loans in the way of third party checks and rechecks to determine that the documentation provided and the employer/banks do really exist. This due diligence completed prior to the loan closing is ensuring that the loans being closed are valid, true and saleable.

The lender does not want to have to repurchase the loan several weeks, months or years down the road and find that the buyer was a straw buyer, the credit, assets were borrowed and the income/job never existed. Documentation that “borrowers” can provide now will be scrutinized carefully for accuracy. The fact that most companies are now also executing the 4506 T and reviewing the IRS reported income for the past 2 years has also cut back the number of loans closed in a “fraudulent” capacity. However, the folks that are into the fraud scheming for whatever reason-profit, the ability to get away with or to transfer a property illegally are very good at what they do.

Most larger companies now have their internal detection programs established that are required to be completed by various levels of staff. The processor will complete the first part of the checking by completing the verifications, documenting the validity of what was found via the internet or other methods (sometimes even just a phone call the see that the company does exist)…UW also now calls the employer to re verify the income and all information verbally just before closing to ensure that the borrower still has that job by closing date. Lastly, many times the closer is also responsible for checking that the borrowers still are employed, have the title company certify the receipt of good funds for closing and that the property is accurately transferred and the documents correctly recorded in the land records.

Next time, we will review more about fraud in the area of appraisals and title. For now, close lots of loans fraud free!

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Fraud Schemes

2010-03-19T14:23:00.001-04:00

Written By: Jane Harford, FHA DE Underwriter

In today’s blog on fraud in the mortgage industry, we will start to address areas in which there are possible red flags. Each of these items on its own may not indicate that there is fraud involved in a file, but when 2, 3 or more items are found in a file, the likelihood of a fraudulent file is greater.

The 1003 should be reviewed carefully for all details on the borrower, property, type of transaction, credits, sellers and loan program type. Hopefully, the loan officer is well trained to take a complete initial application and how to ask questions in such a way that he/she will look for honesty in the borrower’s answers. If the LO feels that there is a potential issue, they can try to look at the topic being discussed in another way.

Here is a list of potential issues that can raise red flags on the initial 1003:

-Providing an incomplete or handwritten 1003.
-Employer’s address is listed only as a post office box.
-Borrower’s education completed differs from his/her job category and level.
-Borrower’s office phone number is the same as the home phone number.
-Assets don’t seem to be consistent with the borrower’s disclosed income.
-The borrower’s income is not consistent with his/her age and education status.
-Borrower’s home phone number has a different area code from the work phone number, even though they are in the same area.
-Borrower is purchasing an investment property, but rents for primary residence.
-Unrealistic drive time between home/work for an owner occupied purchase.
-REO schedule shows that borrower owns property, but no mortgages appear on the credit report.
-Debts listed on 1003 show no mortgage debt, but a check of MERS shows that borrower is on an existing mortgage.
-Borrower’s answers to the declaration questions differ from the documents provided and the profile that the borrower fits into.

As you can see, each one of these items reviewed individually would not give off any vibes of a potentially fraudulent mortgage application. If three or more of the situations exist when the loan officer reviews the initial application, or the processor reviews while conducting the initial workup for loan submission, then it is it time to take a few more minutes to review enclosed documents, conduct some internet research, complete the verbal or written VOE and start to make some conclusions as to whether or not the file is on the up and up or if there are issues that need to be further explored.

The initial person that may draw some conclusions on the information provided would be the loan officer. If the loan officer is accepting the information via email or over the phone, it is strongly urged that the loan officer get on the phone and review the details with the applicant to determine that the information is accurate and verifiable.

The loan processor would be completing the first steps of the validation process. Simple steps can be taken from the start of the application to ensure that the data provided is accurate/correct and verifiable. Let’s review that initial list of possible red flags to see what can be determined after reviewing the data provided for anything that doesn’t seem to make sense.

1) The incomplete handwritten or initial application-could show that the full loan package that will be provided hasn’t been completely put together yet. Legal information, final terms of a sales contract, determining the “seller” and “title” may not have been completed. If these details are added bit by bit during the loan process, sometimes the processor won’t notice the “issues” that are starting to appear.

2) P. O. Box for employer-This could mean that the business doesn’t really exist. Without an established street address, it can’t have a third party check completed.

3) Level of education not consistent with employment - Borrower has training as a medical assistant. She just got a new job as a director of sales for a chain of bridal shops. Her income appears to be inflated. The pay stubs support the income, but the type of education does not support an income that is three times as great as what the training would pay. Any red flags here?

4) Home phone number is the same as office number-this could indicate the borrower is self employed instead of employed by a company. It could also mean that the borrower is not employed at all. What would the issue be here?

5) Assets not consistent with borrower’s income. The assets that the borrower shows are much greater than what a borrower would show for income as the medical assistant. Also, if a VOD is obtained-the opening date is recent and the average balance is much less than what is the current balance. Any red flags here?

6) Location of the subject property versus the borrower’s job location or current residence. There are questions usually raised if the distance between a new home and job seems to be a long distance apart. Also, if the borrower is purchasing a second home-it should be within a reasonable distance of the borrower’s current primary residence address. The thought here is that the borrower would want to utilize the 2nd home on weekends or holidays. With explanations/evidence/third party checks-these questions can be answered, but it does require satisfactory answers to these questions.

7) REO schedule shows ownership of other property, but no debts appear on the credit report. Gain, this would need to be documented and explained by the borrower.

8) Lastly, the MERS check shows that the borrower has an open mortgage debt. The borrower does not disclose this and does not answer the declarations questions to reflect ownership of another property. This also needs to be clarified, explained and satisfactory documentation provided.

We need to remember that 1 even 2 of these factors alone would not set off the bells and whistles for fraud. However, think back to many of the loan files that you have taken and reviewed over the years. For me, as the details of questions come back from the borrowers and loan officer-my concerns about the validity of the file do increase. If the answers don’t make sense, I will condition for the third party evidence of everything that raises a concern to me.

Next week we will review employment and income fraud schemes. Until then, happy mortgage loans to you-fraud free.

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Fraud-Why We are Scared!

2010-03-12T12:31:00.002-05:00

Written By: Jane Harford, FHA DE Underwriter

Did you hear about the settlement of a lawsuit that Lifelock was involved in? FTC was involved due to “overstated claims of how they would avoid ID fraud” for their customers. Here is a link to the story of the lawsuit being settled and what Lifelock has agreed to for the next 20 years that will result in a better, fairer and more accurate reflection of what Lifelock’s program actually does…..
http://www.informationweek.com/news/security/storage/showArticle.jhtml?articleID=223400055

This is part #1 of several installments that will be done to update you on the emphasis that lenders are placing on the huge problem of fraud in our business-both from a pre production and a post closing, servicing and REO point of view. Fraud schemes exist in all areas of the mortgage business. There are many different schemes that start with the taking of the initial 1003 through settlement and for up to 24 month after the loan closes. Although, there are now numerous tools and technologies that exist to help fraud investigations, often it is a combination of the technologies and human efforts

That closes the cases, document the schemes and get the folks that do this convicted and behind bars or banned from doing business. Real estate fraud is complicated, unique and often difficult to detect. As often as the rest of this business changes, so does the type of fraud and how it is conducted. Many lenders are now developing zero tolerance policies towards fraud. Fannie Mae, Freddie Mac, FHA/VA and the MI companies have had teams in place for years to audit REO loans after they go into default.

The emphasis that these agencies are now placing on this has resulted in huge changes in how these loans are audited, how many are done and how the results are used to make changes in current and future program changes. Each of these groups is looking at their own book of REO problems, looking hard at the details that come out of these audits and finally sharing their findings internally with production departments of these agencies. Hopefully, these agencies will also share their findings with each other as well.

We will take the time this week to briefly identify the initial areas in which fraud can start. Since most initial applications now take place over the phone or via the internet, most loan officers do not meet their loan applicants in person. Often, the loan officers have established their sources of business via phone or other methods. Thus, there is room for information and documentation to be provided that is false or changed in some fashion to support income, assets, credit and collateral that is not what it will be once good solid investigation uncovers the truth.

The simplest forms of fraud start with the following areas-
-Occupancy issues often happen when occupancy status is misstated. For instance, if an application is taken stating that the property will be owner occupied when the borrowers fully intend to rent it out is considered to be fraud. There are often small hints along the way that give clues as to the fact that this is not what it appears to be.

Something as simple as when parents jump and want to help out a child by buying them a home can turn into a fraudulent situation. If the child’s credit doesn’t qualify for a mortgage under stricter standards, that person is often removed from the application. Often these loans then do become investment properties and are considered to be fraudulent under the misstated occupancy intentions. The simplest changes to a mortgage loan application may not always be caught by the processor or underwriter when submitted for an initial underwrite. these loans often close without the corrections made by decreasing the loan amount, increasing an interest rate and accounting for the correct change in occupancy status. And since most loan business is now conducted by phone/via electronic means and not in person, it is not possible to meet, get to know and learn about the true intentions of the parties on this loan.

Another form of misstated occupancy intentions has happened in the past few years as family members attempt to help out other family or friends if they are about to lose their home to foreclosure. There has been a huge increase in the numbers of non arms length transaction-the technical term we use for family members purchasing property from another family member for less than fair market value.

Many times, the folks that are selling the property are getting a payoff from the person purchasing it in order to start a new life some place else. The intent is to help out the family member, but it can often turn into a potential misstated occupancy issue or a property flipping issue. The best advice that can be given to first line production folks is to get to know the clients as much as you can even by phone or email. Ask those good questions and get good answers to your detailed questions. If there is something that doesn’t sit well in your gut, let a manager now that you have concerns about the loan applicants, the sellers or the agents involved.

Agents can often dictate or sway how a transaction is handled. Alert, intelligent and wary loan officers and processors can often get an idea that the loan package they have is not the loan closing that will take place.

In the next several weeks, we will cover all aspects of the mortgage loan process. In every step of the process, technology and good detailed detective work can stop loan fraud. It is a huge problem and now is the time that we can learn the basics of what to do and how to stop it.

Have a good productive week-free of fraud.

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Good Faith Estimate Changes - Part 3

2010-03-05T14:22:00.002-05:00

Written By: Jane Harford, FHA DE Underwriter

In today’s blog we will see, how the changes to the RESPA laws have affected the GFE and the HUD1, we will quickly review the changes that have taken place so far and how these changes have affected the work flow, fees that can be charged and the timeframes required to maintain compliance.

As you will remember from the previous blog posts, the purpose of the new forms is to have borrowers better understand and shop for mortgages. This will ultimately result in more stable more products, lower rates and lower settlement charges for borrowers.

Page #1 of the revised GFE gives greater detail of the loan terms, including the initial rate and monthly payment, details on rate and if principal balance can increase( showing the maximums) and if there is a balloon payment or prepayment penalty.

YSP to brokers is shown as part of the Loan Origination fee in Block A on page #2. The GFE also consolidates settlement charges into various categories in Block B to simplify disclosure of charges. Total estimated settlement charges carried from page #2 to bottom of page #1 become the closing costs for a particular loan that the borrower can compare to other GFE’s that the borrower may obtain.

There have also been major changes to the HUD 1 settlement statement. The itemized final settlement charges on page #2 reference the HUD 1 lines so that the borrower can track closing costs fees from one document to the other.

As an example, lines #801, #802, #803 and #1203 from the GFE move directly to the HUD1. These fees are not allowed to change from the GFE to the HUD1.

There is a new page #3 of the HUD1. Top portion of the page compares costs in each of the sections “cannot change”, “total cannot increase more than 10%” and the “can change” sections of the GFE. These fees are reviewed and borrowers can then determine if tolerances have been violated. The loan officer is required under the new RESPA rule to provide the info necessary to complete page #3 of the HUD 1 to the closing officer.

In order to keep the fees from the GFE the same when transitioning to the HUD! Loan officers are working very closely with title companies to ensure the compliance of these fees. Many title companies are offering new online services to loan officers to provide accurate and correct title/closing fees.

If a lender uses this system to prepare a GFE for a borrower and the title company winds up needing to adjust the fees after the initial costs are provided, the title company will pay the difference between initial quote and final HUD 1 costs. This covers sections #1100 and #1200 costs-title charges and government recording/transfer charges. This section does not allow for any tolerances from the GFE to the HUD1.

When the request for an initial GFE comes to the loan officer, they are now using title estimates that come from title company’s web sites. The title company’s staff must be able to provide the correct estimates based on the preliminary information provided by the loan officer at the beginning of the process. In most cases, the sensible thing to do is to overestimate the costs.

But, this then defeats the purpose of the new RESPA law. Loan officers/processors are providing a copy of their GFE when ordering the title work. This gives the title company a heads up as to what the borrower has already accepted in the way of fees.

When estimating these fees at a higher cost, the loan officer does take a risk in dealing with competition from other lenders. RESPA does not regulate lenders from underestimating fees and then re-stating them later. (Only if there are changed circumstances). It does seem that the new RESPA regulations place a greater emphasis on the settlement costs over the APR annual percentage rate, which was the comparison that was required by RESPA to be reviewed carefully in the past.

These new changes do require that loan officers complete a very accurate GFE at the initial application. In the thought patterns that were used to make these historic changes to GFE regulations, there are two very basic things that are no longer considered when completing and reviewing a GFE. 1) With all origination costs appearing in a single box, this increases the amount that the borrower can consider deducting on his tax returns when filing 1040’s with the IRS. Previously, only origination fees could be deducted on Schedule A when borrowers filed their 1040’s.

The other issue is that the revised GFE does not provide for a borrower’s signature line on the form. It is often difficult to determine that the borrower has accepted these costs when no signature line on the form. When underwriting these files, an underwriter cannot determine if the borrowers have acknowledged the costs and total cash to close. No final cash to close figures appear on the new GFE. There is no spot on the form to show bottom line details of the cash to close, less any fees already paid by the borrower, seller/lender credits etc.

Many lenders feel that they must provide this documentation to their borrowers to show that they have provided full disclosure including the cash to close for the borrower’s edification. This has forced lenders to invent “cash to close worksheets”. Using these worksheets, the loan officer is then able to clearly document all costs to close by breaking out the closing costs, escrows, any credits provided by seller/lender and the bottom line figure of cash needed to close. This is the rest of the information that used to appear on the bottom of the old GFE form. For full disclosure, lenders feel that the borrowers do need to be provided all of this information.

Lastly, the 180 day leniency period recognized by HUD ends on 4/30/2010. Lenders may or may not recognize this leniency period based on their own underwriting/closing policies. It is important to determine what the lender’s policies are when processing/submitting a loan to the lender’s office. Each office/branch may interpret the policies a bit differently. For purposes of compliance and clarity, it recommended that you check these policies in advance when working with new clients. This will come in handy, especially when the cash to close is very tight. There may be changes in the overall loan package that will need to be revised upon approval of the loan. Upfront and open discussion will ensure a smooth process from the initial GFE being issued to the closing papers being signed by the buyers/sellers.

As always, please be sure that your forms are signed and dated by all parties. The smallest details are often the ones that will hold up a smooth transition from loan application to loan closing.

About the Writer. As one of NAMP's volunteer writers, Jane brings 30years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Good Faith Estimate Changes - Part 2

2010-02-26T12:14:00.003-05:00

Written By: Jane Harford, FHA DE Underwriter

Today’s blog post will deal with more details on the new GFE and the issues that are being raised. Due to the numerous laws and system changes the lenders, brokers and correspondents have to complete to remain in compliance with the new RESPA laws.

In this post, we will cover the details of “changed circumstances” and how lenders are allowed to make fee changes to the initial GFE provided. To recap, loan officers are required to provide a detailed and accurate cost estimate to their client within three days of taking a loan application. Many changes have been made to the GFE form; several areas of cost estimates are subject to absolutely no tolerance if changed. Loan officers or the brokers must absorb these cost changes. If a revised GFE is issued, HUD detailed the reasons that a change would be allowed. This is the term known as “changed circumstances”.

A “changed circumstance” is defined by HUD as follows: 1) Acts of God, war, disaster or other emergency 2) changed situation or inaccurate information provided by borrowers after issuance of the GFE. Only those fees impacted by the changed circumstances can be changed (note-this is just for increases in fees). Any decreased changes in fees are acceptable and not subject to the RESPA regs.

If pricing changes due to a changed circumstance or a borrower requested pricing change, only the interest rate related charges and terms may change. Lenders are requesting very strictly signed and dated disclosures from the borrowers stating that they have requested and accept these changes. If the loan is locked from a float status, only the rate related charges and terms can change. In either case, Block #1 fees cannot be changed-even with a documented “changed circumstance”. Also, the important dates section must be updated to reflect final lock dates, etc.

The auditors and investors are following the HUD guidelines very strictly, even though HUD stated that there would be a 120 day grace period. There are several documented stories from the various industry blogs, websites and industry forums that report stories similar to this one……

“A loan closed initiated on the new GFE. Seller’s county transfer taxes were not disclosed to buyer on the GFE. Seller typically pays the transfer tax. The subject property was located in a city with no city transfer tax. GFE issued did not have these Costs disclosed to buyer. Prelim HUD1 also did not show these costs.

The closing was scheduled on the loan. Lender docs and title work done for closing. The investor is not accepting the 120 day leniency policy. $737 was the cost for a tolerance cure. This credit went back to seller, not the buyer. There was no opportunity to redisclose (had no affect on borrower’s bottom line cash to close). The lender had to cough up the tolerance cure and the seller got the benefit of that credit.”

Other stories talk about investors not allowing for a third party credit report to be charged or for guarantee of an appraisal fee (when the appraisal was not yet ordered-due to the four day rule)…….

My initial reaction is –how does this strict enforcement benefit the borrower if these charges are unknown or if the seller is benefiting from the tolerance cure…..these are just some of the many pondering questions that will be dealt with as the industry gets further and further into understanding HUD’s full intent of these changes and investor’s policies in following them.

The following is a list of the “Top Errors of GFE’s” which came out in a recent posting from the Mortgage Daily News-this list was provided by U. S. Bank’s wholesale division….some food for thought….

1) Adjusted origination charges need to be completed correctly-Page #2 and box #1 should reflect all income broker/lender expects to receive, except for discount points. This includes origination fees, broker fees, broker comp(typically earned from YSP) and investor commitment fee.
Only 1 box may be checked and only 1 dollar amount may appear in block #2.

2) Block #11-hazard insurance must be completed-purchases require it.

3) The important dates section must be completed correctly. Many times this is not completed.

4) Owner title insurance must be completed.

5) Trade off table must be completed. Many times it is left blank.

6) Lender information must be completed.

7) Escrow account information must be completed accurately.

8) Upfront MIP/VA FF must be listed correctly.

9) GFE completion date must appear on the disclosure.

10) Originator’s email address must be completely provided.

These are basic items, but do require completion. Consider them when you are reviewing a GFE and need to determine if the GFE is truly compliant. In my next blog, we will review the transition of the GFE to the new HUD1 and the HUD1A. Also, we will cover some of the ways that lenders are dealing with the fact that the GFE does not disclose total cash needed to close-like the old GFE did.

Please stay warm and dry wherever you are. All areas of the country are having some funky weather this winter.

About the Writer. As one of NAMP's volunteer writers, Jane brings 30 years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Good Faith Estimate Changes

2010-02-18T18:23:00.007-05:00

Written By: Jane Harford, FHA DE Underwriter

Hello to all! My name is Jane Harford. I am a new blogger for NAMP. My 30 years in the mortgage business have provided much experience - great and awful. As we know, the business cycles in this business are feast or famine. Business is either very good or very bad.

Changes are usually quickly put into place and then we take the time to learn what we are supposed to be doing differently. Change is often done for the better, but the implementation of it can be very painful.

The changes required on the new good faith estimate for loan applications date 1/1/2010 or later are now in place. It is obvious from the news, communication from HUD to the lenders, lenders to their LO’s and staff, from the sales force to the vendors and finally to the loan applicants that these changes have been difficult for all to understand and put into effect. We will take a few minutes to clarify the reasons that this law was passed by Congress and then clarify some of the basics on the new Good Faith Estimate.

When the housing market started to decline in 2006-2007 due to many economic factors, liberal underwriting guidelines, subprime loans and overvalued housing finally crashing, many borrowers had been steered into mortgage programs that they didn’t understand.

It has been clearly documented as to what the issues were and why borrowers either walked away from homes, lost their home in foreclosure, sold their homes via short sale and why values started crashing in all markets in the U. S. The citizens were angry and got that message to their representatives in Washington, DC. Congress started to debate these issues. FHA and other mortgage agencies had their input. Clearly, there were many things that needed to be corrected; updated RESPA laws were a large part of changes to be made.

Most of the changes on the new GFE deal with binding fees, changes in how the origination fees/discount points are determined, how these are disclosed and what can and cannot be changed. We will clarify the delivery of the Good Faith Estimate, important dates that must be met (to be in compliance), disclosing fees and explaining “changed circumstances” (to allow for changes to the GFE and terms of the loan).

http://www.hud.gov/content/releases/goodfaithestimate.pdf shows a copy of the new Good Faith Estimate Form.

There are changes regarding the “delivery” of the GFE form. The initial GFE provided to the borrower becomes the binding GFE unless there is a “changed circumstance. We will define that term in a bit. On the new GFE, lenders are required to provide lists of service providers for all fees incurred. The fees that will be charged at closing cannot exceed what is shown on the GFE. There are very stringent cost requirements that must be met or the loan is not in RESPA compliance.

Block #1 of the GFE will include disclosure of the lender/broker origination fees, points, processing and administrative fees. This will now include all points, and the origination costs will exceed. Mortgagee Letter 09-53 lifts the 1% maximum cap. If there are additional fees to be broken out and disclosed, they will appear in section #800 blank lines. Look at boxes #1-3 in the disclosing Fees section. This section is very specific as to how it must be completed. Only 1 of the boxes may be checked.

The fees disclosed on the new GFE have very limited tolerances that can be shown and approved on the final HUD 1. Required services chosen by the lender have a maximum 10% tolerance between what is disclosed on the initial GFE and what is charged on the final HUD1. It is required that the lender disclose at least 1 service provider for all items in blocks in sections #3, 4, 5, and 6. Sections 7-8 have limited tolerances of less than 10%.

There is no tolerance on the transfer taxes disclosed. If they are calculated incorrectly, the differences are not passed on to the borrower. Loan officers must also be very careful about disclosing an interest rate. The rate that appears on the GFE shows a rate and date for which that rate will be good. There is an important dates section on top of the form. The rate cannot change or deviate unless there is some “changed circumstances” that occur.
We will cover the changed circumstances topic in the next blog. The term “changed circumstances” is defined as an act of God, war, disaster or other emergency or a changed situation based on inaccurate information provided by the borrower after the issuance of the GFE.

Stay warm during this warm winter and we will be back soon to unravel the mysteries of the new RESPA laws.

About the Writer. As one of NAMP's volunteer writers, Jane brings 30years of mortgage business experience in FHA, VA, LAPP and is also an FHA DE Underwriter. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

First time Homebuyers - preparing for the American Dream

2010-02-12T16:49:00.001-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello Everybody - While I was thinking of a topic for this week’s blog, I could not dismiss in my mind the news reports of how many foreclosed homes are being sold at rock bottom prices. I think it is an absolute tragedy that so many people are losing their homes. And their lender could not help them save their home in the wake of all the stimulus money that has been poured into the system. Having said that and then I reflected back on the previous three years when housing prices were skyrocketing and houses were being sold for many thousands of dollars over the asking price - perhaps this is really a market adjustment at the cost of thousands of homeowners who are losing their homes.

Relating back to the news reports on buyers in the current market - could these buyers be those that were priced out of the market the previous three years. I think they may well be. Housing prices in Florida, Nevada, Arizona and California have plummeted. As an underwriter, I have seen houses in California that sold for $750,000 now under contract for $250,000. I have friends who paid $350,000 for a home in Naples, Florida, their current housing development is now 75% in foreclosure and they just got an offer for their home at $89,000. Their lender has agreed to a short-sale; but they put $100,000 down of their own money when they purchased the property. You can do the math.

The foreclosure crisis has opened up housing opportunities to many new borrowers, who could not afford to get into the bidding market of years past. I feel the market is doing a 180 - we are back to verifying employment; asking for pay stubs; asking for bank statements. Qualifying borrowers - it gives lenders a more secure feeling, a feeling of knowing their borrowers.

While there is no shortage of buyers in this market, I feel everyone is still a little shy to buy because of the job market. However, once the market opens to buyers, the choices of properties should be really good.

If you know anyone who will be looking to buy, help them along now. Suggest they get a copy of their credit report; go over the report very carefully - make sure everything is accurate. If there are any discrepancies now would be the time to notify the credit bureau and have the errors corrected. One is under enough stress when you buy a home - one does not need the added stress of an incorrect credit report.

Then - there is a very good probability that the mortgage payment is going to be higher then the current rent; and if they are not paying rent - it is especially important to start saving every month. As a non-profit housing counselor, many years ago, I would always recommended that first time buyers save the difference between their current rent and their new mortgage payment; if they were not paying rent - I would recommend they save their entire mortgage payment for at least three months before purchasing a home. How else were they able to know if they can really afford to buy or what sacrifices they might need to make. There are also the added costs of gas, electric, water, sewage and other utilities that may have been included with the rent - which are not included with the mortgage payment.

Purchasers should also be required to set up a “capital spending account” of X dollars per month - so they have the resources to repair a roof, fix a leak to keep the property in good condition.

With the new pricing of houses many more first time homebuyers will be able to purchase. However, care must be taken with these first time buyers so they understand the responsibilities of homeownership. I do not believe everyone should own a home, even though it is the “American Dream”. Purchasing a house is a huge responsibility which should not be taken lightly.

In conclusion - I want to say - Happy Homeownership to everyone who wants to own a home. Keep processing. More Later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

HUD Secretary Donovan Moving Forward With RESPA Reform

2010-02-12T11:20:00.004-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello Everybody - I hope everybody is doing well and keeping busy. I sure am busy.

I have been following the changes going through the House of Representatives and the changes being made by HUD Secretary Shaun Donovan with much interest. Recently there have been lots of changes proposed, many of which will probably come to fruition. The latest changed - announced Monday, May 11th - you heard it hear first!! is the intent of the RESPA Reform. You can view the new docs on the hud.gov/news/release web site.

The new changes are scheduled to take effect on January 1, 2010 (only 6 months away). These changes will update the mortgage rules for the first time in more than 30 years. These changes will assist the consumers to show for the lowest cost mortgage and avoid costly and potentially harmful loan offers. These changes could save the consumer an average of $700.

“This administration is committed to proving consumers with clear and transparent information when they make the biggest purchase of their lives,” said Donovan. The RESPA changes are part of a bigger reform to the mortgage process.

There is one change that has been tabled for now in order that the bigger scope of the beginning of the RESPA changes could begin. The change that has been tabled for the now is the definition of “required use”. HUD is working on a clearer and more effective definition that protects borrowers from being forced to use affiliated business of the lender.

I have reviewed the new Good Faith Estimate (GFE) and Settlement Statement (HUD1) and the two forms should leave little doubt in the mind of the consumers what was disclosed at the time of application.

Starting with the GFE, which is now three (3) pages, the form is very personal to the borrower, i.e., in the Summary of Your Loan the questions begin with “Your” loan amount; “Your” loan term. Very specific - as to the amount, terms etc. Questions that the Loan Office will need to complete and answer with their borrower. There is also a “Shopping Cart” on the form which will allow borrowers to easily compare loans.

More interesting is the HUD1 Statement, which is also three (3) pages. The lines of the HUD1 now reference the numbers of the GFE. Any borrower going to closing will only need to take the GFE and easily find the numbers that were disclosed and what the actual numbers they are paying at closing. Again the form is very specific i.e., Line 801 of the HUD 1 - Our origination change (from GFE #l) these forms are also a protection to the lenders as much as to the borrowers - there will not be an “I was told” one thing by the LO and was charged something else. If this happens - everything will hopefully be specific enough to avoid any problems.

More changes will be coming to the mortgage industry, in part of because of the disastrous crisis that we have been muddled in for the past year and a half; I am sure those of us in the mortgage industry will like some of the changes and will not like other changes. However, once we get experienced in the new forms and procedures, it will be like we never knew any other way. We must remember that without borrowers, we have no jobs. Huge numbers of jobs were lost and many of our co-workers are still looking for jobs, so as a personal aside, if these changes increase consumer confidence and increase mortgage sales - I can live with them.

Well - this is all for this week. Keep busy. Keep Processing - More Later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Plain Vanilla Home Loans

2010-02-05T11:40:00.001-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello Everybody - Hope everyone is keeping busy. These days the mortgage business never ceases to amaze me. When perusing the newspapers and internet this week for a topic - I came across “Vanilla Home Loans” - I thought what next? While I have felt all along that there needed to be some regulations for the unscrupulous - I am not sure about these Vanilla Home Loans.

Just what is a Plain Vanilla Home Loan? As released by the Associated Press - According to President Barack Obama, if he gets his way - consumers who take out mortgages would automatically get a “plain vanilla” loan. A plain vanilla loan is considered a traditional 30 year fixed rate loan. Now - perhaps if consumers would like sprinkles on the loan that may include an adjustable rate or a loan that was riskier.

President Obama would like to revamp financial regulations to product borrowers from confusing and high-risk mortgages.

Government officials want to make the process of getting a mortgage as simple and abuse-free as signing up for a retirement savings plan. This I absolutely do not understand - the mortgage process is not that simple. If in fact the Vanilla Home Loan is implemented - I could see where less people would qualify for a mortgage. I feel it could actually backfire.

The questions that would arise would be - what loan-to-value; what DTI would lenders require for the Plain Vanilla Mortgage. Approximately 30-40 years ago, I think you could say the Plain Vanilla Mortgage existed; since most mortgages were given by loan Savings and Loans Institutions. You could go in talk to the bank manager - give him a pay stub; run a credit report and Congratulations you have a home mortgage.

If the Obama plan for simplifying the mortgage process is approved - here’s how it might work:

The government would give its seal of approval to a handful of mortgage types - a standard 30 year fixed rate mortgage and perhaps a few varieties of adjustable rate mortgage. For a loan to get the “vanilla” label, the lender would have to verify income and have the borrowers set aside money for property tax and insurance. (I am assuming they mean escrow for taxes and insurance).

To get an “unapproved government loan” the borrowers be warned about the risks - which would be a good thing. I am personally having a hard time wrapping my head around these “vanilla mortgages”.

In reading the documents that have so far been released regarding the “vanilla mortgage” - it is really for the protection of the consumers - who have expressed they did not understand the loans they signed up for during the housing boom. Many expressed concern they were not aware when their rates adjusted their mortgage payment would be much higher.

The Obama plan also calls for fees that brokers and lenders receive tied to inflated mortgage rates.

Brokers have already seen their market share dwindle – brokers currently only account for 20 percent of new loans. If these mortgage fees were eliminated that would be the kiss of death for mortgage brokers.

I will continue to follow this issue of the regulations of the mortgage loan/process and whether the “Vanilla Home Loan” will pass the test of time.

In closing - let me say - I hope every body is staying busy. More later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Shipping Containers Used for Housing

2010-01-26T10:46:00.001-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello everybody - This week’s blog is going to be a little different, while it is very interesting, it is not exactly relating to FHA financing - although perhaps we will see FHA finance these types of housing someday. I found a very interesting article regarding shipping containers on the USA Today website.

I am sure everyone is familiar with the large tractor trailer boxes that travel on the back of semis - well there is a new use!!!! How does affordable housing sound? Thinking outside-the-box some architects and home-buyers are turning the 8-by-40 foot steel containers often left vacant at seaports into housing.

Although it is only experimental at this time - it makes sense and a great housing alternative. Not only are the containers economical at $2,000-$3,000 each they also are recycled containers and eco-friendly. For the most part the homes use anywhere from 4-8 containers. They are stacked and/or put side by side. There is a company that modifies the containers at 17 locations and there is currently about 75 homes nationwide whose purchases have found the “American Dream”.

The company that modifies these containers was founded in 2006 and plans to modify more than 1,000 containers next year. Interestingly these containers can be used for multi-family; multi-storied and cost at least 20% less than traditional building materials.

With the rising costs of construction materials and the demand for affordable housing in high cost areas such as California it only makes sense to get the best use from recyclable material - as long as it works.

There is one couple in Redondo Beach California who has a 3,200 square foot home on an 8,860 square foot lot. There house stands out in the neighborhood and is made of six containers which have been painted beige; the inside has high ceilings, and recycled materials. Since the buyers have retained many features of the containers, there will be little maintenance.

The builder of these homes is stating the cost of these homes start at approximately $150 per square foot compared to $225 to $250 per square foot.

In addition to affordability, the containers strength makes it a valuable source in the construction industry. Look for container housing at the 2010 Winter Olympics in Canada.

There are many companies currently looking into container housing. Builders of condominium projects are looking how they could be used and the safety of the buildings. While for the most part container housing is in the infancy stages - It will probably not be long before we see them popping up, particularly where affordable housing is needed.

Hope everyone enjoyed this tid-bit of information.

Until next week - keep processing. More later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

HOPE for Homeowners

2010-01-22T12:25:00.003-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello All - I understand that most persons who read this blog are loan processors, loan originators and others in the mortgage industry. This blog is not necessarily directed to loan processors or originators but rather to those who might know someone who may be facing foreclosure. The HUD.gov site is just a wealth of information.

Congress created the HOPE for Homeowners (H4H) program for those at risk of default and foreclosure refinance into more affordable loans. H4H is an additional mortgage option designed to keep borrowers from losing their home.

The program went into effect October 1, 2008 and continues until September 30, 2011.

It is estimated that 400,000 homeowners could avoid foreclosure through this program. If you know anybody that is having problems making their mortgage payments; perhaps refinancing under this program into a new mortgage is the answer.

Borrowers may contact their present lender and/or they may contact a new lender to discuss how to qualify for eligibility for this program.

Let’s look at what the lender will consider when they are contacted by a borrower. Every lender will be assessing each loan very carefully and will perform a cost-benefit analysis to determine the feasibility of offering this program to homeowners. Of course, everyone will not qualify so if you are talking to struggling homeowners regarding this program, it is important that you not build their hopes.

The lenders will be looking at the difference between existing obligations and the new loan, which is set at 96.5% of current appraised value. The lender may choose between a loan modification of the current mortgage or accept the losses associated with declining values.

Lenders who determine that the H4H program is a feasible option will then assess the borrowers’ eligibility for the program. The borrower must meet criteria such as - existing mortgage was originated before January 1, 2008; Existing mortgage payments must exceed 31% of gross monthly income - as of March 1, 2008; the homeowner did not intentionally go into default and must not have been convicted of fraud in the last 10 years and Federal and state law; and lastly that the homeowner did not give false information to obtain their current mortgage.

The borrower must be made aware of the 3% upfront mortgage insurance payment and the 1.5% annual premium. The borrower must also realize their will be an Equity and appreciation sharing with the Federal Government (we will discuss in a later blog). And there can be no second mortgages added to the property.

Then there needs to be negotiations between borrowers and lien holders - The lender must negotiate with the existing lien holder to waive all prepayment penalties, existing late fees and agree to accept the loan proceeds of the new loan as total repayment of the existing mortgage. If there is currently a second mortgage on the property, there must be negotiations to participate in the loan modification. FHA could offer to the 2nd mortgage holder that they would share in the future appreciation.

After all of the pre-qualifications, the lender will then qualify the borrower for the new H4H mortgage using established guidelines.

During the underwriting the lender will calculate future appreciation for each subordinate lien holder. At settlement the subordinate lien holders will receive a certificate that evidences their interest as an obligation backed by HUD, with payment as calculated by HUD’s appreciation schedule.

Following closing, the lender will record, all documents for the 1st mortgage and, a shared equity note mortgage. These mortgages will be serviced by FHA.

Upon sale of the property, the homeowner will use their sale proceeds to pay off the H4H mortgage as well as the shared equity and shared appreciation mortgages.

If the homeowner fails to make the first payment on their new H4H mortgage, the H4H statute prevents FHA from paying claim benefits to anyone holding the mortgages.

While some of these procedures may seem confusing and will require a lot of work - it is important to remember it may save thousands of homeowners from losing their home. We will monitor the success of the program as the year progresses.

Until next time - Keep processing. More later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Reforms For American Homeowners and Consumers

2010-01-15T11:48:00.000-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello Everybody - Hope you are keeping busy. With interest rates up and down, depending on the day and hour of the week - refinances have been fluctuating as often. However, there seems to be a trend that home sales are on the rise and many lenders are keeping busy.

We are going to outline the fact sheets on both pieces of legislation:

The Helping Families Save Their Homes Act - The deep housing market recession has created devastating consequences for homeowners and communities throughout the nation. However, by reducing the number of foreclosures, the average homeowner could see their house price bolstered and as many as 9 million may increase the affordability of their mortgages and prevent foreclosures.

New guidelines have been introduced for loan modifications which will establish a new standard practice for affordable modifications. Services covering more than 75% of loans in the country have now begun modifications and refinancing under the Making Homes Affordable Act. - Also please check out the government’s website –MakingHomeAffordable.gov which is a consumer website for the program.

There has been improvement to Hope for Homeowners which should significantly improve the ability of borrowers to benefit from the opportunities provided in the Administration’s housing plan. Incentive payments will be available for successful Hope for Homeowners refinances and services will be required to evaluate ALL applicants for eligibility for Hope for Homeowners and Home Affordability Modification Program.

Hope for Homeowners targets help to borrowers who are faced with the risks of foreclosure. The help would entail the write down of the principal amount to help homeowners increase the equity they have in their home. This program will ease restrictions on eligibility and enable refinancing of mortgages with no equity for a greater number of borrowers.

Increasing Consumer Protections Related to Housing

Consumers who are renters living in foreclosed homes is a very big problem which has not gotten a lot of attention. The problem exists when a property is foreclosed that renters reside. Tenants, who are being forced out of their homes with no notice, will require that in the event of foreclosure - existing leases must be honored, except if the lease is month-to-month; in that case the tenant must be given a 90 day notice to vacate the property.

This will also gives the homeowner the right to know who owns their mortgage. Many times mortgages are sold and then sold again and borrowers do not know who owns their mortgage or who to contact when there is problem. This legislation requires that borrowers be informed whenever their loan is sold or transferred. I also feel it is the homeowner’s responsibility to read all information that is sent by the service of their mortgage.

There seems to be much more legislation before the Senate regarding the rights of the homeowners and renters and what type of assistance will be available. I am doing my best to try and keep up with this legislation because I feel all homeowners and renters need to know their rights. If just one person is helped by this topic, I will have done my job.

In closing - if anyone has any ideas for a topic, please do not hesitate to contact me. - Till next week - More later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Summary of H.R. 1728 - Part 2 of 2

2010-01-08T09:57:00.001-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello Everybody - I hope everyone found the information contained in Part 1 of HR 1728 as interesting as I did. As I stated I cannot image all the changes in the House Bill actually becoming law; I feel by the time it is chopped up and amended, we probably will not recognize it as it reads today.

The HR 1728 bill also provides protection for tenants who are renting when the homes they rent go into foreclosure. Under the proposed Bill the tenants with a lease have a right to remain in the property until the end of the existing lease. However, if the purchase intends to use the property as the primary residence, the lease may be terminated with giving the tenant 90 days to vacate. Tenants without a lease or a month-to-month lease must receive 90 days to vacate.

Section 8 Housing Assistance - If a tenant is currently receiving Section 8 assistance; the purchasers of the property are subject to the existing lease and housing assistance payments for Section 8. While foreclosure does not constitute good cause for termination of Section 8 if the property is unmarketable while occupied of if the new owner will use the property as his primary residence the lease may be terminated.

Additional standards also fall under this Bill to protect consumers. They are – prohibiting certain prepayment penalties; prohibiting the credit from directly or indirectly financing a single-premium credit insurance; prohibiting mandatory arbitration and requiring specific disclosures for loans that include negative amortization features.

In the case of an adjustable rate mortgage, a notice at least six months before the expiration of a fixed introductory rate must be sent to the borrower. The notice must explain the rate adjustment process and the consumer’s alternatives and they must be given an annual notice regarding interest rate terms.

With regard to Title III (High-Cost Mortgages) there will be changes to enhance the consumer protection. Some recommended changes are: lowering the points and fee trigger from 8% to 5% for transaction of $20,000 or more and including additional costs and fees in the trigger. Prohibiting the financing of points and fees; charging excessive fees for payoff information, modifications or late payments; prohibiting practices that increase the risk of foreclosures, such as balloon payments, encouraging a borrower to default and call provisions. The Bill is also requiring pre-loan counseling.

Title IV – (Office of Housing Counseling) - The Office of Housing Counseling at HUD will be charged with carrying out and coordinating homeownership and rental housing counseling programs. The public will be informed of Housing Counseling through public service announcements, multimedia campaigns to promote housing counseling. In addition – HUD will be required to update the Mortgage Information Booklet to provide consumers with a greater understanding of the terms and purchasing a house.

Title V – (Mortgage Servicing) - This title requires borrowers with higher-cost and subprime loans to have accounts established to provide protection again tax liens and force placement of homeowners insurance.

If borrowers waive the right to have their taxes and insurance paid by the servicer, written disclosure must be given by the lender that explains the need to pay property taxes and homeowners insurance. RESPA will also be updated to create safeguards so the borrower understands when the servicer may impose force-placed hazard insurance. There will also be a mandate for swifter responses to consumer written inquiries, increasing penalties for abuses and requiring the prompt crediting of payments.

Title VI (Appraisal Activities) - Establishes strong, enforceable Federal standards with tough penalties, which allow appraisers to act as independent referees to verify the value of the property for buyer, the seller, the lender and the investor. This new Bill will also strengthen the appraiser licensing and education standards and a Federal grant program to assist States in their regulatory activities.

WOW – all these changes really get my mind racing. I am not sure how all these new regulations will be set into place. I can only image it could take years for any of these new regulations to take effect.

If anyone has any ideas for a Blog, please let me know. Until next week – keep processing. More later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Summary of H.R. 1728 - Part 1 of 2

2010-01-04T11:59:00.001-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello Everybody - What is this Blog title you ask - Well it got your attention, now I will explain. The Blog Title is referring to the Summary of House of Representatives Bill Number 1728, which was introduced on March 26, 2009 by House Financial Services Committee Chairman Barney Frank, Rep. Brad Miller (D-NC) and Rep. Mel Watt - (D-NC). This House Bill, if passed, will change the mortgage industry as we know it today. Because of the length of the bill which is 155 pages in the original form - I will report on the summary of the bill.

First in the long list of changes is - All mortgage originators (including individuals as well as companies and banks that originate mortgages) will be subject to a federal duty of care that requires, licensing and registration under State or Federal law. All originals must present consumers with appropriate mortgages loans (i.e., loans that a consumer has a reasonable ability to repay and for which he/she receives a net tangible benefit (for refinancing) and that do not have predatory characteristics). The originators will make full disclosures to consumers, certifying to lenders compliance with origination requirements and including a mortgage originator’s unique identifier in loan documents.

Yield Spring premiums and other compensation that could cause mortgage originators to “steer” applicants toward more costly mortgages are banned for all mortgage loans. The total direct and indirect compensation from all sources permitted to the mortgage originator may not vary with the terms of the mortgage loan.

It gets more interesting. A mortgage originator that violates the duty of care will be liable to a consumer for the greater of actual damages or an amount equal to three times broker fees plus costs, including attorney’s fees.

Title II - Minimum Standards for ALL Mortgages - Ability to repay/net tangible benefits. Every residential mortgage loan will be subject to two new Federal standards that apply to creditors, assignees and securitizes.

At the time the mortgage is entered into, the creditor must make a reasonable good faith determination that the consumer has a reasonable ability to repay the loan at a fully indexed fully amortizing rate, based on verified and documented information including the consumer’s credit history, current and expect income debt-to-income ratios.

For refinancing - the will loan must provide a net tangible benefit to the consumer, based on information known or obtained in good faith by the credit. The Federal banking agencies shall prescribe relations that define “net tangible benefit” and loans for which the cost of refinancing exceeds the newly principal specifically do not provide a net tangible benefit.

Qualified Mortgage - Safe Harbor is a mortgage that provides prime, fully documented 30 year fixed-rate mortgage that have no negative am or interest-only features are presume to the meet the ability to repay and net tangible benefits standards. However, this presume is rebuttable. Qualified mortgages are defined as such - the APR does not exceed an average prime offer rate (i.e. 1.5 percentage points for a first lien and 3.5 percentage points for a subordinator lien); the income and financial resources have been verified; the underwriting process is based on a fully indexed rate; the loan meetings a combined debt-to-income test prescribed by the Federal banking agencies and the loan has a fixed rate of not less than or more than 30 years.

If this Bill passes as presented the consumer will have other remedies against the creditor under the Truth in Lending Act. If the creditor violates the ability to repay or net tangible benefit standards they will be liable to the consumer for recession plus the consumer’s costs for the recession unless the creditor provides a cure within 90 days after receiving notice from the consumer.

What is the cure? A no-cost modification or refinancing of the loan to provide terms that would have satisfied the minimum standards if the loan had contained terms as of the original date, as well as the payment of costs the consumer incurred as a result of the violation.

Is this enough information for this week? I think so. Every time I read this Bill, my head starts to swim. So I will save some for next week - however, it is a start and it will be very interesting to see if this Bill passes as introduced.

So until next week - keep processing. More Later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Self-Employment Made Easy – Part 2 of 2

2009-12-28T13:29:00.001-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello All – I hope the blog on Self-Employment is informative and it is helping to answer questions you may have. This week we will discuss Corporate Tax Returns, “S” Corp Tax Returns and Partnerships.

Corporate Tax Returns seem to be the most frightening to everyone. I do not know one processor or underwriter who likes Corporate Tax Returns. Many borrowers set up a Corporation to protect their personal assets in case of bankruptcy or lawsuits. A Corporation is a state-chartered business that is owned by the shareholders. The shareholders could be as few as 1 or as many as millions. Compensations to the officers of the corporation are based on the percentage of ownership and are reflected on the shareholder’s personal tax return. If the percentage of ownership of is not shown on the tax returns, this information must be obtained from the corporation’s accountant. After the adjusted business income is obtained, it should be multiplied by the borrower’s percentage of ownership.

When analyzing the corporate tax returns, the following adjustments must be made:

1. Depreciation and Depletion – must be added back to after-tax income.

2. Taxable Income – is the corporation’s net income before federal taxes. The income must be reduced by the tax liability.

If the corporation operates on a fiscal year rather than a calendar year, an adjustment must be made to relate corporate income to the individual’s tax return.

In order that the corporation does not suffer from the negative impact of the withdrawal of cash – an accountant’s letter should be obtained stating the withdrawal of cash from the corporation will not have a negative impact.

“S” Corp Tax Returns – An “S” Corp is generally a small start-up business with gains and looses passed on the stockholder in proportion to each stockholder’s percentage of business. The owners receive a W-2 form for the income and it is taxed as personal income.

The compensation of officers line on the IRS 1120S is transferred to the borrower’s IRS form 1040. Both depreciation and depletion may be added back to the income in proportion of ownership. Again ask for verification from the accountant that the withdrawal of cash from the corporation will not have a negative impact on the corporation.

Partnership Tax Returns - A partnership is formed when two or more individuals form a business and share in the profits, losses and responsibility for running the business. Each partner pays taxes on the share of the partnership’s net income.

General and Limited Partnerships report income on IRS Form 1065; this form must be reviewed by the lender to ascertain the strength of the business. The partners share is report on Schedule E of the 1040. Depreciation and depletion may be added back to income in proportion of ownership. However, losses in the business must also be proportionally subtracted from the income. In order to assess the impact of taking cash out of the business – again ask for an accountant’s letter as to strength of the business.

So – that is all there is to Self-Employment. I have been receiving many questions from processors, former underwriters and those who want to start underwriting. The questions range from how do I get started to I need to hone my skills – so next week, I will be discussing how I feel you can get started as an underwriter. Of course, it will be my opinion; however, I feel it will give you a good starting point.

Till next week – keep processing. More later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Self-Employment Made Easy – Part 1 of 2

2009-12-18T11:46:00.002-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello- I hope everyone is getting ready for the volcanoes of refinances when the new guidelines are finalized. I am actually looking forward to being busy, busy, busy – I will begin to feel hopeful.

Many processors and just as many underwriters that I know, start to panic, get heart palpitations and sweaty hands when they see a self-employed applicant. I cannot tell you how many processors have run into my office screaming for help – how do I qualify the borrower? I hope I can make your life a little easier by covering some steps for self-employment.

Important to remember - Any borrower who owns 25% or more of a business is considered self-employed for FHA mortgage loan underwriting.

Working for Relatives or Family Owned Business - Many times borrowers may say, I work for my father, my uncle owns the business, etc. Well that is fine – however, they must submit additional documentation to show they do not own a part of the business. In additional to paystubs and W2’s – they must also provide copies of their personal signed tax returns or a signed copy of the corporate tax return showing ownership percentages. The ownership percentage is located on the K-1 form.

What is the minimum length of employment of Self-Employment? If a borrower has been self-employed for two years or more – it is considered stable income. If an applicant is self-employed LESS than one year – the income may not be considered effective. Between ONE and TWO years – the income may be considered effective if the borrower has had at least two years documented successful employment or formal education in the field.

All self-employed borrowers must provide signed and dated individual tax returns, plus ALL applicable schedules for the most recent two years. If all schedules have not been filed – you cannot accept the income on page 1 for qualifying.

In addition – you need signed copies of federal business tax returns for the past two years with ALL applicable schedules, if the business is an “S” Corp or partnership. A year to date profit and loss statement and business credit report on corporations and “S” Corps.

OK – we have all the forms we need, let’s start analyzing the income. Two years is the magic number; however, the income may be averaged over three years. If the tax returns show an increase in earnings, use the two most recent years; however, if there is a decrease in earnings the income may not be used for qualifying. Let’s first look at the borrower’s Individual Tax Returns.

Wages, etc. Many times a borrower may pay him/herself a salary with a W2; in addition a spouse may also be working for the corporation and receiving a W2, in which case the income must be subtracted from the adjusted gross income in the analysis.

Schedule C – Business Income or Loss – The sole proprietorship income is calculated on Schedule C – and Depreciation and Depletion may be added back to the adjusted income.

Schedule E – Rents, Partnership Income – Any income received from rental properties may be used as income after adding back any depreciation – shown on Schedule E.

Schedule D – Capital Gain or Loss – Since most of the time this transaction generally occurs only once a year – it is not used for determining income. However, if the borrower is a housing developer or someone who buys and sells throughout the year, the income may be included in the income. The borrower would need to provide three years tax returns to show he has a history of Capital Gain income.

Schedule B – Interest and Dividend Income – This income which is taxable and tax-exempt, may be added back to the adjusted gross income only if it has been received for the past two years and is expected to continue.

Schedule F – Farm Income – Depreciation may be added to the adjusted gross income.

IRA Distribution, Pensions, Annuities and Social Security Benefits – Only the non-taxable portion of these incomes may be included and added to the adjusted gross income. Of course, you need to verify the income will continue for at least three years.

Employee Business Expenses – are expenses associated with the job the borrower is performing and must be deducted from the borrower’s adjusted gross income. When a borrower has a history of business expenses, you must also make an adjustment on the current YTD income by taking the percentage of last year’s expenses and deducting it from this year’s income.

Well – I hope this was not TMI (too much information) at one time. Next week, we will go over Corporate Tax returns.

Until next week – keep processing. More later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Mortgage Fraud Awareness - Part 5 of 5

2009-12-11T13:27:00.000-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello to everybody and sorry for the mix-up of last week’s blog, I missed the deadline because my mind was still on a holiday mode. Well this will be the final blog for this series on Mortgage Fraud and Red Flags.

This week, I feel it is important to review some issues and emphasize those items that should always be looked into and immediately suspect to fraud.

In recent years, the number of borrowers who have stated they are purchasing a primary residence when in fact, they were purchasing a rental property has been on the rise. And – this is one area that lender’s have cracked down on because of the fraud in this area; I will outline some Red Flags.

On page 1 of the 1003 (Mortgage Application), it is important to check the borrower’s current address and employment location - if the borrower is stating he will be using the property as a Primary Residence. If the borrower will be traveling a significant or unrealistic number of miles to work, and this varies in different parts of the country, question the borrower as to why and how he will making his trek to work everyday. If you are not sure about mileage and are not familiar with the area of the property vs. work location – Google it!!

If a borrower has purchased his current primary residence within the past year or two and is currently purchasing another primary residence, ask for a letter of explanation as to why he is purchasing another primary residence. If the borrower has rental properties in the area, chances are he is purchasing another rental property. If the underwriter is not satisfied with the explanation, the reason of the purchase could be changed to investment property.

Is the borrower purchasing a smaller or less expensive home than their current home? A little of explanation is needed.

Another red flag which is needed to be considered is the appraisal. It is important to check the seller’s name on the appraisal against the contract of sale. If they are different, it must be questioned. Verify the person signing the contract of sale has the authority to sell the property; verify the information against your State’s Assessment and Taxation Records. If there is any discrepancy – it must be worked out prior to loan approval.

Are the seller and borrower’s name the same? Is a relative selling this property, is this an arm’s length transaction? Some lender’s now reduce loan-to-value on non-arms length transactions. This is another item which needs to be addressed.

In addition to checking the seller and borrower’s name on the appraisal, it is important to look at the comparable properties and the number of miles to the subject property. If you are in doubt about the number of miles to comparables used by the appraiser – Google IT!!!!

Is the property being sold “Fee Simple” or with“Leasehold” – check the Contract of Sale against the Appraisal. If there is a discrepancy – it needs to be resolved prior to closing. The Title Company who is closing the property should be able to resolve this issue.

In closing this series, I would like to say – there are many Red Flags from Application to Closing a Mortgage. Look at any discrepancy as a Red Flag – Question – why is there a discrepancy? Is there an explanation – does it make sense? If you are not convinced – question it again. If you answer can be obtained from a third party – question the third party. Fraud is on the rise – protect your lender and broker, they will Thank You!!!

I hope you have enjoyed this series and I look forward to sharing more information with you. If anyone has a topic they would like to see in this space – please e-mail me – I am always looking for topics that will help you with processing. More Later.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Mortgage Fraud Awareness – PART 4 OF 5

2009-12-04T11:04:00.002-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello - I am starting to hear that the real estate market is getting to its “slow” time of the year!! In my opinion if this entire year would have been any slower there would virtually be no one left in the industry. As it is – the downturn of the market has caused brokers and lenders to flea in massive numbers. Those remaining are the die hards and they are working hard for their deals; which is all the more reason to do our due diligence prior to sending a package to the investor. It is easier to turn a borrower down prior to closing – then it is for a branch or broker to buy back an early default.

In the past several weeks we have talked about the 1003 (application); credit reports, employment verifications and what to look at for possible red flags. This week – let’s go over the Bank Statements and Declarations (Part VIII) on the 1003.

We have all seen large deposits on the VOD or bank statements and I am sure everyone has heard stories about how the money was obtained. It was a gift, cash under the mattress, my cousin gave it to me, my boss gave it to me etc. The problem arises when the source of the large deposit cannot be verified. When the loan officer takes an application, it is important that all accounts be included on the 1003 as well as very close estimates (if the bank statements are not readily available) of the balance in the account. Large deposits are an immediate Red Flag!!!

If you are looking at bank statements – and the borrowers pay bills writing checks, I always verify the sequence of the checks that have cleared. If you have two months statements, verify the sequence of all checks cleared and that the same check number has not cleared more than once. I have personally seen the same check numbers clear two separate bank statements with different dates – since this is one of personal experiences; it is sometime I am always tuned into. If you are dealing with a VOD, you do not have the luxury of verifying check numbers. However, if there is a large deposit on a VOD the source of funds must be verified. Many times the borrower will state, it was a paycheck. Well then I verify the net amount of the borrower’s pay check and determine if it could be reasonable that the borrower deposited his full paycheck and it makes sense. If the deposit is over the borrower’s pay check amount – you must question the borrower further as to the source of funds.

It is also important to note the date the bank account was opened on the VOD – if the account has been opened in the past 60-90 days with a large balance, it is important to verify the source of funds for opening the account.

If the borrower has given Earnest Deposit Money with the Contract of Sale, ask for a copy of the cancelled check. If the check has not yet cleared the bank and is being held by the broker – ask the broker for a copy of the check. Verify the bank account actually belongs to the borrower and that there are sufficient funds for the check to clear, since it has not been deposited.

If there is a sale of residence, verify funds with HUD1; if it is a personal loan repayment, ask for a copy of the promissory note; if it is a sale of a car, ask for a copy of the contract, copy of check received and deposit slip.

Verify that there will be sufficient funds to close on the transaction after deducting the amount of the Earnest Deposit Money. If a borrower prints a copy of his bank statement from the internet – it must contain the borrower’s name and account number; if the print out does not contain this information, it must be signed by the manager of the bank.

It is important to remember – never leave a question in your mind where the borrowers are obtaining funds for the closing on their property. Some times one answer to a question, will lead to 20 more questions. That’s OK!! Keep asking until you are satisfied with the answers.

Moving on to the Declarations section of the 10034 - I feel the question most often answered incorrectly in the Declarations section of the 1003 is – Are you obligated to pay child support or alimony? More times than not – the question is answered NO, no child support or alimony is paid. As an underwriter – I always go back to the borrower’s age; is the borrower married or unmarried; are their any dependents listed on page 1.

If the borrower is unmarried and has dependents listed - ask for an explanation of why there is no child support being paid. If the borrower is separated from the spouse, always ask for a copy for a copy of the separation agreement, if one does not exist you must determine the borrower is not paying child support, double check the borrower’s pay stub, maybe it is being deducted by his employer. If a borrower states there is no child support and has under- aged children – ask for a letter from the attorney or ask for a letter of explanation from the spouse who has custody of the children as to the child support.

It is just as important if a borrower is receiving child support and it is used for qualifying income and verification of three years continuance is absolutely necessary.

I hope some of these Red Flags will raise questions in your mind while processing. Keep asking questions.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Mortgage Fraud Awareness - Part 3 of 5

2009-11-25T11:46:00.001-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello – I hope everyone is holding on to their job. In this economy it is frightening to say the least with the downturn of the real estate market. As the market gets tighter and banks are again tightening guidelines, it is important that good quality loans be submitted for underwriting and even more important that the borrowers are qualified to purchase and given instructions not to make any changes in their job or credit report prior to closing.

In my opinion, the one issue that is not needed is for the lender to pick up discrepancies in the file between submission and audit closing – your borrowers could be packed with the moving van parked at the settlement office and the loan is not being funded because the investor ran an updated credit report and there is more debt or the borrower quit their job the day before. EEKKK!!!!!

I just happened to think of the above ways to kill your loan and thought I would share those thoughts with you. Now – back to the series on RED FLAGS during processing. This is the 3rd Part and as stated last week – I will discuss what to look for and the Red Flags on Tax Returns.

Regarding the income of the borrower – determine the type of work the borrower performs Does the borrower receive a 1040 or 1099 from his employer? When calculating income, in addition to base pay, does the borrower receive any bonus, commission or “other” income? If the borrower receives bonus or commission or “other” income – there must be a two year history of receiving this income. My philosophy underwriting a file is simple – if a borrower is receiving a base pay and you do not need the bonus or commission income for qualifying – do not use it!!!! Use only the income that is needed for the borrower to qualify, since bonus and commission income must be averaged and could open up more questions.

What types of income should be suspect of receiving salary and bonus income and when should you request the 1040’s or better yet – the 4506, then you can order the tax returns yourself directly from the IRS.

In addition to obvious occupations that receive salary and bonus and/or commission income – sales, cosmetology field, bartender, and waiting tables – you must also look at the title of the occupation. Is the borrower a “Manager” on the 1003 – verify that the borrower is not the owner. Is the telephone number for the borrower and employer the same? Is the borrower working for a family member? Red flags should be popping up.

Any time there are red flags you need to do your due diligence to preserve the integrity of the loan.

When looking at the tax returns – determine; are the returns signed; was the returns prepared by borrower or independent tax company. If the borrower receives bonus or commission is there a copy of “Unreimbursed Employee Expenses” attached? If so – the percentage of expenses must be deducted from the current year’s income. If the tax returns are signed, what date is the signature? Are the tax returns handwritten? If you have W2’s – verify the income on the W2 compared with the income on the tax returns. Whenever you have a question regarding taxes – use the 4506 that will confirm or alleviate your suspicions.

If you suspect a borrower is working for a family member or owns the business – check with your State Assessment and Taxation Office. The state where I live we can obtain (read only mode) the corporation papers; if the borrower is president, resident agent, any officer of the company. Check with your State Assessments or Licensing Bureau for specific information for your state.

There are many issues involved with tax returns; however, they can tell a story. The information supplied here is very general because every form means something different and if you have an accountant friend – I am sure he/she could answer your questions more in depth than outlined here.

So until next week – Keep Processing. More Later. Happy Thanksgiving with near and dear ones!!

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)

Mortgage Fraud Awareness - Part 2 of 5

2009-11-20T11:11:00.001-05:00

Written By: Joan Ewing, NAMP-CALP, FHA DE Underwriter

Hello – This is the 2nd part of a series of 5 that will alert all loan processors, as well as loan officers and underwriters to “RED FLAGS” on the original application (1003). This week we will cover the income/employment section of the 1003.

The employment section of the 1003 must MAKE SENSE. First the age of the borrower must coincide with the number of years the borrower states he has been working. If the borrower is 22 years old has been working 8 years – that must be questioned. I have had borrowers who have worked in a family business since they have been 14 years old; however, that could open up another can of worms, and we will get into that later. The occupation of the borrower must also align with the number of years of schooling the person disclosed, which was in last week’s article.

Let’s start – the borrower has been working for ABC Company for 2 years (which always seems to be the magic number). You need two pay stubs, 2 years W2’s and a verbal VOE or written VOE. When verifying an employment verbally – it is important to independently obtain the telephone number from Superpages.com; 411; Google, etc. Do not use the telephone number supplied by the borrower on the 1003 and never verify using a cell telephone number. It is always suggested that you verify the employment through Human Resources, or an Office Manager and not the borrower’s direct supervisor, since they would not necessarily have the date of employment and salary.

I would like to state at this point it is important to be aware if the borrower is, or could be, working and receiving commission or bonus income. Also, any borrower working for a school system, whether it is a teacher, bus driver, crossing guard, and secretary or maintenance person – chances are, they get paid 20 pay periods per year – not 26. I always request a written VOE. This could dramatically affect the annual income.

Some red flags to look for when looking at pay stubs and determining income should be – Are the pay stubs consistent? Are they prepared by a payroll company or in-house by the employer? Hand written pay stubs are never acceptable – you will need a copy of the payroll ledger from the company and docs to support appropriate taxes were withheld. If no taxes were withheld from the check – you must get tax returns because the borrower would be considered self-employed.

When obtaining a written VOE check for white-outs or alterations on the verification – I know most companies now fax or e-mail verifications, however, if there is any doubt about the content, I always condition for the original.

It is important to verify the information on the pay stub, for example, verify that the year-to-date income matches with the hourly/monthly rate paid by employer. Recently, I was underwriting a file – the borrower was employed by a hospital, paid bi-monthly ($2000) so it should not have been a problem. However, when checking the year-to-date income – the numbers did not add up to the current salary. For example, the ytd income was $22,000; instead of the current ytd being $24,000 – the pay stub shows $22,300 – I have checked for any non-taxable income, flex spending, etc. and there were no non-taxable items. RED FLAG – Why wouldn’t a hospital calculate correct income? The file was suspended until the issues could be resolved.

If a borrower is working in sales, cosmetology field (including, nails, waxing, etc.) it is known in the industry - the borrower works on commission or tips – Recently I have been instances where an employer, in order to help the employee – states the borrower has been promoted to a salary job and no longer receives commission or even tips. This is of great concern to me, considering where the market has been recently. If a borrower has received a “promotion” and no longer receives tips or commission, I ask for two most recent pay stubs – a written VOE will not suffice. I will most likely also ask for a letter on employer letterhead – explaining the promotion, when it was effective and what duties the borrower has undertaken differently, i.e., supervises other sales persons, etc.

Another red flag is income, taxes, deductions, with no cents, only whole dollars. I would suggest asking for a letter from the employer. Numbers that look squeezed in on pay stubs, W2’s – anything that looks suspicious should be questioned.

Fraud is getting harder to detect since just about all forms can be generated on the computer – therefore, it is important to verify any and all information that is questionable.

In closing this week – I would like to say – The fewer conditions the underwriter requests – the sooner the loan closes. The Loan Officer and Processor are the first point to making the loan close on time. ‘Til next week – Keep Processing. Next week, we will cover looking at the tax returns for borrowers receiving commission, bonus and tip income.

About the Writer. As an active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP Certified Ambassador Loan Processor (CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)