Wednesday, March 26, 2008

The FNMA Automated Government Underwriting Sham

Think Fannie Mae has tightened their underwriting standards and that Automated Underwriting Systems produce investment quality loans?

Think again.

FNMA’s Desktop Underwriter, PMI Scorecard, and TOTAL Scorecard approvals are producing high risk garbage that do not meet government loan underwriting standards.

This AUS decision is a prime example of the loan quality produced by automated underwriting systems (AUS).

As you can see, the LTV is 100%, the debt to income ratios are 46/62, residual income is $1301, and reserves after closing would be $1184. The mid credit score for primary borrower is 708, and the borrower’s total recurring debt including projected negative cash flow from their existing home which they intend to retain as a rental is $1174 a month.

However, in addition to a high DTI and minimal balance left over for family support, the borrower’s monthly housing expense would be increasing by almost 50% without a demonstrated savings ability. Furthermore, the borrower and spouse are habitual spenders with no demonstrated savings ability. The borrower also has sizable commute resulting in a high commute expense which is not factored into the ratios.

While the borrower has a 708 credit score, the borrower has maxed out many of his credit lines and there is evidence of prior credit issues via collections and charge offs. In reviewing the history of borrower’s current home, the borrowers have repeatedly completed equity refinances and have a first, second, and third on their existing home which is currently over-encumbered. Furthermore, the borrowers have no property management experience, and lack sufficient reserves to maintain a rental property.

While message #37 states “The debt to income ratio was not subject to restriction due to compensating factors in this case” the reality is the only compensating factor is that the residual income exceeds VA’s requirement by over 30%. However, VA’s residual requirements for the West was established several years ago and has not been adjusted to current inflation levels. Based on the fact that the borrowers have to resort to equity withdrawals and heavy credit use to finance their existing lifestyle with a much lower housing expense, the residual income is not a compensating factor, but moreover, a further layering of risk.

The reality is that these borrowers are actually considering bankruptcy and if they would have completed the purchase planned to default on their existing loan. Nonetheless, if the borrower had elected to purchase a home, any company or broker who refused to honor the AUS decision could face a fair housing violation or otherwise be accused of discrimination as the borrower’s are minorities.

While this is VA AUS approval, FHA approvals are just as loose even in declining areas where values are projected to decline by as much as 40-45%.

Now that FHA and agency limits have been increased to such unreasonably high levels, underwriting must be tightened so as to ensure against program abuse and non-investment quality loans.

Automated underwriting continues to enable abusive lending practices courtesy of the taxpayers.


Anonymous said...
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I'm Not POTUS said...

shakadal is an arse that is spamming your comments page. Get rid of his link.

A SFR in Temecula at the max loan limit. HMMMMM... And he only had $8,000 left on his old loan?????

Sounds like he is moving from a double wide to bank REPO. Great post. I recommend reviewing comments before you let them post. Fresh blog will die with a scam post turning off viewers.

Do_the_math said...

Thanks INP. I followed your advice and changed my comment settings.

The $8000 mortgage is actually the borrower's third mortgage. It is only showing because the account is duplicated and had to be omitted. The borrower's existing mortgages aren't showing as a recurring debt because only the net income or loss from the schedule of real estate is used. However, the borrower's current housing expense is $2276. a month with all three mortgages.

In taking a closer look at the gross rental income that the borrowers provided, the estimated rent was overstated by at least $500-$800 based on the Temecula rental market making this approval all the more toxic.

Carl Pruitt said...

Great posts. (parts 1 &2)

Just one quick correction. FHA TOTAL Scorecard is HUD's system that DU only accesses and doesn't control. Even when running a loan through Freddie Mac's Loan Prospector it goes through the exact same TOTAL Scorecard engine.

That being said, your points are still all valid. Even though the most significant factor correlating with foreclosures is the declining value issue, one of my pet peeves on FHA automated approvals is debt ratio. We just aren't doing people any favors by getting them into houses when they don't have enough money left over to eat or to make simple repairs to the house as they become needed.

I know FHA hasn't experienced the same increase in foreclosures yet that conventional loans have, but with approvals like these continuing it is only a matter of time!

Many people who are crying about the subprime problems don't realize the extent of the danger being faced in "prime" mortgages.

Do_the_math said...

Thank you Carl. You are absolutely right, and I appreciate you making that clarification.

I like your blog and hope you don't mind me adding you to my links. Your FHA content is excellent!