Underwriting Clarifications; 2-4 Unit Condos; DU Plus ; HUD-1 Reviews/Controls

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1 HUD-1 Reviews/Controls Purpose This communication announces: Underwriting Clarifications for Rental Income and the Fannie Form 216 requirements. Addition of a new 2-4 Unit Condo Form. DU Refi Plus changes for new DU release 6/27/09. HUD-1, Audit Point for Reviews and Controls Effective Date As Noted. Form 216 and Rental Income MSI has made clarifications to our Underwriting Chapter pertaining to Rental Income and exactly when a Form 216/988 is required. The Underwriting Chapter, Rental Income and Appraisal Forms sections in the Seller Guide will be clarified and updated. It is a secondary marketing delivery requirement that the Gross Monthly Rental amounts for all 2-4 and single family investment properties be provided to the end investors. Therefore, when a 216/988 is not required from an underwriting qualification perspective (borrower is able to qualify with the full payment); MSI still requires that the Gross Monthly Rents for the property be provided on the Underwriting Transmittal. 2-4 Unit Condo Form Effective Immediately, for loans locked on/after 6/06/09. For all 2-4 Unit Condo Projects, MSI requires the completion of the new 2-4 Unit Condo Form. The form is attached for your convenience; it will also be posted on the Web Site. Reminder: Sellers must identify the type of condo warranty on the Underwriting Transmittal (1008). DU Refi Plus Fannie Mae has published Release Notes, May 20, 2009 that outlines the DU Version 7.1 June Update that will make changes to the DU Refi Plus product. The changes and how MSI will interpret/accept are outlined in the DU Release Notes, 6/27/09 Matrix. See the Fannie Mae Web Site, for the full Release Notes document. Continued on next page WPA Page 1 of 4 (MSI).

2 HUD-1 Reviews/Controls, Continued DU Refi Plus, Continued DU Release Notes, 6/27/09 Matrix Blue Font is excerpted from the Fannie Mae Release Notes Document DU 7.1 Enhancement 6/27/09 MSI Interpretation/Requirement Modification to the Allowable Amount of Cash Back As stated in Announcement 09-13, the borrower may receive cash back at closing of no more than $ on DU Refi Plus transactions. If the borrower is receiving more than $ cash back, as reflected in the Details of Transaction section of the loan application, the loan casefile will not be underwritten as a DU Refi Plus transaction. Note: As this requirement applies to loan applications dated on or after July 1, 2009, this modification will only apply to new loan casefiles submitted to DU on or after July 1, Temporary Interest Buydowns Enhancements to the Identification of Existing Fannie Mae Mortgage Loan and Update to DU Refi Plus Message and New DU Refi Plus Eligibility Messages Modified DU Refi Plus Property Requirements Effective for loans submitted to DO/DU on/after 7/01/09, MSI will require this restriction as outlined in the Release Notes and Announcement If at closing, (for reasons unknown beyond the control of the Seller at the time of loan submission to DU) the cash back is more than $250.00, any excess must be applied to principal and the HUD-1 must clearly show that the Borrowers did not receive more than $ cash back in the transaction. Note: DU Refi Plus loans with cash back greater than $ originally submitted to DU prior to 7/01/09 must be purchased by MSI no later than 9/01/09. MSI has already announced that we do not permit or accept temporary buydowns for DU Plus loans. These enhancements will make the identification of DU Refi Plus loans more robust; additionally, the new messages will provide why a loan was not underwritten using the DU Plus criteria. MSI will not accept a PIW, regardless of AUS findings. MSI requires a full Fannie Mae appraisal. Standard appraisal requirements apply. Continued on next page WPA Page 2 of 4 (MSI).

3 HUD-1 Reviews/Controls, Continued DU Refi Plus, Continued DU Release Notes, 6/27/09 Matrix Blue Font is excerpted from the Fannie Mae Release Notes Document DU 7.1 Enhancement 6/27/09 MSI Interpretation/Requirement Implementation of Ability to Underwrite as Standard Limited Cash Out Lenders will now be able to instruct DU to underwrite a DU Refi Plus loan casefile as a standard limited cash-out refinance. On or after the weekend of June 27, lenders will be able to use the Product Description field to instruct DU to underwrite the loan casefile as a standard limited cash-out refinance by entering the phrase Standard LCOR in this field prior to underwriting. The Desktop Originator / Desktop Underwriter (DO /DU) user interface will be updated the weekend of July 18, 2009 in order to add the Product Description field to the Additional Data section of the loan application. Loan casefiles with no value entered in the Product Description field, or a value entered other than Standard LCOR in the Product Description field, will continue to be underwritten as DU Refi Plus if the loan is matched to an existing eligible Fannie Mae loan and the loan casefile meets the eligibility criteria required for DU Refi Plus. DU will issue the following message if the borrower s existing loan has been identified as an eligible Fannie Mae loan, and loan casefile is not underwritten as DU Refi Plus because the lender instructed DU to underwrite the loan casefile as a standard limited cash-out refinance: The borrower s existing loan has been identified as a Fannie Mae loan. The loan casefile was not underwritten according to the DU Refi Plus expanded eligibility guidelines because DU was instructed to underwrite the loan casefile as a standard limited cash-out refinance. This was indicated by Standard LCOR being entered in the Product Description field. This will enable MSI to accept loans for which our overlays prevent the loan from being purchased by MSI as a DU Refi Plus. To be eligible for funding/purchase, the loan must include the proper DU Message, The borrower s existing loan has been identified as a Fannie Mae loan. The loan casefile was not underwritten according to the DU Refi Plus expanded eligibility guidelines because DU was instructed to underwrite the loan casefile as a standard limited cash-out refinance. This was indicated by Standard LCOR being entered in the Product Description field. Continued on next page WPA Page 3 of 4 (MSI).

4 HUD-1 Reviews/Controls, Continued HUD-1 Reviews/ Controls MSI will implement the following HUD-1 Review and Control Audit Point effective for all loans, regardless of registration/lock or closing date. We have been informed by our end investors that this control is required to guard against fraud. HUD-1 Reviews and Controls: MSI requires that any disbursement equal to or greater than $5,000 on the Seller s side of the HUD-1 that does not correlate with a lien shown on the preliminary title report must be documented as a valid disbursement to the Seller (for value gained.) Seller Guide As Applicable: The Seller Guide and applicable Product Quick Reference Sheets will be updated within 2 business days of the effective date of the change. Questions If you have questions, contact your Account Executive. WPA Page 4 of 4 (MSI).

5 Seller Name: Seller ID#: Borrower Name: MSI Loan # Project Name: Property Address: Phase: MSI Condo Questionnaire 2-4 Unit Projects 1. Are all the Common Areas and facilities complete? Yes No 2. Does any single entity own more than one unit? Yes No 3. Has 75% of the units in the project been conveyed to an owner-occupant or second home purchaser? Yes No 4. Is the HOA or unit owners involved in any litigation, arbitration, mediation or other dispute resolution process? Yes No IF YES, explain: 5. Are there any adverse environmental factors affecting the project as a whole or the individual units? Yes No 6. Do the project legal documents include any restrictions on sale which would limit the free transferability of title? (i.e. Age Restrictions, First Right of Refusal, other deed/income restrictions) Yes No 7. Is any part of the project used for commercial purposes? Yes No IF YES, what percentage of square footage? Describe the commercial space: Percentage: 8. HOA is named insured on master insurance policy? Yes No 9. Are common elements/limited common elements insured to 100% replacement cost? Yes No Coverage: Deductible: Expiration Date: 10. Are units or common improvements located in a flood zone? Yes No IF YES, is flood insurance in force? Yes No Does this cover at least 80% replacement? Yes No OR, is this the coverage maximum available per federal flood program? Yes No 11. Is the HOA insured for general liability? Yes No IF YES, amount per occurrence $ 12. Minimum number of days required for written notification to be given to HOA or insurance trustee before any substantial changes or cancellation of the project coverage? 13. Is the project an ineligible project in accordance with MSI and/or Fannie Mae Guidelines? Note: If the project is a condo operated as a cooperative or condotel, as identified by the presence of hotel-type services (i.e., registration desk and/or use of daily occupancy rates; the availability of food and telephone services; provisions for daily cleaning services) or a time-share type arrangement, the project is ineligible. Yes No Reviewer s Name: Position/Title: Reviewer s Signature: Questions 8-12 can be answered with an insurance binder. Phone: Date: Revised 6/04/09 Page 1 of 2

6 Condo Questionnaire Answer Key 1. All common areas and any recreational facilities must be complete for the project to be acceptable. 2. No single entity may own more than one condominium unit in the condominium project. 3. Maximum 25% (of total number of units sold) rental. 4. If yes, obtain details and consider impact on all units and marketability. (Note: a newer project generally has pending assessments.) If yes, obtain details and consider risk. Examples: (1) HOA suing individual owners for unpaid dues is usually o.k. (2) HOA being sued for a "slip and fall" liability issue will usually be o.k., so long as suit will not be for more than general liability insurance coverage. (3) HOA suing developer for structural defects is usually not o.k. u (4) nless all repairs are completed and costs paid (so that suit is only to recover paid repair costs. 5. If yes, appraiser must address impact on value and marketability. 6. See project eligibility requirements in Seller Guide Underwriting Age Restrictions First Right of Refusal Other deed or income restrictions. 7. <= 20%, if more than 20% a Full Project Approval is required 8. HOA must be the named insured 9. Must be insured to 100% Deductible cannot exceed 5% of the policy face amount. The total coverage amount should make sense for the size project. Insurance must be in force at loan closing. 10. If yes, must carry flood Must be 80% current replacement or the max available. Deductible cannot exceed $25, Must be $1 million per occurrence 12. Minimum 10 days 13. Seller must warrant that project is not an ineligible project. Revised 2/20/09 Page 2 of 2