Announcement December 20, Amends these Guides: Selling and Servicing

Transcription

1 Announcement December 20, 2006 Amends these Guides: Selling and Servicing Expansion of Interest-Only Mortgage Loans Eligible for Delivery to Fannie Mae, and Elimination of the InterestFirst Product Name In 2001, Fannie Mae introduced InterestFirst, one of the first interest-only ( IO ) products in the mortgage market. Since that time, many variations of IO products have become widely available. With our ongoing commitment to provide the tools necessary for our lenders to meet the needs of borrowers, we are announcing several enhancements to our IO offerings designed to further expand IO mortgage eligibility criteria and increase efficiencies for our lenders. These changes include eliminating the InterestFirst product designation, eliminating the need for lender variances to deliver mortgage loans that have an IO feature, expanding the products that are eligible for an IO feature, expanding the occupancy and property types eligible for an IO feature, permitting lenders to underwrite most products with an IO feature outside of Desktop Underwriter (DU ), permitting temporary buydowns for fixed-rate mortgage loans with an IO feature, modifying our pooling and delivery guidelines for mortgage loans with an IO feature, adding to the Servicing Guide the requirements related to payment application and payment changes in response to principal curtailments for mortgage loans with an IO feature, and requiring borrowers to be qualified at a fully-indexed rate that assumes a fully-amortizing repayment schedule. Announcement Page 1

2 Elimination of the InterestFirst Product Name and Replacement with IO Feature In the past, Fannie Mae identified InterestFirst as a unique product, with its own set of defined parameters. Based on the increased market demand for IO structures, we will now treat IO as a feature, i.e., an amortization option, and permit the IO feature to be used with various mortgage loan products. These include select standard fixed-rate and adjustable-rate products contained in the Selling Guide, as well as our Flexible 97, Flexible 100, and MyCommunityMortgage (MCM ) products. (See Announcement for additional information and restrictions for MCM.) Consistent with this shift to treat IO as a feature, use of the InterestFirst name and related product designation will be retired effective January 30, Elimination of the Need for Variances to Deliver Most Mortgage Loans with an IO Feature Until now, Fannie Mae required variances to a lender s master agreement to deliver the InterestFirst product and/or other IO products. This Announcement makes IO structures a standard feature available to all Fannie Mae lenders. As a result, special approvals, variances, and/or negotiated contracts no longer will be required to deliver mortgage loans to Fannie Mae that have an IO feature and otherwise conform to the requirements of our Selling Guide (as amended by this Announcement). IO will be a standard offering beginning January 30, Expansion of Products Eligible for an IO Feature Under the existing InterestFirst structure, the following fixed-rate (FRM) and adjustable-rate (ARM) products are eligible for delivery to Fannie Mae: 30-year FRM with 10-year IO period (10/20); 30-year FRM with 15-year IO period (15/15); 3/1 ARM with either a 3-year IO period (ARM plans 3270 and 3271) or a 10-year IO period (ARM plans 3513, and 3514); 5/1 ARM with either a 5-year IO period (ARM plans 3223, 3226, 3502 and 3503) or a 10-year IO period (ARM plans 3504, 3505, 3515, and 3516); 7/1 ARM with either a 7-year IO period (ARM plans 3224 and 3227) or a 10-year IO period (ARM plans 3517 and 3518); and 10/1 ARM with a 10-year IO period (ARM plans 3225 and 3228). The products listed above will be eligible for an IO feature. Note that the eligible ARM plan numbers are the same as for the existing InterestFirst ARMs, but now may be used for all ARMs with an IO feature. In addition, we have expanded the eligible products to include five new fixed-rate IO structures: 40-year FRM with 10-year IO period (10/30), 40-year FRM with 15-year IO period (15/25), Announcement Page 2

3 40-year FRM with a 5-year IO period (5/35), 35-year FRM with a 5-year IO period (5/30), and 30-year FRM with a 5-year IO period (5/25). The following products are not eligible for delivery to Fannie Mae if they contain an IO feature: mortgage loans that receive a DU Expanded Approval recommendation with or without Timely Payment Rewards (except for mortgage loans originated as MCM, which are eligible for delivery with EA-I/Eligible or EA-II/Eligible recommendations from DU); HomeStyle Construction-to-Permanent and HomeStyle Renovation; Community Lending products, with the exception of MCM (see restrictions for MCM, below); mortgage loans originated subject to resale restrictions or located within a community land trust (see Announcement for details); and ARM plans not specifically listed above. Restrictions on IO Structures for MCM Announcement outlined the permissible IO structures that could be used with MCM. The enhancements contained in this Announcement do not supersede those IO structures. MCM may only be used with the following IO structures: 40-year FRM with 10-year IO period (10/30), 35-year FRM with 5-year IO period (5/30), 30-year FRM with 10-year IO period (10/20), and 5/1 ARM (2/2/5 caps) with 10-year IO period (ARM plans 3515 and 3516) (one-family and two-family properties only). Expansion of Occupancy and Property Types Eligible for an IO Feature Fannie Mae s InterestFirst product was limited to mortgage loans secured by one-family primary residences and second homes. We have expanded our eligibility guidelines. Unless otherwise restricted under the guidelines of the applicable mortgage loan product, the following occupancy and property types are now eligible in connection with mortgage loans originated using an IO feature: primary residences consisting of one-family, two-family, three-family, or four-family properties; second homes consisting of one-family properties; and investment properties consisting of one-family or two-family properties. In accordance with our standard MCM guidelines, mortgage loans originated with an IO feature may be secured by a one-family to four-family primary residence (see additional Announcement Page 3

4 MCM restrictions above). Second homes and investment properties are not eligible property types under our standard MCM guidelines. The following property types are not eligible in connection with mortgage loans originated with an IO feature: manufactured homes and units in cooperative projects (except that MCM loans secured by one-family cooperative units are eligible (see additional MCM restrictions, above); and investment properties consisting of three-family or four-family properties. Interest Rate Buydowns With the exception of MCM, temporary interest rate buydowns are allowed on fixed-rate mortgage loans with an IO feature for primary residences or second homes provided the rate reduction does not exceed three percentage points, and the rate increase will not exceed one percentage point per year (e.g., a buydown is permissible). For fixed-rate mortgage loans originated under the MCM guidelines, temporary interest rate buydowns are allowed for purchase money transactions secured by one-family and two-family primary residences, provided the reduction does not exceed two percentage points, and the rate increase will not exceed one percentage point per year (e.g., a 2-1 buydown is permissible). Buydowns are not permitted on mortgage loans that 1) have an IO feature and are secured by investment properties, 2) are originated in cash-out refinance transactions, or 3) are ARMs. All interest rate buydowns must otherwise meet the requirements of the Selling Guide Part VII, Section and the Guide to Underwriting with DU (as updated by DU Release Notes), as applicable, including the requirement that when the source of the buydown funds is an interested party to the property sale or purchase transaction, our interested party contribution limits apply. Underwriting Mortgage Loans with an IO Feature With these new enhancements, lenders will be permitted to choose how to underwrite most mortgage loans originated with an IO feature either through DU, manually, or through another automated underwriting system that has been approved by Fannie Mae for the lender s use. Mortgage Loans Underwritten With DU Effective immediately, lenders may submit mortgage loans with an IO feature to DU. Those mortgage loans may be delivered on or after January 30, 2007, as previously stated. All mortgage loans submitted to DU that have an IO feature must continue to receive either an Approve/Eligible or Refer/Eligible recommendation to be eligible for delivery to Fannie Mae, except that MCM loans are eligible for delivery with an EA-I/Eligible or EA- II/Eligible recommendation from DU. Announcement Page 4

5 DU will be updated in 2007 to reflect the expanded eligibility criteria detailed in this Announcement. Until those enhancements are reflected in DU, lenders may deliver IO mortgage loans that comply with the IO requirements contained in this Announcement, even if they receive any of the following DU messages: Temporary buydowns on fixed-rate mortgages - This case is ineligible because buydowns are not permitted on InterestFirst mortgages. One- and two-family investment properties - This case is ineligible because InterestFirst mortgages are not permitted on loans secured by an investment property. AND/OR This case is ineligible because InterestFirst mortgages are not permitted on loans secured by a two-, three-, or four-unit property. Two-, three- and four-family owner occupied (primary residence) properties - This case is ineligible because InterestFirst mortgages are not permitted on loans secured by a two-, three-, or four-unit property. Amortization Terms greater than 30-years - This case is ineligible because loans with amortization terms exceeding 30 years are only allowed with specific loan terms. Other - This loan was processed as an InterestFirst mortgage. The lender must be approved to deliver InterestFirst mortgages in its Master Agreement. If the mortgage complies with all applicable product guidelines, it will be eligible for the limited waiver of representations and warranties allowed for DU-underwritten mortgage loans. Underwriting Flexible 97 and Flexible 100 Products Flexible 97 and Flexible 100 products (collectively referred to as Flexible products ) are now eligible with an IO feature, however, these Flexible products must continue to be underwritten through DU. Flexible products with an IO feature must receive an Approve/Eligible or Refer/Eligible recommendation to be eligible for delivery to Fannie Mae. All other requirements of the Flexible products remain the same, as outlined in the Selling Guide and the Guide to Underwriting with DU. Flexible products that receive an Ineligible recommendation due solely to the following eligibility enhancements will be eligible for delivery to Fannie Mae: 97/100 LTV - DU will not recognize mortgages with LTVs greater than 95 percent with an IO feature as a Flexible product and therefore will trigger one of the following messages: This case is ineligible because the LTV (or CLTV) cannot exceed 95 percent for a purchase, InterestFirst adjustable-rate mortgage secured by a primary residence or a second home. OR Announcement Page 5

6 This case is ineligible because the LTV (or CLTV) cannot exceed 95 percent for a limited cash-out refinance, InterestFirst adjustable-rate mortgage secured by a primary residence or a second home. Lenders will not, however, receive the applicable messages for Flexible products that identify the borrower contribution requirements or the special feature code(s) required to deliver the mortgage to Fannie Mae. When the lender is processing a Flexible product with an IO feature, the following messages, though not provided by DU in the Fannie Mae Underwriting Findings Report, must be adhered to: Verify the borrower is contributing at least $500 of their own funds or 3 percent from allowable Flexible mortgage sources to the down payment, closing costs, or prepaid fees. Interested party contributions, subject to standard contribution limits, and premium pricing can be applied to any amount above the borrower's initial $500 or 3 percent contribution. OR Verify the borrower is contributing at least 3 percent to the down payment (if applicable), closing costs or prepaid fees. The contribution can come from allowable Flexible mortgage sources. Interested party contributions, subject to standard contribution limits, and premium pricing can be applied to any amount above the borrower's initial 3 percent contribution. AND The following list of special feature codes is provided to assist you in determining which codes may be associated with this loan. Other codes may be required. Refer to the Fannie Mae Selling Guide for a comprehensive list. Special Feature Code Description 206 Flexible Mortgage (90-97 LTV) 412 Flexible Mortgage (100 LTV) 446 Flexible Mortgage w/sub Financing 564 Flex Minimum Contribution Option Mortgage Loans Underwritten Outside of DU Beginning January 30, 2007, lenders may deliver mortgage loans with an IO feature that are underwritten outside of DU (with the exception of Flexible products, as noted above). This includes mortgage loans that were underwritten either manually or with an automated underwriting system (such as Loan Prospector ) approved in writing by Fannie Mae for a particular lender s use. Please note that mortgage loans underwritten as InterestFirst prior to, but delivered on or after, January 30 th cannot be underwritten outside of DU, and must receive a DU recommendation of Approve/Eligible. Borrowers must be qualified using the principal, interest, taxes, and insurance payment (PITI) assuming a fully-amortizing repayment schedule based on either the applicable interest rate for a FRM or the fully-indexed rate for an ARM. The fully-amortizing repayment schedule is based on the term of the mortgage. For example, the amortizing payment for a loan with a 5-year IO period and a 30-year term would be calculated based on a 30-year amortization schedule. The fully-indexed rate generally equals the index value prevailing at the time of underwriting plus the applicable margin that will apply after the expiration of any introductory interest rate period. (For more details on determining the fully-indexed rate, refer to Part VII, Section of the Selling Guide.) Announcement Page 6

7 The qualifying ratios as outlined in the Selling Guide for the underlying base product must be adhered to. These underwriting guidelines will be incorporated into DU when it is updated in In addition, the minimum representative credit score, loan-to-value ratio (LTV) and combined loan-to-value ratio (CLTV) guidelines will apply, as outlined below. For mortgage loans originated with subordinate financing in the form of a home equity line of credit, the applicable home equity combined loan-to-value ratio (HCLTV) is permitted to be 5 percent above the CLTV identified below. Maximum LTV Maximum CLTV Minimum Credit Score Purchase 1 95% 95% 640 or Limited 2 90% 90% 680 Cash-Out 3 80% 80% 680 Refinance 4 80% 80% 680 Occupancy Purpose Units PRIMARY RESIDENCE SECOND HOME INVESTMENT PROPERTY Cash-Out Refinance Purchase or Limited Cash-Out Refinance 1 90% 90% % 90% % 75% % 75% % 95% 640 Cash-Out Refinance 1 90% 90% 680 Purchase 1 90% 90% 680 or Limited 2 90% 90% 680 Cash-Out 3 N/A N/A N/A Refinance 4 N/A N/A N/A Cash-Out Refinance Contributory Risk Factors Associated with IO 1 70% 70% % 70% N/A N/A N/A 4 N/A N/A N/A Mortgage loans originated with an IO feature have unique characteristics that warrant additional review and consideration by the lender. During the IO period, the borrower makes payments of interest without amortizing any principal. This may significantly impact the borrower s equity in the subject property as compared to a fully-amortizing mortgage loan. In addition, the borrower may experience payment shock at the end of the IO term when monthly payments become fully-amortizing payments of principal and interest. Based Announcement Page 7

8 on these characteristics, Fannie Mae has established the guidelines contained in this Announcement to limit IO features to mortgage loans with terms of at least 30 years and, in the case of ARMs, to those with fixed-rate periods of three years or more. In addition, certain mortgage loans with additional risk factors are required to be submitted through DU and are not eligible for manual underwriting. Even though IO features have established limitations, lenders must consider an IO feature in relation to the other terms of the transactions. An IO feature is considered to be a contributory risk factor that increases risk, as defined in the Selling Guide, Part X, Section 302. The lender is required to consider all primary and contributory risk factors when reaching an underwriting decision. Mortgage Insurance For mortgage loans underwritten with DU, standard mortgage insurance (MI) for the specific product is required for all loans when the LTV is greater than 80 percent. Note that for loans that receive an Ineligible recommendation, the DU message will not identify the level of MI required. For manually underwritten loans, standard MI coverage for the specific product is required for all mortgage loans when the LTV is greater than 80 percent. Financed MI is now eligible for loans with an IO feature pursuant to the requirements contained in Part V, Section of the Selling Guide. The Reduced MI or Lower-Cost MI options are not permitted on loans with the IO feature. However, the lower standard MI coverage levels associated with MCM also apply to MCM loans that have the IO feature. Legal Documents In July 2006, we began allowing lenders to use the InterestFirst legal documents to deliver their proprietary IO mortgage loans and MCM loans with an IO feature (effective September 1, 2006) by deleting all references to InterestFirst. Our legal documents have been updated and no longer contain references to InterestFirst; they are posted on Lenders should begin using the updated documents as soon as possible. We will continue to accept the previous versions for mortgage loans closed on or prior to May 31, Mortgage loans closed on or after June 1, 2007, however, must be closed using the updated documents (unless the lender s documents comply with the nonstandard document warranties that appear in Part I, Section , subsection B Documentation-specific warranties, of the Selling Guide). Announcement Page 8

9 The legal documents and the original form numbers have not changed. The following table indicates the correct note and security instrument rider to be used with both the existing and new IO structures: Product Amortization Cap IO Period Index ARM Note Rider Term Plan* 5/25 30-year - 5-year /20 30-year - 10-year /15 30-year - 15-year /30 35-year - 5-year /35 40-year - 5-year /30 40-year - 10-year /25 40-year - 15-year /1 30-year 2/2/6 3-year CMT /1 30-year 2/2/6 3-year LIBOR /1 30-year 2/2/6 10-year CMT /1 30-year 2/2/6 10-year LIBOR /1 30-year 2/2/5 5-year CMT /1 30-year 2/2/5 5-year LIBOR /1 30-year 2/2/5 10-year CMT /1 30-year 2/2/5 10-year LIBOR /1 30-year 5/2/5 5-year CMT /1 30-year 5/2/5 5-year LIBOR /1 30-year 5/2/5 10-year CMT /1 30-year 5/2/5 10-year LIBOR /1 30-year 5/2/5 7-year CMT /1 30-year 5/2/5 7-year LIBOR /1 30-year 5/2/5 10-year CMT /1 30-year 5/2/5 10-year LIBOR /1 30-year 5/2/5 10-year CMT /1 30-year 5/2/5 10-year LIBOR Fixed Adjustable *Fannie Mae ARM plans that are not listed in this table are not eligible for delivery with an IO feature unless lenders have negotiated and received explicit approval for other ARM plans. IO Pricing Change Whole loan and MBS pricing conventions for IO mortgage loans (fixed-rate and ARMs) will remain unchanged from current levels with the following exceptions: Pricing Change for IO Fixed-Rate Loans with LTV Greater than 90 Percent Previously, on FRM InterestFirst loans with LTVs greater than 90 percent, a loan-level price adjustment (LLPA) of 0.25 percent was required. That LLPA has been eliminated. Lenders should be advised, however, that the 0.25 percent LLPA for FRMs and ARMs with the IO feature that are originated with subordinate financing and LTVs greater than Announcement Page 9

10 75 percent will continue to apply. This LLPA is in lieu of, and not in addition to, the standard LLPA for mortgage loans with subordinate financing, per the Selling Guide. MCM IO Pricing Changes for Mortgage Loans with Terms Exceeding 30 Years Effective January 30, 2007, MCM IO mortgage loans with terms greater than 30 years in MBS will no longer be assessed the LLPA of percent for the extended term. MCM IO mortgage loans in MBS will only be assessed the 0.25 percent LLPA required for an IO feature. Therefore, whether the term is 30 years, 35 years, or 40 years, all MCM IO options will have identical pricing for MBS. Likewise, for whole loans, the yield adjustment required for terms greater than 30 years for MCM IO mortgage loans will be removed. Live pricing options for current production mandatory whole loan commitments for MCM 35-year and 40-year terms that are posted in Fannie Mae s ecommitting and for best efforts commitments on ecommitone will reflect this improvement beginning January 30, Streamlined Committing and Delivery Requirements for Mortgage Loans Originated with an IO Feature Previously, lenders were required to follow separate processes and procedures to deliver InterestFirst and other IO mortgage loans to Fannie Mae. Enhancements have been made to these processes such that all mortgage loans with an IO feature, including those formerly designated as InterestFirst, will follow a single process and procedure for committing, selling, and delivery to Fannie Mae. These enhancements, including the use of standard IO ARM plans, will simplify the delivery process for loans with an IO feature, and make it easier for lenders to do business with Fannie Mae. The following aspects of committing and delivering mortgage loans with an IO feature remain unchanged: Daily commitments are available with no minimum commitment amount. Both Scheduled/Scheduled and Actual/Actual remittances are available for IO FRMs and ARMs. On both whole loans and MBS deliveries using Loan Delivery (LD) or MORNET, lenders may use a 360-month, 420-month, or 480-month term and the IO payment. The lender s IO payment must match Fannie Mae s calculated IO payment with a tolerance of +/- $0.01. Whole loans and MBS use the same ARM plans listed on the chart under the Legal Documents section of this Announcement. There are no special feature codes unique to an IO feature. Whole Loan Delivery Beginning January 30, 2007, lenders may commit mortgage loans with an IO feature by selecting the appropriate IO feature in ecommitting. Announcement Page 10

11 MBS Delivery MBS pools containing mortgage loans with an IO feature will still require identification with future feature codes, however, we are phasing out the existing InterestFirst future feature codes and replacing them with IO future feature codes. Beginning January 30, 2007, lenders may start using the IO future feature codes shown in the chart below for all mortgage loans with an IO feature that are delivered to Fannie Mae. Fannie Mae will continue to accept mortgage loans delivered with InterestFirst future feature codes for pools with issue dates up to and including June 1, For pools with issue dates of July 1, 2007 and later, the InterestFirst future feature codes will become inactive, and use of the new IO future feature codes will become mandatory. IO Period IO Future Feature Code InterestFirst Future Feature Codes TO BE RETIRED after 6/1/ year year and year year , 145, and year IO fixed-rate MBS pools are available through Fannie Majors only, and will be assigned a special prefix that is determined by the length of both the IO period and the loan term. The table below shows IO MBS prefixes and their definitions (there are no special prefixes for IO ARMS). Fixed-Rate MBS Prefix NO NP NQ NA NB NC IO Fixed Rate MBS Prefixes IO Term IO period is 3 years and 5 years IO period is 7 years and 10 years IO period is > 10 years and 15 years IO period is 3 years and 5 years IO period is 7 years and 10 years IO period is > 10 years and 15 years Loan Term Loan term is = 30 years Loan term is > 30 years and 40 years Other aspects of committing and delivering InterestFirst and mortgage loans with an IO feature remain unchanged, as follows: Lenders should continue to use the standard delivery process through the MORNET Pool Submission System (MPSS) or LD. The Interest-Only flag should be set to Y. The IO end date, representing the due date of the final IO payment, should be entered on each mortgage in LD or MPSS for MBS deliveries. The appropriate future feature code from the chart above should be entered into LD or MPSS for both FRM and ARM IO MBS. Lenders should use the following, as applicable: o either the 30-year or 40-year FRM buyup and buydown grids, or o the 30-year hybrid ARM buyup and buydown grids. Announcement Page 11

12 Lenders should contact the Fannie Mae Capital Markets Sales Desk at to obtain a Fannie Majors pool number along with a CUSIP number. Addition of IO Provisions into the Servicing Guide Because IO is becoming a standard feature, the Servicing Guide will be updated to include specific language related to mortgage loans with this feature. There are no changes to existing requirements for servicing mortgage loans with an IO feature. The specific servicing requirements for mortgage loans with an IO feature relate to payment application and payment changes resulting from a principal curtailment. Below is a brief overview of those provisions to assist servicers that are not currently servicing mortgage loans with an IO feature. Payment Application for Mortgage Loans with an IO Feature During the IO period, the amount received from the borrower will be applied first to the interest due (which represents the monthly payment) and then to any escrow deposits. If the borrower remits funds in addition to the interest due and any amounts required for escrow deposits, and specifically designates the funds as additional principal (refer to Part III, Section of the Servicing Guide regarding application of additional amounts not specifically designated as additional principal), those amounts should be applied to principal. Upon expiration of the IO period, funds will be applied in accordance with the provisions in Part III, Section 101 of the Servicing Guide. Payment Changes as a Result of a Principal Curtailment For mortgage loans that have an IO feature, the application by the servicer of a principal curtailment in any amount during the IO period will result in a change to the borrower s monthly payment amount. In those instances, the curtailment will be applied to reduce the principal balance of the mortgage. The servicer will calculate the new IO payment by multiplying the postcurtailment balance by the annual interest rate, and then dividing the result by twelve. This new IO payment amount will be applicable for the remainder of the IO portion of the mortgage loan term, unless a subsequent curtailment is received. If a curtailment is received after the IO period, i.e., during the period when payments consist of both principal and interest, the servicer will follow the standard procedures outlined in Part III, Section of the Servicing Guide. ********* Lenders who have questions about this Announcement should contact their Customer Account Team or Servicing Specialist. Pamela S. Johnson Senior Vice President Announcement Page 12