Freddie Mac Single-Family Seller/Servicer Guide 5202.1 — Credit assessment for Manually Underwritten Mortgages
Freddie Mac Single-Family Seller/Servicer Guide section 5202.1 — Credit assessment for Manually Underwritten Mortgages. Full verbatim section text, substring-verified against snapshot 5869ee9e606cd4ae.
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Freddie Mac Single-Family Seller/Servicer Guide 5202.1 — Credit assessment for Manually Underwritten Mortgages
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§This section contains requirements related to: ■ Establishing…7,046 ch
This section contains requirements related to: ■ Establishing Borrower’s credit reputation ■ Documenting Borrower’s credit reputation ■ Evaluating Borrower’s credit reputation ■ Adverse or derogatory credit information ■ Evaluating other credit information ■ Documenting and delivering Underwriting Scores and Indicator Scores Manually Underwritten Mortgages must meet the requirements of this chapter and the Guide. (a) Establishing Borrower’s credit reputation To establish an acceptable credit reputation, there must be at least a minimum amount of credit history available as described below. There may be situations in which a credit history of short duration is sufficient to demonstrate an acceptable reputation. A credit history of short duration adds a layer of risk that must be considered in evaluating the Borrower’s credit reputation. (i) Minimum number of payment references At least one Borrower whose income or assets are used for qualification must have a minimum number of payment references consisting of: ■ At least three Tradelines, whether or not on the credit report, or ■ If a Borrower does not have three Tradelines, at least four Noncredit Payment References or a total of four Tradelines and Noncredit Payment References A Tradeline for an account for which the Borrower is not the primary account holder but is an authorized user may be considered a Borrower’s Tradeline if the Seller maintains in the Mortgage file documentation that evidences at least one of the following: ■ Another Borrower on the Mortgage owns the Tradeline in question ■ The Tradeline is owned by the Borrower’s spouse ■ The Borrower has been making the payments on the account for the last 12 months and the monthly payment reported on the Borrower’s credit report is included in the monthly debt payment-to-income (DTI) ratio When a permanent or nonpermanent resident alien Borrower has established the minimum number of payment references required above in the United States, a U.S. credit history may be supplemented with a credit history from a foreign country to establish an acceptable credit reputation. Documentation from a foreign country must meet all applicable Guide documentation requirements, including: Additional Guide provisions related to foreign documentation Requirements Guide section General requirements for verification documents Section 5102.3 Age of documentation Section 5102.4 Credit reports Section 5203.1 (ii) Noncredit Payment References A Noncredit Payment Reference must have existed for at least 12 months to be used to establish a minimum payment history. A Borrower with a credit reputation established using only Noncredit Payment References adds an additional layer of risk that must be considered by the Seller. In addition, when the credit reputation for all Borrowers is established using only Noncredit Payment References, at least one Borrower must participate in a homeownership education program before the Note Date or the Effective Date of Permanent Financing for Construction to Permanent Mortgages and Renovation Mortgages. See Section 5103.4 for requirements related to homeownership education. When the Borrower has a housing payment history, the Seller must verify both current and prior housing payment histories for no less than the most recent 12 months (or length of housing payment history if less than 12 months) in accordance with Section 5202.1(b). Documented payments of a voluntary nature, such as deposits to a savings account, contributions to a payroll savings plan or contributions to a stock purchase plan of at least 12 months, may be included as one of the Noncredit Payment References if the history shows periodic deposits (at least quarterly) resulting in a growing balance over the year. (b) Documenting Borrower’s credit reputation (i) Required documentation The Seller is required to document the Borrower’s credit reputation and the Seller’s determination that the Borrower’s credit reputation is acceptable. Although the documentation necessary to establish an acceptable credit reputation may vary, the documentation in the Mortgage file must clearly demonstrate the Borrower met his or her obligations over an extended period of time. To document the Borrower’s credit reputation, the Seller must use the following: ■ Form 65, Uniform Residential Loan Application ■ The credit reports ■ For Caution Mortgages, the Feedback Certificate ■ Any direct verification of payment histories ■ An underwriting summary such as Form 1077, Uniform Underwriting and Transmittal Summary ■ Additional documentation may be required depending on the Borrower’s credit history The Seller must first document the Borrower’s existing credit history by documenting a history of payments made by the Borrower through the credit reporting process as detailed in Section 5203.1 and/or by direct verification. If the credit report does not include a reference for each significant open debt, including housing debt, listed on the Mortgage application, the Seller must obtain a separate written verification for each unreported debt. Accounts listed on the credit report as “will rate by mail only” or “need written authorization” also require separate verification by the Seller. The Seller must document in the Mortgage file and describe on Form 1077 or another document in the Mortgage file: ■ Any additional risks uncovered during the evaluation of the credit history ■ The Seller’s analysis and conclusion that the Borrower’s credit reputation is acceptable The documents used to establish the Borrower’s credit history must be consistent with each other and with the Borrower information found on the Mortgage application. The Mortgage file must also include any supporting documentation necessary to address derogatory information or other risks identified by other sources. When underwriting with Credit Scores, the Seller must identify on Form 1077, or another document in the Mortgage file, the Credit Score selected for each Borrower and the process used to select that Credit Score from among all Credit Scores received for that Borrower. An explanation for any Credit Scores found to be unusable due to an insufficient number of Tradelines or inaccurate information should also be included. (ii) Documentation of Tradelines and Noncredit Payment References Tradelines and Noncredit Payment References may appear on a credit report meeting the credit report requirements of Section 5203.1, or the Seller may obtain a direct verification from the creditor or other acceptable documentation of payment history meeting the requirements of this section. If the verification of a Noncredit Payment Reference on the credit report or direct verification is provided by a source other than a professional business, the Mortgage file must also include other documentation supporting the payment history (e.g., canceled checks, depository statements, documentation from a third-party money transfer application or service or receipts issued by the creditor), subject to requirements below.
ADirect verification A direct verification may be either a…1,416 ch
(A) Direct verification A direct verification may be either a completed verification form or a computer-generated payment history obtained by the Seller directly from the creditor and signed by the individual providing the verification. Direct verifications must contain sufficient information to establish all of the following: ■ The name and address of the creditor ■ The name of the payor ■ The name and title of the individual providing the credit reference ■ The telephone number of the creditor ■ The account number, if applicable ■ The nature of the obligation (e.g., rent, utilities, payment for purchases, insurance) ■ The highest credit balance, if applicable ■ The amount of the payment due ■ The outstanding balance ■ The current and historical status of the account. The completed verification form must indicate the number of times and duration of times past due. The historical account status format should be “0 x 30, 0 x 60, 0 x 90 days” late. However, alternative formats are acceptable as long as the meaning is clear. Statements such as “current,” “as agreed” or “satisfactory” are not acceptable by themselves because they are too vague. ■ For a housing payment history, age of the reference if the length of housing payment history is less than 12 months General reference letters without the above information are not sufficient documentation for establishing an acceptable credit reputation.
BOther acceptable documentation In lieu of a direct verification…2,230 ch
(B) Other acceptable documentation In lieu of a direct verification from the creditor, the Seller may obtain canceled checks, receipts issued by the creditor in accordance with the requirements of Section 5202.1(c) below, documentation from a third-party money transfer application or service or depository account statements from the Borrower. The Mortgage file must also contain documentation that substantiates the terms of the debt repayment (e.g., a copy of a fully executed lease agreement for a rental verification). The obtained documentation must contain sufficient information to establish all of the following: ■ The name and address of the creditor ■ The name of the payor ■ The nature of the obligation (e.g., rent, utilities, payment for purchases, insurance) ■ The highest credit balance, if applicable ■ The amount of the payment due ■ The outstanding balance ■ The current and historical status of the account, including number of times past due and how many days past due ■ For a housing payment history, age of the reference if the length of housing payment history is less than 12 months Documented payments of a voluntary nature, such as deposits to a savings account, contributions to a payroll savings plan or contributions to a stock purchase plan of at least 12 months may be included as one of the Noncredit Payment References if the history shows periodic deposits (at least quarterly) resulting in a growing balance over the year. If a savings history is used as one of the Noncredit Payment References, the Mortgage file must contain documentation, such as depository account statements, that meet the asset eligibility and documentation requirements of Section 5501.3(a). For rental verification, in order to meet the documentation requirements of this subsection, the Seller must: ■ Obtain a copy of a fully executed lease agreement and either canceled checks, depository account statements, documentation from a third-party money transfer application service or receipts from the creditor for payments in cash in accordance with the requirements of this Guide chapter, and ■ Confirm that the Borrower has made timely payments in accordance with the terms of the lease for the most recent 12 months
CRequirements for receipts Receipts from the creditor are…41,660 ch
(C) Requirements for receipts Receipts from the creditor are…1,486 ch
(C) Requirements for receipts Receipts from the creditor are acceptable documentation only if the payments being verified were made in cash and there is no evidence in the Mortgage file that the payments were made by checks or direct bank transfers. (c) Evaluating Borrower’s credit reputation The Borrower’s credit reputation must be evaluated by one of the following methods: ■ For Borrowers with usable Credit Scores, manually underwriting with FICO® scores and reason codes and analyzing the information in each of the Borrower’s credit reports and other verifications as required by this section. When a minimum Indicator Score is required, it must be met or exceeded for the Mortgage to be eligible for sale to Freddie Mac. ■ For Borrowers without usable Credit Scores, manually underwriting without FICO scores and analyzing all information contained in each of the Borrower’s credit reports and other verifications (i) Determining whether Credit Scores are usable The Seller must determine that each Credit Score (FICO score) received is usable. For a FICO score to be usable, it must be based on sufficient, accurate information. Too little information, or information that is significantly inaccurate, makes the FICO score unusable for Mortgage underwriting. This is important both to ensure that the FICO score is adequately indicative of a Borrower’s credit reputation and to ensure fairness for Borrowers in using Credit Scores to evaluate their overall credit reputation.
AInsufficient information Although FICO scores may be generated if…740 ch
(A) Insufficient information Although FICO scores may be generated if a consumer reporting agency (CRA)’s file includes only one Tradeline, the Seller must not use any FICO score based on fewer than three Tradelines. Because a merged credit report or Residential Mortgage Credit Report may show more Tradelines than were included in the particular CRA’s file used to generate the FICO score, the Seller should request that the credit reporting company (CRC) indicate on the credit report the number of Tradelines that were used to create each FICO score. Alternatively, the Seller may obtain the in-file report used to create each FICO score and use the in-file report to determine if the FICO score was based on at least three Tradelines.
BInaccurate information If the CRC reports that the CRA file used…6,907 ch
(B) Inaccurate information If the CRC reports that the CRA file used to create a FICO score contains inaccurate information about a Borrower’s credit history, the Seller must determine if the inaccuracy is significant, and, if so, it must disregard that FICO score and explain the decision on Form 1077 or another document in the Mortgage file. However, minor discrepancies in the balances owed or payment amounts on open accounts belonging to the Borrower are not to be considered significant. FICO scores based on information that includes minor discrepancies must not be disregarded. The Seller must disregard FICO scores based on significant inaccuracies. Significant inaccuracies include: ■ Public records information on a bankruptcy, foreclosure, judgment or collection that does not belong to the Borrower ■ Delinquencies that are reported in error ■ One or more Tradelines that do not belong to the Borrower ■ Tradelines for accounts for which the Borrower is not the primary account holder but is listed as an authorized user (authorized user accounts). However, the Seller does not have to disregard the FICO score if the Seller obtains and retains evidence in the Mortgage file of at least one of the following for each authorized user account: ❑ Another Borrower on the Mortgage owns the Tradeline in question ❑ The Tradeline is owned by the Borrower’s spouse, or ❑ The Borrower has been making the payments on the account for the last 12 months and the monthly payment, as reported on the Borrower’s credit report, is included in the monthly DTI ratio If the Seller is unable to document one of the above three requirements for each authorized user account, the FICO score does not have to be disregarded if the Seller determines that the authorized user accounts have an insignificant impact on the Borrower’s overall credit history and the information on the credit report is representative of the Borrower’s own credit reputation. The Seller should base its determination on the number of the Borrower’s own Tradelines as well as their age, type, size and the payment history, as compared to the authorized user accounts. The Seller must document its determination on Form 1077 or another document in the Mortgage file. The Seller must not adjust the value of a FICO score because some information used to create the score is inaccurate. The Seller may obtain and use a different FICO score from another CRA if the score obtained from that CRA was not based on similar inaccurate information. For each Mortgage that the Seller has determined the inaccurate information is significant, the Mortgage file must contain written documentation from the CRA or the creditor reporting the inaccurate information affirming the errors. In addition, the Seller is strongly encouraged to inform the Borrower that, pursuant to rights granted under the federal Fair Credit Reporting Act, the Borrower has a right to contact both the CRA from which the inaccurate FICO score was obtained and the furnisher of the inaccurate credit information to require the disputed credit information to be reinvestigated and corrected. The requirements of this paragraph do not apply to authorized user accounts. (ii) Underwriting with usable credit scores The Seller must comply with the following requirements when the Borrower has usable Credit Scores. (A) Identifying and using the Underwriting Score for each Borrower To use Credit Scores to underwrite the Borrower’s credit reputation, the Seller must select a single FICO score for each qualifying Borrower from the FICO scores that were received and determined to be usable as described above. To identify the Underwriting Score, the Seller must use the middle/lower method: Identifying the Underwriting Score for each Borrower Number of usable FICO scores obtained The Underwriting Score is… 3 The FICO score with the middle value 2 The lower of the two FICO scores 1 The FICO score Example: If the FICO scores are 660, 656 and 640, the single FICO score selected by the Seller would be 656. When there is a duplicate score, the Seller would select that score to be the Underwriting Score. If the FICO scores for a Borrower are 660, 660 and 640, the Seller would select 660. Underwriting Scores are used to identify an Indicator Score for the Mortgage. (B) Identifying and using the Indicator Score for the Mortgage For Borrowers with usable Credit Scores, Freddie Mac requires that an Indicator Score be identified and delivered for a Mortgage for reasons such as eligibility or pricing. The Indicator Score must be identified in accordance with any one of the three methods described in the table below and must be delivered in accordance with the requirements of Section 5202.1(f). Freddie Mac prefers the Seller use one method for all of their Mortgages. Freddie Mac recommends the Seller use the middle/lower then lowest method to identify an Indicator Score, as it is the most predictive of the overall credit reputation of the Mortgage. Before the Seller can identify an Indicator Score, the Seller must identify the Underwriting Score for each qualifying Borrower as described above. If a Borrower has no usable FICO score, and no Underwriting Score can be identified for that Borrower, the Seller may use the Underwriting Scores for the remaining Borrowers to identify the Indicator Score. Identifying the Indicator Score for each Borrower Method The Indicator Score is… Middle/lower then lowest method The lowest Underwriting Score. Note: If there is only one qualifying Borrower, that Borrower’s Underwriting Score is the Indicator Score for the Mortgage. Middle/lower then average method The average value of all Underwriting Scores. Average/average method The average value of all Underwriting Scores, except that the Underwriting Score for each Borrower is the average value calculated from all usable FICO scores received for the Borrower. The minimum Indicator Score requirements for Mortgages are included in the individual Guide chapters for the product or offerings and in Exhibit 25, Mortgages with Risk Class and/or Minimum Indicator Score Requirements, and must be met or exceeded for the Mortgage to be eligible for sale to Freddie Mac. Sellers should also review other Purchase Documents for additional Indicator Score requirements. For some Mortgages, a minimum Indicator Score is required to be eligible for sale to Freddie Mac. If no Borrower has a usable FICO score and an Indicator Score is required for the Mortgage to be eligible, there can be no Indicator Score for the Mortgage, and it is not eligible for sale to Freddie Mac. An Indicator Score does not indicate that the Borrower’s credit reputation is acceptable. Even when the Indicator Score for the Mortgage exceeds the minimum required, the Seller must determine that each Borrower individually, and that all Borrowers collectively, have an acceptable credit reputation.
CAdditional requirements for Borrower’s with usable Credit Scores…32,527 ch
(C) Additional requirements for Borrower’s with usable Credit…9,603 ch
(C) Additional requirements for Borrower’s with usable Credit Scores Because FICO scores reflect the information in the Borrower’s CRA credit file at the time the FICO score was created, a Seller underwriting with FICO scores will find much of the evaluation of the Borrower’s credit reputation is already reflected in the FICO score and accompanying reason codes. The Seller must use reason codes to identify credit factors that need to be addressed in determining the Borrower has an acceptable credit reputation. The reason codes indicate the most important reasons why a FICO score is not higher. The Seller must document credit-related offsets for the risks indicated by the reason codes; for example, if the reason codes indicate nonpayment of obligations, the Seller may establish that the Borrower was unable to meet credit obligations because they experienced financial difficulties attributable to extenuating circumstances. (See Section 5202.1(d) for more information about adverse or derogatory credit information.) Seller must not use the following factors as offsets for weaknesses in the Borrower’s credit reputation because they have already been considered in creating the FICO score: ■ The absence or age of derogatory information ■ The number/proportion of accounts paid as agreed versus delinquent ■ The types of accounts paid as agreed versus the types of accounts that are delinquent ■ Recent pay-down or consolidation of account balances by the Borrower ■ The length of the Borrower’s credit history ■ Any combinations of the above factors (iii)Borrowers without usable Credit Scores If the Borrower doesn’t have a usable Credit Score, the Mortgage may be manually underwritten using Noncredit Payment References, as described in this chapter, when it is: ■ A purchase transaction or “no cash-out” refinance ■ Secured by a 1- to 4-unit Primary Residence, and ■ Not a super conforming Mortgage (iv) Additional requirements for evaluating Borrower credit reputation An acceptable credit reputation is established by a history that, when viewed as a whole, evidences a Borrower’s willingness to make ongoing payments and ability to manage obligations as agreed. The Seller must determine that each Borrower individually, and that all Borrowers collectively, have acceptable credit reputations. The acceptable credit reputation of one Borrower cannot be used to offset the unacceptable credit reputation of another. When evaluating each Borrower’s credit reputation, the Seller must: ■ Review all of the credit documentation in the Mortgage file, including the credit reports and direct verifications, to determine the data is accurate and the documentation in the Mortgage file is consistent with the credit report; ■ Thoroughly review and evaluate the Borrower’s entire credit history, in accordance with the requirements of this section, with the exception of trended credit data, which must not be considered. Note: Trended credit data is expanded credit information reflecting historical Tradeline data such as balances, scheduled payments and actual payments reported for each month over an extended period of time. ■ Evaluate the Borrower(s) overall credit reputation using the factors described in this section and those listed in the reason codes accompanying the FICO score, for Borrowers with usable Credit Scores; ■ Identify and document credit-related offsets for significant derogatory information included in the credit history, such as bankruptcy, foreclosure, short sale or recent late housing payments (see Section 5202.1(d)); ■ After credit reputation is established, evaluate the overall layering of risk (see Section 5102.2(b)); and ■ Document its evaluation and conclusion that the credit reputation is acceptable on Form 1077 or on a separate document in the Mortgage file In evaluating the Borrower’s credit reputation, the Seller must weigh the following factors in arriving at a conclusion that the Borrower’s credit reputation is acceptable: 1. The type and amount of credit outstanding 2. How long the Borrower has had credit 3. How the Borrower uses available credit, including revolving balances-to-limits 4. Recent changes in the number of open accounts or overall amount of credit outstanding 5. The payment history and status of all accounts 6. Any recent inquiries shown on the credit report 7. Any public record or collection items If a Borrower’s credit history includes both Tradelines and Noncredit Payment References, the Seller must put more weight on the Tradelines when evaluating the Borrower’s credit reputation and cannot use Noncredit Payment References to offset derogatory credit in a Tradeline reference. If a Borrower’s credit history includes housing obligations (rental or Mortgage), the Seller should put more weight on how housing payments were made than nonhousing payments but must not ignore any derogatory information in the credit history. The Seller must also consider layering of risk in its evaluation of credit reputation. A stronger credit reputation may be required if either capacity or collateral is weak. (See Sections 5102.1 and 5102.2(b) for more information on how to evaluate the overall risk of the Mortgage using credit reputation, capacity and collateral.) (d) Adverse or derogatory credit information Adverse credit information in and of itself does not mean the Borrower’s credit reputation is unacceptable. When there is adverse or derogatory information in the Borrower’s credit history, the Seller must establish whether the derogatory information is significant. If the Borrower’s credit history includes significant adverse or derogatory credit within the most recent two years, the Borrower’s credit reputation must not be considered acceptable. For all other significant derogatory information, the Seller must document extenuating circumstances or conclude that it was due to financial mismanagement. (i) Establishing whether adverse or derogatory credit information is significant Derogatory information must always be considered significant if any of the following exist: ■ The Mortgage is underwritten using FICO scores and at least two reason codes are related to nonpayment of obligations ■ There are several accounts showing recent late payments ■ There are multiple 60- or 90-day late payments ■ There is more than one 30-day late housing payment in the last 12 months ■ There are more than two 30-day or more than one 60-day late housing payments within the most recent two years ■ The number and size of the delinquent accounts are large in relation to the overall credit ■ There are multiple episodes of late payments extending over a period of time ■ The credit history shows derogatory credit information within the two most recent years combined with multiple revolving accounts with high balances-to-limits ■ The public record information reveals several occurrences of derogatory credit information, including judgments, tax liens and/or non-medical collection accounts ■ There is a bankruptcy, foreclosure, deed-in-lieu of foreclosure or short sale within the last seven years that is disclosed on a credit report, disclosed by the Borrower on Form 65 or is evidenced by other documentation contained in the Mortgage file When establishing whether other adverse or derogatory credit information is significant, the Seller must weigh the amount of derogatory information against the rest of the credit history and determine whether it is significant. When making this determination, the Seller should not ignore any derogatory credit but must give more weight to late housing payments and to derogatory information or late payments occurring within the past two years. Generally, the more recent the adverse or derogatory credit information, the more likely it is significant. The Seller must consider all of the following: ■ The number, timing and extent of the adverse or derogatory credit information ■ The number, type and size of accounts with adverse or derogatory credit information ■ Public record information, such as judgments and non-medical collection accounts ■ Other characteristics listed in this section Example: A 30-day late housing payment has more weight than a 30-day late non-housing payment, and a non-medical collection account has more weight than a 30-day late payment on a revolving account. Although there may be many situations involving derogatory credit information that are less clear, especially when disputes about obligations are involved, the derogatory credit information is not significant when it consists only of isolated late payments, even if several accounts show sporadic late payments, provided all of the following exist: ■ The late payments were not recent ■ The late payments did not extend beyond one month ■ The number and size of delinquent accounts is not large in relation to the overall credit ■ The credit history does not show multiple revolving accounts with high balances-to-limits or high overall utilization of revolving credit ■ All other credit has been paid as agreed Timeshare loans are considered installment debts, regardless of how they are reported on the Borrower’s credit report; therefore, payments on timeshare loans are not considered housing payments for purposes of evaluating late housing payments as required above. Additionally, the foreclosure recovery time periods for reestablishment of credit below do not apply to timeshare loans in foreclosure. If the Seller determines that the derogatory information is not significant, it must provide documentation supporting its conclusion in the Mortgage file.
AEvaluating significant adverse or derogatory information caused…6,022 ch
(A) Evaluating significant adverse or derogatory information caused by extenuating circumstances Freddie Mac considers an extenuating circumstance to be a nonrecurring or isolated circumstance or set of circumstances that was beyond the Borrower’s control and that significantly reduced income and/or increased expenses and rendered the Borrower unable to repay obligations as agreed, resulting in significant adverse or derogatory credit information. If the Borrower’s credit history includes significant adverse or derogatory credit within the most recent two years, even if it was caused by extenuating circumstances, the Borrower’s credit reputation cannot be considered acceptable. When the Seller uses extenuating circumstances to justify that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information, the Seller must use third-party documentation to confirm the extenuating circumstances and that the Borrower has reestablished an acceptable credit reputation. When the Seller determines that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information caused by extenuating circumstances, the Mortgage file must contain all of the following documentation: ■ A written statement from the Borrower, in the form of a signed letter or an e-mail directly from the Borrower, attributing the cause of the financial difficulties to outside factors beyond the Borrower’s control that are not ongoing and are unlikely to recur ■ Third-party documentation confirming that the events related by the Borrower in the explanation were an isolated occurrence and significantly reduced the Borrower’s income and/or increased expenses and rendered the Borrower unable to repay as agreed ■ An underwriting analysis on Form 1077 or on a separate document in the Mortgage file, relating the Borrower’s explanation to the Mortgage file documentation and leading to a reasonable conclusion that: ❑ The explanation is consistent with the adverse information reported and the other information in the Mortgage file ❑ The events causing the financial difficulties were beyond the Borrower’s control, are not ongoing and are unlikely to recur; and ❑ The Borrower has reestablished an acceptable credit reputation ■ Evidence on the credit report and other documentation in the Mortgage file of the length of time since completion of the significant derogatory event to the date of application (i.e., the recovery time period) The following table contains the requirements for reestablishment of credit, including the minimum recovery time periods and, when applicable, additional requirements that must be met: Requirements for the reestablishment of credit Extenuating circumstances Significant derogatory event: Foreclosure Recovery time period ■ 36 months from the completion date or ■ When foreclosure resulted from a Mortgage that was extinguished in Chapter 7 bankruptcy, the recovery time period for a Chapter 7 bankruptcy caused by extenuating circumstances may be applied and counted from the date of the bankruptcy discharge, provided that: ❑ The Mortgage file includes documentation supporting that the foreclosure resulted from a Mortgage that was extinguished in the Chapter 7 bankruptcy ❑ The foreclosure proceedings did not begin before the bankruptcy filing, and ❑ The Mortgage was not reaffirmed through the bankruptcy Additional requirements Whenever a Borrower has had a previous foreclosure, the Mortgage must either be: ■ A purchase transaction Mortgage secured by a Primary Residence with a maximum loan-to-value (LTV)/total LTV (TLTV)/Home Equity Line of Credit (HELOC) TLTV (HTLTV) ratio of the lesser of 90% or the maximum LTV/TLTV/HTLTV ratio for the transaction, or ■ A “no cash-out” refinance Mortgage that meets the requirements of Chapter 4301 Additionally, the Mortgage file must contain evidence of the completion of the foreclosure. Significant derogatory event: Deed-in-lieu of foreclosure Recovery time period 24 months from the execution date Additional requirements Whenever a Borrower has had a previous deed-in-lieu of foreclosure the Mortgage must either be: ■ A purchase transaction Mortgage secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the Requirements for the reestablishment of credit Extenuating circumstances lesser of 90% or the maximum LTV/TLTV/HTLTV ratio for the transaction, or ■ A “no cash-out” refinance Mortgage that meets the requirements of Chapter 4301 Additionally, the Mortgage file must contain evidence of the deed-in-lieu of foreclosure. Significant derogatory event: Short sale Recovery time period 24 months from the completion date Additional requirements Whenever a Borrower has had a previous short sale within the last seven years, the Mortgage must either be: ■ A purchase transaction Mortgage secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the lesser of 90% or the maximum LTV/TLTV/HTLTV ratio for the transaction, or ■ A “no cash-out” refinance Mortgage that meets the requirements of Chapter 4301 Additionally, the Mortgage file must contain evidence of the short sale. Significant derogatory event: Bankruptcy (all bankruptcy actions) Recovery time period 24 months from the discharge or dismissal date Additional requirements Whenever a Borrower has had a bankruptcy within the last seven years, the Mortgage file must also contain: ■ Copies of the bankruptcy petition, schedule of debts and discharge or dismissal ■ Evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid ■ Any other evidence necessary to support the Seller’s determination that the Borrower has reestablished and maintained an acceptable credit reputation Requirements for the reestablishment of credit Extenuating circumstances Other significant adverse or derogatory credit information Recovery time period 24 months from the most recent significant adverse or derogatory credit information Additional requirements N/A
BEvaluating significant adverse or derogatory information caused…16,902 ch
(B) Evaluating significant adverse or derogatory information caused by financial mismanagement If the Seller is unable to document extenuating circumstances in accordance with Freddie Mac’s requirements, then it must conclude that the problems were due to financial mismanagement. Making a case that the Borrower is sufficiently willing to repay obligations when significant derogatory information was caused by financial mismanagement is very difficult. It will take a longer and more convincing reestablishment period to overcome derogatory information caused by financial mismanagement than would be needed if the Borrower had experienced financial difficulties due to extenuating circumstances. When the Seller determines that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information caused by financial mismanagement, the Mortgage file must contain all of the following documentation: ■ Evidence that the Borrower has reestablished an acceptable credit reputation as required in Topics 5100 and 5200 for Manually Underwritten Mortgages ■ A written explanation from the Borrower addressing adverse or derogatory information, in the form of a signed letter or an e-mail directly from the Borrower ■ An underwriting analysis, on Form 1077 or on a separate document in the Mortgage file, relating the Borrower’s explanation to the Mortgage file documentation and leading to a reasonable conclusion that: ❑ The explanation is consistent with the adverse information reported and the other information in the Mortgage file ❑ The financial mismanagement is unlikely to recur ❑ The Borrower has reestablished an acceptable credit reputation ■ Evidence on the credit report and other credit documentation in the Mortgage file of the length of time since completion of the significant derogatory event to the date of the application (i.e., the recovery time period) The following table contains the requirements for reestablishment of credit, including the minimum recovery time periods and, when applicable, additional requirements that must be met: Requirements for the reestablishment of credit Financial mismanagement Significant derogatory event: Foreclosure Recovery time period ■ 84 months from the completion date or ■ When foreclosure resulted from a Mortgage that was extinguished in Chapter 7 bankruptcy, the recovery time period for a Chapter 7 bankruptcy caused by financial mismanagement, may be applied and counted from the date of the bankruptcy discharge, provided that: ❑ The Mortgage file must contain documentation supporting that the foreclosure resulted from a Mortgage that was extinguished in a Chapter 7 bankruptcy ❑ The foreclosure proceedings did not begin before the bankruptcy filing, and ❑ The Mortgage was not reaffirmed through the bankruptcy Additional requirements N/A Significant derogatory event: Deed-in-lieu of foreclosure Recovery time period 48 months from the execution date Additional requirements Whenever a Borrower has had a previous deed-in-lieu of foreclosure within the last seven years, the Mortgage must either be: ■ A purchase transaction Mortgage secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the lesser of 90%, or the maximum LTV/TLTV/HTLTV ratio for the transaction, or ■ A “no cash-out” refinance Mortgage that meets the requirements of Chapter 4301 Additionally, the Mortgage file must contain evidence of the completion of the deed-in-lieu of foreclosure. Requirements for the reestablishment of credit Financial mismanagement Significant derogatory event: Short sale Recovery time period 48 months from the completion date Additional requirements Whenever a Borrower has had a previous short sale within the last seven years, the Mortgage must either be: ■ A purchase transaction Mortgage secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the lesser of 90%, or the maximum LTV/TLTV/HTLTV ratio for the transaction, or ■ A “no cash-out” refinance Mortgage that meets the requirements of Chapter 4301 Additionally, the Mortgage file must contain evidence of the completion of the short sale. Significant derogatory event: Chapter 7 or Chapter 11 bankruptcy Recovery time period 48 months from the discharge or dismissal date Additional requirements Whenever a Borrower has had a bankruptcy within the last seven years, the Mortgage file must also contain: ■ Copies of the bankruptcy petition, schedule of debts and discharge or dismissal ■ Evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid ■ Any other evidence necessary to support the Seller’s determination that the Borrower has reestablished and maintained an acceptable credit reputation Significant derogatory event: Chapter 12 or Chapter 13 bankruptcy Recovery time period 24 months after the discharge date or 48 months from the dismissal date Additional requirements Whenever a Borrower has had a bankruptcy within the last seven years, the Mortgage file must also contain: ■ Copies of the bankruptcy petition, schedule of debts and discharge or dismissal Requirements for the reestablishment of credit Financial mismanagement ■ Evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid ■ Any other evidence necessary to support the Seller’s determination that the Borrower has reestablished and maintained an acceptable credit reputation Significant derogatory event: Multiple bankruptcy filings in the past seven years Recovery time period 60 months from the most recent discharge or dismissal date Additional requirements Whenever a Borrower has had a bankruptcy within the last seven years, the Mortgage file must also contain: ■ Copies of the bankruptcy petition, schedule of debts and discharge or dismissal ■ Evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid ■ Any other evidence necessary to support the Seller’s determination that the Borrower has reestablished and maintained an acceptable credit reputation Other significant adverse or derogatory credit information Recovery time period 48 months from the most recent significant adverse or derogatory credit information Additional requirements N/A (ii) Documenting Borrower explanation of adverse or derogatory information A written explanation is required for significant derogatory information. The purpose for requiring a written explanation is to assist the Seller in determining whether the Borrower’s credit problems were due to extenuating circumstances (factors clearly beyond the control of the Borrower) or whether they reflect financial mismanagement (the Borrower’s disregard for the payment of obligations when due). When adverse or derogatory information is not significant, the Seller may need to request that the Borrower provide a written explanation, in the form of a signed letter or an e-mail directly from the Borrower, of the circumstances causing the payment difficulty. The decision to require an explanation letter should be based on such factors as the age of the delinquent account, the frequency and severity of late payments, the size of the account balance and payment, when the late payments occurred and the status of the Borrower’s other credit accounts. In order to accomplish this purpose, it may be necessary to allow someone to assist the Borrower in preparing the explanation. If the Borrower needs assistance in preparing a written explanation, another party, such as the real estate agent or loan officer, should be encouraged to assist the Borrower in preparing the explanation. As long as the explanation accurately reflects the facts as related by the Borrower (as evidenced by the Borrower’s signature attesting accuracy), the Seller should accept the explanation as documentation for its review. A written explanation in and of itself does not satisfy the Seller’s responsibility to determine the Borrower’s willingness to repay. When adverse or derogatory information is considered significant, as explained in Section 5202.1(d), the Seller must relate the reasons for the late payments, as stated by the Borrower, to the other information about the Borrower’s credit history contained in the Mortgage file. The Seller must reasonably be able to conclude that: ■ The explanation is consistent with the adverse information reported and the other information in the Mortgage file ■ The explanation establishes a credible cause for the late payments ■ The Borrower represents an acceptable credit risk and exhibits the ability and willingness to repay the Mortgage (e) Evaluating other credit information (i) Inquiries Inquiries on the credit report generally reflect the Borrower’s requests for new or additional credit. When the credit report indicates that a creditor has made an inquiry within the previous 90-day period, the Seller must determine if additional credit was granted. If additional credit was granted, the Seller must: ■ Obtain verification of the debt; and ■ Include the monthly payment in the DTI ratio calculation. Refer to Section 5401.2. When underwriting with FICO scores, a reason code will alert the Seller that the number of inquiries affected the Borrower’s FICO score and, therefore, should not be overlooked in underwriting. In this case and when underwriting without FICO scores, the Seller must decide whether the number of recent inquiries, especially when combined with other credit information, increases the risk of the Borrower’s credit profile. Several inquiries within the most recent 12 months generally increase risk and, when combined with high balances-to-limits on revolving accounts, may indicate that the Borrower is in danger of becoming overextended. In addition, several recent inquiries combined with a credit history of short duration may make even mild derogatory credit information significant. To address how risk evidenced by several recent inquiries, layered with other credit reputation risks, affects the Borrower’s overall credit reputation, the Seller must look at: ■ The Borrower’s payment history ■ The age of the Borrower’s other credit ■ The type of credit being sought ■ The total amount of credit outstanding, and ■ The overall credit utilization reflected on the report (ii) Age of accounts The Seller must review the age of the Borrower’s credit obligations to determine whether there has been a recent, significant increase in the number of open accounts. The age of an account is found on a credit report by referring to the “date opened” column. The length of a Borrower’s credit history can be measured from the oldest account. Like inquiries, several recently opened accounts may be a warning that the Borrower could become overextended and require a more conservative approach to reviewing both Borrower credit reputation and capacity. A credit history with all recently opened accounts may indicate that the Borrower lacks sufficient experience managing financial obligations. The Seller should also review the age of accounts to determine if there has been a significant change in the Borrower’s credit profile. A change in the Borrower’s pattern of credit use, which includes several newly opened revolving accounts, several inquiries and high utilization of revolving Tradelines, introduces significant layering of risk to the Borrower’s credit reputation. When underwriting with FICO scores, a reason code will alert the Seller that the age of accounts affected the Borrower’s FICO score and therefore should not be overlooked in underwriting. In this case and when underwriting without FICO scores, the Seller must decide whether the age of accounts, combined with other credit information, increases the risk of the Borrower’s profile. To address how the age of a Borrower’s accounts, layered with other credit risks, affects the Borrower’s credit reputation, the Seller must consider: ■ The Borrower’s payment history ■ The amount of outstanding credit ■ The overall utilization of revolving accounts, and ■ Recent inquiries (iii)Balances-to-limits/high overall utilization of revolving credit The Seller must evaluate balances-to-limits ratios of revolving accounts and the overall revolving credit utilization. When evaluating balances-to-limits, the Seller must: ■ Compare the current balance for each open account to the high credit or limit to determine whether there is a pattern of accounts with balances at or near their limits ■ Consider multiple revolving accounts with balances more than 50% of their limits an additional risk when evaluating credit reputation. The more accounts with high balancesto-limits and the higher the percentage used, the higher the risk. High balances-to-limits may also indicate the Borrower is making minimum payments on revolving accounts rather than reducing the debt and may be at or near payment capacity. Any derogatory information in a credit history within the most recent two years combined with several revolving accounts at or near their limits should be considered significant derogatory information when evaluating the credit reputation. When evaluating revolving credit utilization, the Seller must: ■ Compare the overall amount of outstanding revolving credit to the overall amount of revolving credit available to the Borrower, as shown on the credit report, to determine credit utilization ■ Consider usage of more than 60% of available revolving credit a risk factor when evaluating credit reputation. The higher the Borrower’s overall utilization of revolving credit, the higher the risk. A pattern of revolving accounts at or near their limits and utilization of a high proportion of the overall revolving credit available to the Borrower, especially when combined with newly opened accounts, indicates that the Borrower is becoming overextended and there is significant risk in the Borrower’s credit reputation Example: For a Caution Mortgage with at least two Feedback Certificate messages related to high balances-to-limits or high overall utilization of revolving credit, the Seller should presume the Borrower’s credit reputation is unacceptable. The Seller may not use the lack of adverse or derogatory credit information as an offset for high balances-to-limits or high overall utilization of revolving credit. When underwriting with FICO scores, a reason code will alert the Seller that the balances on revolving accounts are too high or the proportion of balance to high credit on bank revolving or all revolving accounts is too high and affected the Borrower’s FICO score. The Seller must determine whether the balances-to-limits and overall revolving utilization, combined with other credit information, make the Borrower’s credit reputation unacceptable. Example: A Borrower with multiple revolving accounts with balances at or near limits, overall utilization of revolving credit of 90%, and less than four years of credit history would have an unacceptable credit reputation, even if there were no derogatory information in the credit report, unless the Borrower had sufficient cash reserves to pay off all revolving account balances and the Borrower’s total DTI ratio was within guidelines. To address how high balances-to-limits, when layered with other credit risks, affect the Borrower’s overall credit reputation, the Seller should look at all of the following: ■ The Borrower’s payment history ■ The age of the Borrower’s credit ■ The number of accounts with outstanding balances ■ Recent inquiries ■ The total amount of credit outstanding (f) Documenting and delivering Underwriting Scores and Indicator Scores (i) Documenting the Underwriting Score and the Indicator Score When a Minimum Indicator Score is required, the Seller must: ■ Note on Form 1077 or a similar document in the Mortgage file the Underwriting Scores and the Indicator Score and how each was identified ■ Retain the source documentation for the Indicator Score in the Mortgage file (ii) Delivering an Indicator Score When the Indicator Score is based on usable Credit Scores in accordance with this section, the Seller must deliver the Indicator Score in ULDD Data Point Loan Level Credit Score Value and deliver the method used by the Seller to determine the Indicator Score in ULDD Data Point Loan Level Credit Score Selection Method Type: ■ “Middle Or Lower Then Lowest” ■ “Middle or Lower Then Average” ■ “Average Then Average” If the Seller determines there is no usable Indicator Score in the Mortgage file due to insufficient credit information, the Seller must select the valid value of “Insufficient Credit History” in ULDD Data Point Credit Score Impairment Type. If the Seller determines there is no usable Indicator Score in the Mortgage file due to significant inaccurate credit information, the Seller must select the valid value of “Significant Errors Score” in ULDD Data Point Credit Score Impairment Type.
Operationalizing Freddie Mac Single-Family Seller/Servicer Guide 5202.1 — Credit assessment for Manually Underwritten Mortgages
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