Understanding the New 97% Conventional Loan Product

In a continued effort to create and distribute valuable and relevant content to our partners, CU Companies orchestrated and recorded a webinar on the new Fannie Mae 97% Loan Product to help our partners provide the best lending solutions to their members.  If you work with first-time home buyers, please take a look at an option with many benefits in today's market.

On March 19, 2015 Jason Groth, Mortgage Production Manager at CU Companies, spoke about the new Fannie Mae 97% Loan Product.  This webinar can be viewed at Understanding the New 97% Conventional Loan Product.  Below are the Learning Objectives and FAQ's for quick reference.

LEARNING OBJECTIVES:

• Learn how borrowers over 80 percent LTV can have similar payments to FHA but not have to carry MI for the life of the loan
• Understand how borrowers can obtain and use only three percent down
• Learn which borrowers can qualify for the 97% My Community reduced MI loan
• Understand there are still options for borrowers who do not qualify for the 97% MCM median income limit loan program

FAQ’s

Q: Will lenders have increased repurchase risk by delivering 97% LTV loans?

A: Fannie Mae will handle loans with LTV ratios up to 97% the same way we have handled all loans we have acquired since January 1, 2013: Using proprietary analytical tools, we electronically review 100% of loans acquired, matching data from different sources to confirm that our guidelines are met. When data discrepancies are identified in the analysis process, those loans are selected for further scrutiny, which may include requiring the lender to submit the full loan file for a discretionary quality control review, or conducting a data validation process with the lender. This review is focused on confirming that loans were eligible as delivered. There is NO targeted review based on risk characteristics.

Q: Are 97% LTV loans at greater risk of default  than loans with higher down payments?

A: Borrower equity and LTV ratio are both important factors when determining the borrower’s ability to repay the mortgage in support of sustainable homeownership. Our analysis indicates that there is minimal difference in default risk for loans with LTVs greater than 90% up to 95% compared to those with LTVs greater than 95% up to 97%.

All loans with LTVs greater than 95% up to 97% are required to be underwritten through DU, our proven risk management tool. DU conducts a comprehensive risk assessment of all aspects of the transaction, including the LTV, to provide an underwriting recommendation. Borrowers with certain risk factors, such as a high LTV, must demonstrate other compensating factors to achieve an Approve recommendation. The use of DU allows Fannie Mae to provide the broadest eligibility to creditworthy borrowers while continuing to support sustainable homeownership.

Q: Will the mortgage insurers (MIs) provide coverage for loans with LTVs up to 97%?

A: Fannie Mae has confirmed that all the Fannie Mae–approved MIs already offer coverage for loans up to 97% LTV. The coverage they offer is generally aligned to our 97% LTV options, but lenders should confirm any specific requirements or limitations with each MI provider.

The MIs have expressed their commitment to this business, and most also offer online home- buyer education programs. (Note that Fannie Mae accepts online home-buyer education that is provided by an MI and meets our Selling Guide requirements.)

Q: What property types are eligible for the 97% LTV option?

A: The property must be a one-unit principal residence, including condos, co-ops, and PUDs. Manufactured housing is not permitted.

Q: What loan types and terms are permitted?

A: The loan must be a fixed-rate mortgage with a term up to 30 years. The maximum LTV is being expanded from 95% to 97% only for fixed-rate mortgages; all other mortgage products, including adjustable rate mortgages and high-balance loans, remain subject to the maximum LTV requirements per the Selling Guide.

Q: Why is Fannie Mae restricting purchase transactions with LTVs greater than 95% to only those including a first-time home buyer?

A: According to consumer research conducted by Fannie Mae, the primary barrier to homeownership for first-time home buyers is saving money for the down payment and closing costs. In support of ongoing efforts to expand access to credit and support sustainable homeownership, Fannie Mae is offering 97% LTV financing to help home buyers who would otherwise qualify for a mortgage but may not have the resources for a larger down payment.

Q: What are the key differences between a standard purchase loan up to 97% and MCM 97%?

A: There are three key differences between MCM and standard purchase transactions with LTVs greater than 95% to 97%:

• Borrower Eligibility. MCM is our premier product for low- to moderate-income borrowers. Under existing MCM guidelines, borrowers must meet the established income limits for the product and may not own any other residential property at the time of loan closing. Our standard, non-MCM guidelines do not impose these restrictions.
• Pricing and MI Coverage. MCM offers charter-minimum MI coverage without the standard loan-level price adjustments (LLPAs) that typically apply for reduced coverage. In addition, MCM has a different pricing construct consisting of a standard LLPA in place of the risk-based pricing that is applied to standard, non-MCM business. Standard business receives standard pricing, including risk-based LLPAs.
• Home-Buyer Education and Counseling. At least one borrower on all MCM loans with LTVs greater than 95% up to 97% must complete home-buyer education and counseling. This is not a requirement for standard loans (although home-buyer education is always recommended for first-time buyers).

Q: How will lenders verify that borrowers meet the first-time home buyer requirement?

A: At least one borrower must be a first-time home buyer, as indicated on the Uniform Residential Loan Application (Form 1003) in Section VIII. DU will only allow the LTV to exceed 95% when at least one borrower has responded “No” to Declaration M: Have you had an ownership interest in a property in the last three years? If there are no first-time home buyers on the loan case file, DU will issue an Ineligible recommendation.

Q: What are the details of the home-buyer education and counseling requirements for MCM?

A: At least one borrower must complete an acceptable pre-purchase home-buyer education and counseling program in accordance with the existing requirements of the Selling Guide.

Generally, the requirement is for education and counseling that adheres to the National Industry Standards for Homeownership Education and Counseling or equivalent – a set of guidelines for quality homeownership and counseling services. The National Industry Standards (NIS) include requirements for four to eight hours of classroom training (education) using a specified curriculum, and counseling provided in a minimum of one 30-60 minute, one-on-one session, either face-to-face or by telephone. We also permit online education provided by an MI.

Post-purchase early delinquency counseling must be available for any delinquency that occurs during the seven years following the date the mortgage is originated.

Q: What are eligible sources for the borrower’s minimum contribution, including down payment (3%), closing costs, and reserves (if required)?

A: The eligible sources for the borrower’s down payment and closing costs have not changed and will follow existing Selling Guide policy that allows for gifts, grants, and Community Seconds® in addition to the borrower’s own funds. Announcement SEL-2014-15 also updated policy to allow gifted reserves on all MCM transactions (regardless of LTV), in alignment with standard, non-MCM guidelines.

The amount of reserves required for any transaction is determined by DU.

Q: What data must be entered in DU to indicate the existing mortgage is owned by Fannie Mae?

A: Lenders must inform DU that Fannie Mae owns the existing mortgage by indicating Fannie Mae in the “Owner of Existing Mortgage” field in the online loan application. In the Desktop Originator® (DO®)/DU User Interface), this field is located on the Additional Data screen in the Full 1003. Because this indication will be used by DU to determine eligibility of the loan for delivery to Fannie Mae when the LTV, CLTV, or HCLTV exceed 95%, the lender will be required to document that the loan being refinanced is currently owned by Fannie Mae.