Loan Prospector Changes to Reflect New Requirements for Nontraditional Mortgages

[July 16, 2007]

As directed by our regulator, the Office of Federal Housing Enterprise Oversight (OFHEO), we announced changes this past Friday to our requirements for the purchases of nontraditional mortgage products consistent with the practices referenced in the federal banking agencies’ Interagency Guidance on Nontraditional Mortgage Product Risks issued in final form in October 2006.

Our special Single-Family Seller/Servicer Guide (Guide) Bulletin [PDF ] issued July 13 implements changes to our requirements for these nontraditional mortgage products, including our Initial Interest^SM fixed-rate and adjustable-rate mortgages (ARMs), as well as other ARMs and fixed-rate mortgage products with an interest-only component. The changes are effective for these nontraditional mortgages with loan application dates on or after September 13, 2007.

We plan to update Loan Prospector® for assessments on August 12 to reflect these changes to our Guide requirements. The update will apply the prescriptive, risk-based standards outlined in the Guide for originating nontraditional mortgages. These include, among other things, qualifying the borrower using a monthly housing expense that includes, but is not limited to, the principal and interest payment on the mortgage, and using a principal and interest payment that is based on a fully amortizing payment schedule for the term of the mortgage.

It is important to thoroughly review our special July 13 Guide Bulletin [PDF ], which details the following important information on our new requirements. In addition, if you are a third-party originator, please contact your wholesale lenders to determine how they plan to incorporate these changes as they may implement an alternative implementation approach based on their regulator’s guidance.

New Requirements for:

Loan Prospector Impacts

Nontraditional Fixed-Rate Mortgages
For Initial Interest fixed-rate and other fixed-rate products with an interest-only feature, you must use a principal and interest payment that is based on a fully amortizing payment schedule for the term of the mortgage.

Loan Prospector will be adjusted to assess Initial Interest fixed-rate mortgages and other Guide fixed-rate mortgage products with an interest-only feature, using an automatically calculated full principal, interest, taxes, and insurance (PITI) amount.

Please note: Since Loan Prospector will automatically calculate the full PITI amount, you can continue to input data into Loan Prospector as you do today for these mortgages. If you are accessing Loan Prospector directly through the web browser method, please follow the guidance provided below.

Nontraditional ARMs
For Initial Interest ARMs and other ARM products with an interest-only feature, you must use a principal and interest payment that is based on a fully amortizing payment schedule for the term of the mortgage. This means you must qualify the borrower using payments calculated at the higher of the note rate or the fully indexed rate.

Note that the fully indexed rate is the sum of the Margin plus a value of the applicable Index at any time within 90 days preceding the note date, rounded to the nearest one-eighth of 1% (0.125%).

Loan Prospector will be adjusted to assess Initial Interest ARMs and other Guide ARM products with an interest-only feature, using the higher of the note rate or an automatically calculated fully indexed rate.

Loan Prospector assessment changes scheduled for August 12 will not take into account negotiated terms of business, and federally-regulated customers or state-regulated customers who will be implementing an alternative approach as described in our July 13 customer communications.

UPDATE: With our August 12 changes, the "Proposed Housing (PITI)" Field on the Loan Prospector Feedback Certificate will also be updated to reflect the following:

For Initial Interest fixed-rate mortgages and other Guide fixed-rate mortgage products with an interest-only feature, the “Proposed Housing (PITI)” field will reflect the full PITI amount used to assess the loan in Loan Prospector
For Initial Interest ARMs and other Guide ARM products with an interest-only feature, the “Proposed Housing (PITI)” field will reflect the ARM Qualifying PITI amount used to assess the loan in Loan Prospector.

UPDATE: With our October 21 update, Loan Prospector will display a new "ARM Qualifying Rate" field on the Loan Prospector Feedback Certificate for all adjustable-rate mortgages (ARMs) assessed through the system.

The new field will display the qualifying rate used to assess loans for traditional and nontraditional ARMs:

Nontraditional ARMs: The rate displayed will be the higher of the note rate or an automatically calculated fully indexed rate for all Initial Interest^SM ARMs.
Traditional ARMs: The rate displayed will be the value entered in the “ARM Qualifying Rate” field for all mortgages that do not have an interest-only feature.

Important Information for Web Browser Access Method Users

If you are accessing Loan Prospector directly through the web browser access method (LoanProspector.com) and key data directly into the LoanProspector.com interface using summary-level data, you will now need to:

Input the full PITI amount for all nontraditional mortgages with an interest-only feature, not just the interest, taxes, and insurance amounts as previously instructed.
Enter the higher of the note rate or the fully indexed rate into the ARM Qualifying Rate field in Loan Prospector, as Loan Prospector will not calculate this for you.

These requirements will not impact you if you are importing a file or data into the browser from a loan origination system or entering component-level data into the browser.

Managing Resubmissions

It is also important to note that once Loan Prospector is updated to address these new requirements, if you resubmit a loan previously submitted to Loan Prospector before August 12, the loan will be assessed based on our new requirements, potentially changing its risk class. It is important that you consider this when determining whether or not to resubmit a loan to Loan Prospector after the system has been updated on August 12.

To find out what these new requirements mean for you and your business, carefully review our Single-Family Advisory message sent to Seller/Servicers on July 13, and our special July 13 Guide Bulletin [PDF ].