Freddie Mac Announces Credit Underwriting Changes
September 14, 2017, Freddie Mac issued Guide Bulletin 2017-20, announcing updates to several topics in the Single-Family Seller/Service Guide. This article includes a detailed description of changes pertaining to Credit Underwriting and a brief summary of other changes announced in the Bulletin.
Assets as a basis for repayment of obligations
The changes include, but are not limited to, the following:
New asset types
Borrowers who maintain significant funds in securities and depository accounts may use those funds to pay their monthly obligations. Depository accounts and securities have been added as eligible asset types, subject to conditions which include, but are not limited to, the following:
- Limiting the use of these accounts to mortgages in which at least one borrower is 62 years old or older. Borrowers who are of retirement age are more likely than younger borrowers to use saved funds to make debt payments as they decrease their participation in the workforce or exit it entirely. Although retirement age may differ from one borrower to another, Freddie Mac wanted to choose an age which was representative of the majority of cases. Because fair lending laws prohibit discrimination on the basis of age but permit favoring applicants 62 years or older, the age was set as a reasonable approximation for retirement-age.
- The borrower must be the sole owner of the assets, or if the assets are jointly owned, each owner must be a borrower on the mortgage and/or on the title to the subject property.
- The account, less any portion pledged as collateral for a loan or otherwise encumbered, must be accessible by the borrower in its entirety as of the note date.
- Account funds must not be subject to a withdrawal or other penalty, and
- The seller must document the source of funds for any deposit exceeding 10% of the borrower’s total eligible assets in depository accounts and securities, and verify that the deposit does not include gifts or borrowed funds, or reduce the eligible assets used to qualify the borrower by the amount of the deposit.
Asset calculation for establishing the debt payment-to-income ratio
Freddie Mac has analyzed historical rates of returns on savings and investments and has removed the requirement that no more than 70% of the balance of an eligible asset be used as a basis for the debt-to-income ratio calculation. The following must be subtracted from the total amount of eligible assets:
- Funds required to be paid by the borrower to complete the transaction (e.g., down payment and closing costs)
- Any gift funds and borrowed funds, and
- Any portion of the assets pledged as collateral for a loan or otherwise encumbered
Restricted stock and restricted stock units
Employers increasingly include restricted stock (RS) and restricted stock units (RSU) as a component of employee compensation. RS plans are grants of company shares which represent equity interest in the company. RSU plans are grants valued in terms of company shares that do not represent equity interest in the company. Both RS and RSU plans are subject to a restriction period during which recipients are not permitted access to granted shares until vesting requirements are met. Vesting requirements are based on varying criteria but the most common types are:
- Performance-based (e.g., a certain percentage of total granted shares vest based on individual or corporate performance), and
- Time-based (e.g., a certain percentage of total granted shares vest after a pre-determined period of employment)
As a result of the increased use of RS and RSU, Freddie Mac is providing requirements and guidance on how to calculate, analyze and document these types of income.
Asset eligibility requirements update
Freddie Mac is specifying that any stock with limitations on its accessibility is not an eligible source of funds to qualify the borrower for the mortgage transaction.
Please refer to the Bulletin for additional detailed information for other changes, summarized below:
Super Conforming 5-year ARMs
- Super conforming 5-year ARMs are eligible for purchase
- Updates to specify that unlicensed, trainee (or similar classification) appraisers may perform the appraisal and sign the appraisal report
- Revisions to appraisal requirements for super conforming mortgages
- Removal of the requirement that copies of multiple listing service (MLS) photographs may only be used for comparable sales if original photographs are not available
- Owner-occupancy requirements for New Condominium Projects
- Changing the owner occupancy requirement from at least 70% of the total units in the project to at least 50% of the total units in the project
- Condominium insurance
- Updates to requirements for Condominium Unit insurance
View the Bulletin here: http://www.freddiemac.com/singlefamily/news/2017/0914_guidebulletin.html