Fannie Mae Updates Borrower Credit and Property Insurance Requirement
by: Anna DeSimone
July 29, 2014 Fannie Mae issued SEL-2014-10, “Selling Guide” updates. The update included changes to the following:
- Significant Derogatory Credit Events
- Property Insurance Requirements
- Lender Quality Control Policy Updates and Clarifications
- Notification Requirements for Misrepresentation or Breach of Selling Warranty and Fraud
- MBS Buyup and Buydown Ratio Grids
- Incorporation of Announcement SEL-2014-08, Fannie Mae Announces Approved Mortgage Insurance Forms
- Incorporation of Announcement SEL-2014-09, Anti-Money Laundering Requirements
- Special Feature Codes
- Miscellaneous Selling Guide Update
Please note that this article covers only items 1 and 2 above.
Please refer to the Fannie Mae announcement for further information. The updated topics are dated July 29, 2014.
Significant Derogatory Credit Events
Fannie Mae has made changes to a number of policies pertaining to significant derogatory credit events. Most of these changes were previously announced in the Desktop Originator/Desktop Underwriter Release Notes, Version 9.1 August Update for DU loan case files. They also apply to manually underwritten loans.
Waiting Period for Mortgage Debt Discharged through Bankruptcy
The Selling Guide has been updated to indicate that if a mortgage debt has been discharged through bankruptcy, even if a foreclosure action is subsequently completed to reclaim the property in satisfaction of the debt, the borrower is held to the bankruptcy waiting periods and not the foreclosure waiting period. Lenders must obtain documentation to verify that the mortgage debt in question was in fact discharged as part of the bankruptcy.
Waiting Period after a Preforeclosure Sale or Deed-in-Lieu of Foreclosure
The current requirements that apply to waiting periods following a preforeclosure sale (short sale) or deed-in-lieu of foreclosure provide for different waiting periods of 2 years or 4 years and set out different maximum loan-to-value ratios (LTV) for those timeframes. These requirements are being updated to remove the LTV restrictions tied to different waiting periods, and establish a standard 4 year waiting period, with a 2 year waiting period permitted if a borrower has extenuating circumstances.
Charge Off Accounts – Mortgage Debt
A new policy has been established to specifically address charge-offs of mortgage accounts by requiring a 4-year waiting period following this derogatory credit (2 years if the borrower can demonstrate extenuating circumstances). In addition, the existing charge-off policy in the Selling Guide has been relabeled as “non-mortgage charge-offs” to clearly differentiate the two policies.
Effective Date
The Waiting Period for Mortgage Debt Discharged through Bankruptcy is effective immediately. TheWaiting Period after a Preforeclosure Sale or Deed-in-Lieu of Foreclosure and Charge Off and afterAugust 16, 2014 (to align with DU Release 9.1).
Please refer to the Announcement for reference information to the Selling Guide and additional details regarding other updates to Significant Derogatory Credit.
Property Insurance Requirements
The property insurance requirements for condos, co-ops, and PUDs in Part B7 of the Selling Guide have been revised to update terminology, address common lender questions, and align policies with acceptable industry practices. Following is a brief description of the major policy updates. An attachment to this announcement details the changes made to each individual topic in the Guide.
Extended Replacement Cost coverage was added as an acceptable form of project insurance (in addition to the Guaranteed Replacement Cost and Replacement Cost coverage already permitted).
If there is a coinsurance clause in the insurance policy, inclusion of an Agreed Amount Endorsement or selection of the Agreed Value Option (which waives the requirement for coinsurance) is considered acceptable evidence that the 100% insurable replacement cost requirement has been met.
If the insurance policy includes a coinsurance clause, but the coinsurance provision is not waived, the policy is still eligible if evidence acceptable to the lender confirms that the amount of coverage is at least equal to 100% of the insurable replacement cost of the project improvements.
A Building Ordinance or Law Endorsement for project policies is not required if it is not applicable; nor is it required if it is not obtainable in the insurance market available to the association.
For all co-op projects, the amount of coverage has been revised to $1 million for bodily injury and property damage for any single occurrence–the coverage amount currently required for all condo and PUD projects.
$5,000 is the minimum amount of HOA funds that triggers the requirement for fidelity/crime insurance. If the calculated amount to determine insurance coverage is equal to or less than $5,000, fidelity insurance is not required.
HOA fidelity/crime coverage must cover the management agent if the management agent handles the HOA’s funds.
The HOA’s fidelity/crime policy must name the HOA as the
named insured.
named insured.
Lenders have additional flexibility in verifying the financial control requirements for HOA funds in order to allow reduced fidelity/crime insurance coverage.
Co-op fidelity policies must adhere to the 10-day cancellation notice provision already required for condo.
NOTE: The term “hazard” insurance has been replaced with “property” insurance throughout the entire Selling Guide.
Effective Date
Lenders are encouraged to implement these changes immediately but must do so for all mortgage loans with application dates on and after November 1, 2014.
About the Author:
Anna is President and Founder of Bankers Advisory, Inc. She can be reached at anna@bankersadvisory.com.
Anna DeSimone founded Bankers Advisory in 1986 and is a nationally recognized authority in residential mortgage lending. She has received numerous industry awards and has authored more than 40 best practices guides and hundreds of articles.
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