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FHA guidelines state that their recommendation is not an absolute approval as “The Mortgagee may not accept or deny an FHA-insured Mortgage based solely on a risk assessment generated by TOTAL Mortgage Scorecard.” There still needs to be a determination that the borrower has the ability to repay the debt.
One of the areas left up to underwriters, regarding FHA eligibility requirements, is to determine when a loan may need to be downgraded to a manual underwrite, even if the mortgage received an Accept recommendation.
Two of those requirements are very subjective and require an analysis of the information and documentation contained in the loan file and are noted below.
- The mortgage file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard;
- Additional information, not considered in the AUS recommendation, affects the overall insurability of the Mortgage.
I am bringing this to your attention because I recently had the opportunity to review an FHA loan that was originated in 2016. That date was significant when taken into context with information in the loan file.
The loan received an Approve/Eligible recommendation, but the loan file contained multiple NSF charges, over a three-month period, and a notice from the IRS offsetting their 2015 income tax refund by the deduction of delinquent federal taxes owed from 2011 and 2013. A letter of explanation was provided. But, these were not considered isolated occurrences.
FHA states “Borrowers with delinquent Federal Tax Debt are ineligible.” In this case, the delinquent federal tax debt from 2011 and 2013 was paid off, prior to closing, with the offset of their 2015 income tax refund.
The debt does not make the loan ineligible; but it was required that the loan be manually downgraded based on the delinquent federal tax debt, along with the numerous NSF charges because “the loan mortgage file contains information or documentation that cannot be entered into or evaluated by TOTAL Mortgage Scorecard.”
In the final analysis, needed for a manual downgrade, “The underwriter must determine the creditworthiness of the Borrower, which includes analyzing the Borrower’s overall pattern of credit behavior and the credit report.”
In this instance, the credit report was evaluated. But, the delinquent federal tax debt, that went unpaid for several years, and the recent NSF charges were not evaluated. They showed that the borrower had a lack of credit worthiness and poor overall pattern of credit behavior.
Based on the above, the loan should have been downgraded and had a more stringent set of guidelines applied and eventually declined.
Everyone knows hindsight is 20-20. But, I must share with you that in 2017, a year after the origination, the borrower filed for bankruptcy and went delinquent on their loan. FHA came back and requested an indemnification from the lender for any losses.
As production slows and margins compress, an interest rate rising environment will have more and more lenders looking to approve more loans and credit quality will suffer.
This is just an example, as each loan needs to be reviewed on its own merits. As a due diligence company, LoanLogics performs a valued service by bringing a loan like this to our client’s attention. They depend on us to raise these concerns so that these issues can be addressed by their senior management team and help them to reduce litigation risk as well as monetary losses.
