Lenders will soon be required to use a new scorecard for FHA to insure mortgages that utilize automated underwriting.
Effective May 1, 2004, all electronically underwritten single-family mortgage loans seeking to be insured by the Federal Housing Administration must be risk scored by the TOTAL Mortgage Scorecard, or Technology Open To Approved Lenders, according to a mortgagee letter by the U.S. Department of Housing and Urban Development.
Lenders' automated underwriting (AU) systems must be able to link to the TOTAL system by the effective date for the loan to be insurable by FHA.
TOTAL, which has been tested by several major lenders within the past six months, will replace the existing proprietary scorecards of Fannie Mae and Freddie Mac used for FHA insurance eligibility, said HUD. Tim Doyle, director of government affairs for the Mortgage Bankers Association of America, said the innovative mortgage scorecard is a mathematical equation for use within an AU that will look at five factors for FHA to either automatically approve/accept a loan or refer it to manual underwriting: credit score, front end ratio, the number of payments a borrower has in reserve, the loan to value ratio of a loan and loan term.
TOTAL's risk assessment will not be means for a borrower to get denied a loan, rather, Direct Endorsement mortgagees will remain solely responsible for the final decision, said HUD.
"I think it's a good move for loan originators once they are able to use it," said Doyle. "(TOTAL) will give them the confidence that this is a formula that the FHA has developed and manages, and they're not getting an accept from an automated underwriting system on a loan without FHA interaction.
"(Loan originators) are going to have a clearer understanding of what's a good FHA loan and what's not," added Doyle.
Doyle pointed out loan originators will keep benefiting from TOTAL, as they do with the current scorecards, in that it will eliminate further documentation on the mortgage credit portion of a loan that gets an "accept." However, he said FHA will benefit most because it will have control over the AU as to what FHA is tolerant to risk based on its own loan portfolio history. The remaining unanswered question is whether lenders will see more or less loans get approved with FHA's formula, compared to the one currently in place by Fannie and Freddie. Doyle further highlighted that borrowers with no credit score will not be able to be risk scored by TOTAL.
The TOTAL Mortgage Scorecard User Guide published in November details which loan purposes, FHA insurance products, property types and plan types can be risk assessed by TOTAL.
According to the guide, the Uniform Residential Loan Application, which captures most of the information needed to obtain a risk assessment from an automated underwriting system, is required for all FHA insured mortgages and therefore required to obtain a risk assessment by TOTAL. Ways to improve the chances of eligibility for insurance include that the following URLA criteria be entered into the AU:
- The correct interest rate at which a loan will close, although lenders may use the entry rate for acceptable interest rate buydowns on fixed-rate mortgages.
- The interest rate on adjustable-rate mortgages must be one percentage point above the initial rate if the loan-to-value is equal to or more than 95%.
- The accurate property county and property state as listed in the AU vendor's Maximum Mortgage Limit Table
- Except for streamline refinances of FHA-insured mortgages, borrower information must include two-year residency history for each borrower and the employment information must include a two-year employment history for each borrower.