Explore Our Credit Invoice Example for Quality Assurance

Credit invoice example for Quality Assurance

good afternoon and welcome to today's session all lines are on listen only mode this call is being recorded and will be posted on the qc website if you have any objections please disconnect now if you have any questions please enter them in the q a box located in the bottom right hand corner of your screen if you have joined using a browser other than chrome or firefox please disconnect and join using one of them or if you are experiencing any technical difficulties during the session please use the raise hand icon and someone will assist you and finally we invite you to please remain on the line at the conclusion of the session to complete a brief survey your feedback is very important to us with that i will turn it over to our director of single family underwriting steve glancy steve the floor is yours thank you welcome everyone to freddie mac's qc freddie mac's let's qc quarterly webinar series my name is steve glancy and i'm a director of quality control here at freddie mac pardon me while i start my video here with me today are qc managers george karenschak and mike zeeman as well as susan ren lindemann and kelly morocco from our affordable credit policy team in a few moments you will get a chance to meet them and hear about their topics quickly a reminder of where this idea began in 2020 freddie mac took a look at our sampling volumes and saw tremendous growth within the community lending segment we think the historically low interest rates along with your ability to serve your communities through this pandemic helped fuel this growth rapid growth can also bring challenges and we noticed an increase in the overall not acceptable quality rate what freddie mac refers to as an naq naq is a performance metrics which uses the base random sample loans determined to be defective and resulting in remedy this metric impacts the seller's base random sample and is also used by freddie mac to measure our overall loan quality so we put this series together to share areas our qc department sees defects in present scenarios for particularly challenging situations and include updates from other business areas such as our credit sales or policy teams as we continue to strengthen the relationship with our community lenders our goals for these let's qc quarterly calls are to provide training and guidance allow transparency and insight into our quality control loan review process and give you useful information to incorporate into your underwriting and qc process so let's meet the team so a little background on myself minus a brief hiatus after the crash in 2008 i have been in the industry since 2003 and 14 of those 16 years have been in underwriting or qc with the last 11 spent right here at freddie mac in quality control i will be sharing with you some of the common defects and trends we see in our qc process george how about you introduce yourself in your topic thanks steve good afternoon my name is george karenchak and i've been with freddie mac for the last 11 years with all of that time being spent in quality control today i will be presenting our first lung scenario that focuses on previous adverse credit events mike hi everyone my name is mike zeman i've been with freddie mac for the last 10 years all of which have also been in quality control today i will be presenting our second loan scenario that focuses on evaluating a borrower's credit for manual underwriting susan you're up thanks mike i'm susan ren lindemann and i joined freddie mac just 16 months ago as an affordable credit policy manager i'm passionate about helping serve the underserved community through our work in the affordable policy area and look forward to talking with you today about affordable seconds kelly hi i'm glad to be here today my name is kelly morocco my entire career has been focused on affordable in the retail market local government administration and for the last five years at freddie mac i spent my first two years on the duty to serve team and the most recent three years as director of affordable credit and policy one of the largest barriers to low-income borrowers is down payment and freddie mac's flexibilities around our affordable seconds have a positive impact on bridging that gap we look forward to telling you more about it today thanks everyone it looks like we've got a lot to cover so let's get started so in this series we will look at defects on loans that resulted in remedy in the prior quarter and break them down by different categories we'll also identify any trends we see these defects will be specifically from loans sold to freddie mac by our community lending segment currently we're looking at defects for loans freddie mac qc closed in the first quarter of 2021 and trending them against defects from loans that freddie mac closed in the fourth quarter of 2020. for q1 2021 we found 448 unique loans with one or more defects from a population of 2821 performing loans and while this was a 22 increase in defects from the 366 loans in the prior quarter it was also in line with a 36 percent increase in funding volume the net result was a two percent decrease in the overall defect rate so in order to highlight areas of focus we'll only look at individual defect codes that appeared on five or more loans hey steve let's remind everyone that similar to their own post-closing qc most of these loans were originated and closed earlier in 2020 we hope you find this information we share valuable so you can focus your qc efforts within your own organization that's a great reminder thanks so let's take a closer look at our top 10 defects so this chart here shows the top five defects on loans closed in q1 2021 the first one missing verification of taxes or insurance is a top defect across all loans we did increase it from 95 to 123 this quarter this continues to be a leading defect in qc and it is related to taxes and insurance on the primary residence or other real estate owned not being validated as a reminder just even when freddie mac is able to validate it through other sources we still capture this defect on remedy loans which also contributes to its higher frequency the next defect under collateral is appraisal flexibility violation so we saw a jump in this category as it moved into the second spot this defect is related to the temporary covet 19 appraisal flexibilities that were created during the pandemic we continue to see these predominantly in owner-occupied cash-out refi and our internal monitoring continue to pick up many of these issues steve didn't we recently announced the retirement of the appraisal flexibilities yes on april 21st in bulletin 2021-15 we announced the final extension of the temporary appraisal flexibilities that were published in bulletins 2020-5-8-11 loans funded after june 1st 2021 must meet all applicable guide requirements so our third one is liability docs missing or insufficient this is usually when a liability disclosed on the app or somewhere else in the file is not properly documented hey steve can you give us some examples here yeah absolutely a lot of things we see like alimony and child support along with student loans are common ones the common ones that we see that are not always properly documented and the payment may not match what is on the credit report or other documentation when used in qualifying so i also want to point out that the number of defects in this category actually remains steady and while it's still the third highest defect this was good news because we saw the number of defects in many other categories across the board spike so fourth one is insufficient funds another category we saw a large jump in during qc reviews closed in the first quarter of 2021. hey steve can you remind our listeners of some examples of ineligible funds sure some of the ones that we see can be anything from an unsourced large deposit to funds borrowed from an unacceptable source like the builder or even gifts that are not from a related person as defined in the freddie mac glossary steve i'm not sure everyone knows how freddie mac defines related persons didn't we just make improvements to the online guide published on our single family website that could help easily identify this and other terms yes we did so now in our online guide if you see a term underlined with dashes and you hover over it you'll get a pop-up box with the glossary definition for that term and the the last one that rounds out the top five is miscalculated income it did move down one spot combined with income docs missing you'll see at the top of the next slide these two continue to exceed all other categories with the exception of the missing taxes and insurance so a majority of our challenges continue to be in the calculation of hourly and fluctuating income sources for both newly employed and seasoned workers the most recent wages and hours on a pay stub are typically used however we find many borrowers lack the required history to support the level of earnings used to qualify so we encourage you to pay close attention to this on all loans what we've found is that small miscalculations can frequently mean big trouble especially for loans with a dti ratio in excess of 40 percent so let's take a look at the next slide and here we just touched on income docs missing on our prior slide i will note too this is the only category we saw a decrease in the number of defects but let's look at the remaining four province temporary income violation we did see a large jump in this category as we continue to assess loans under the covet 19 temporary guidelines this defect covers issues discovered in both wage earners and self-employed borrowers as they relate to covet 19 temporary guidance while the increase was a concern it is still less than half the number of defects we see regarding income in general the origination vintage of this population also included more loans that were subject to our more restrictive self-employed guidelines that went into effect on june 11th 2020 and the last three are related to credit liabilities and we'll touch on them real quick in liabilities we saw a small jump in this category and we want to remind everyone that if you exclude a liability we must see documentation to support that omission bankrupt stock's missing while this document sorry while this defect has generally been on the decline we did see a small uptick in the number of loans with this defect please remember to include bankruptcy documents when required if a mortgage was involved in the bk the statement of intention is a critical part of the bankruptcy package that we find frequently missing and we'll discuss that more in our first scenario an undisclosed non-mortgage debt fraud in general we mentioned last time has been on the decline however this is our first fraud related deficiency code to enter the top 10. this is also our top trending fraud defect code in qc we encourage you to review all credit inquiries and address them with your borrowers prior to closing so before we move on let's review some key takeaways covid19 temporary appraisal flexibility violations are still a concern defects from inaccurate income calculations and missing documentation continue to lead our industry missing assets with its recent uptick and we wanted to remind you no no cash out refi's and debt paid off prior to closing may still require documentation of funds and lastly collateral defects outside of covet 19 temporary guideline violations remain low our ace and loan collateral advisor take-up rates continue to rise so last quarter we looked at where we see defects across transactions and occupancy types and here we discovered temporary covet 19 guidelines defects were concentrated in cash out refi liability income defects were prevalent in refi's and the community lending segment has a very high level of owner occupied transactions so this time let's take a closer look at some of the changes from q4 to q1 the first defect for income it saw a minor jump for wage earners of four percent which was only driven by two extra loans and while defects related to self-employed borrowers went up by 145 percent this included the coven 19 temporary requirements in addition to defects for income miscalculated or income docs missing so the decree the increase again was not surprising as many of these loans were originated after june 11 when the new self-employment requirements kicked in so we saw a 100 decrease in missing or insufficient bk docks for investment in second home properties with which had zero defects for those property types it did however increase 75 in owner-occupied transactions which contained all 14 defects this quarter and third our coveted temporary income defect saw an increase across all transaction types you'll notice the percentages are high however it's important to remember that we started with very low number of defects in all three categories at 7 4 and 2. in addition to the increase in number of loans we were funding we also saw more loans subject to and impacted by the covet 19 temporary guidelines and lastly missing or insufficient documentation to support liabilities actually went down 17 percent for our wage earners and self-employed however it increased 500 percent for people earning any other source of income so the quick takeaways from this are one we must remain vigilant on every loan try not to let any less risky business or strained resources impact quality as we see defects can pop up anywhere two continue to be aligned with the remaining covet 19 temporary guidance in particular the tightening around income requirements and three defects related to income and liabilities remain high among all our seller servicers so lastly this slide shows the types of defects we see on investment properties and second homes the leading defect for both these occupancy types remain the same quarter over quarter with taxes and insurance missing and liability documents missing or insufficient and while minimal and it was only by three loans income shifted slightly from miscalculated last quarter to documentation missing or insufficient this quarter again remaining vigilant across all occupancy income and transaction types remains a top priority for an effective origination quality control process so here i also wanted to take a quick moment for a qc psa year to date quality control has seen a 56 percent increase in our missing document rate as well as a 43 increase in our appeals we're issuing more repurchases and a large amount of them are for missing or incomplete files this puts additional touches on files which further strains resources so we do encourage you to take the full 30 days that we allot to deliver a file to ensure it is complete as possible and we'll touch on loan file delivery in a future webinar so now let's open it up for any questions you have on this topic we will now be taking questions if you have a question please enter it in the q a box located in the lower right hand corner of your screen uh steve we do have one question and that question is can clients see their missing docs sure that's a that's a great question so yes uh we have a system called qca or what freddie mac refers to as quality control advisor and there is a tab within that called management reporting within that tab is a chevron for missing docs so when you're in that chevron you can see your missing dock rate you're missing doc response times your trending of missing docs over time and even your top 10 missing docs and there's any of the blue view details there's a little blue blue link at the bottom of each box that says view details and it'll give you a list of all the missed blocks for the selected time period it'll include the comments qc provided and it's exportable to excel so this is a great way to use our find exists feedback into your own process to improve quality thanks for that steve i don't see any further questions yet at this time excellent well then i'm going to hand it off to our qc managers they're going to present some scenarios around adverse credit events so george take it away thanks steve good afternoon everyone for our second topic we will discuss two loan scenarios related to adverse credit events we chose these scenarios because we receive feedback from our sellers as well as our own quality control and quality assurance teams that these always present unique and difficult challenges also as you saw on the defect trending liabilities income and bankruptcy documentation are still top trending defects these adverse credit events can touch on all three of these categories first we'll examine a loan scenario of mortgages included in bankruptcies and later mike will evaluate another loan scenario of a borrower's credit for manual underwriting so let's get started in our first scenario we have a purchase transaction of an owner-occupied single-family residence the loan to value ratio is 80 with a total debt payment to income ratio of 30 the loan received a loan product advisor risk class of caution the note date for our loan was october 1st 2020. credit risk comment messages reflected on the lpa certificate included the following bankruptcy significant derogatory information appears on credit report analysis of credit history is recommended delinquency reported on accounts number of inquiries high risk combined with other factors high overall utilization of revolving credit adds risk and finally for mortgages not verified on the credit report direct verification of payment history is required a view a review of the credit report reflected a chapter 7 bankruptcy that was filed in december of 2016 and discharged in may of 2017. so george don't we know right away that the loan is not eligible for delivery to freddie mac isn't the recovery period for a chapter 7 bankruptcy 48 months from the discharge or dismissal date good question mike for guide section 5202.5 the recovery period is 48 months when the significant adverse or derogatory information was caused by financial mismanagement however if it was caused by extenuating circumstances then the recovery period is only 24 months now this is a very high bar to meet however for this loan the lender was able to provide sufficient documentation and justification to support extenuating circumstances existed therefore the recovery period is acceptable since they established the existence of an extenuating circumstance then the loan would be acceptable well not necessarily there's still more analysis that we have to do to determine the credit reputation is acceptable when reviewing the file the credit report did reflect the prior bankruptcy additionally a mortgage trade line was reflected with a history reporting through december 2016 that indicated as closed the trade line included the following additional comments bankruptcy chapter 7 real estate mortgage bankruptcy discharged further analysis of the credit report reflected eight trade lines that were currently open and active which included the following an auto loan paid has agreed for 36 months two student loans paid as agreed with a greater than 24 month history five revolving accounts all paid as agreed with a greater than 12 month history so all re-established credit has been paid as greed so the file documented extenuating circumstances so the bankruptcy recovery period was met and the borrower has sufficiently re-established their credits since the bankruptcy as evidenced by the credit report it sounds like we now have a loan that is acceptable as a mainly unwritten mortgage well unfortunately there's still more documentation that is needed section 5202.5 of the guide also reflects the following additional requirements when a borrower has had a prior bankruptcy and these are required regardless of whether the loan establishes extenuating circumstances or we are following the requirements for financial mismanagement these requirements are whenever a borrower has had a bankruptcy within the last seven years the mortgage file must also contain copies of the bankruptcy petition schedule of debts and discharge or dismissal evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid any other evidence necessary to support the seller's determination that the borrower has established and maintained an acceptable credit reputation in this case the file did not contain the bankruptcy papers as required the documentation is further needed to determine what occurred with the mortgage on the credit report that was indicated to be included in the bankruptcy why would we need further documentation on that mortgage the credit report confirmed the account was closed and that it was discharged as part of the bankruptcy what else would you expect lenders to do when they see a mortgage included in bankruptcy that's another great question unfortunately the credit report cannot be accepted as sufficient documentation to verify the final disposition of that mortgage still must be determined what became of the property that the mortgage was secured by as there are several possible outcomes these include the borrower could have retained the property and signed a reaffirmation agreement the mortgage could have been discharged but the borrower agreed to continue making payments or they could have ceased making any payments in the latter the lender could could have then foreclosed on the property or may have worked out a short sale given that the recovery timelines for these events differ it is necessary to find out exactly what occurred with the property and document it ingly so the end result is that the loan in this scenario is not acceptable due to insufficient insufficient documentation that's correct in this case or a purchase letter would be issued due to the insufficient documentation it seems that all we need are bankruptcy papers if the lender provided those through the appeal process we'd be able to rescind that repurchase that would be the first step however however the providing of the bankruptcy papers alone may also not be sufficient let's see what happened in our scenario where the bankruptcy papers were in fact provided on appeal the papers did include the statement of intention that reflected the mortgage from the credit report and the property that it was secured by it further reflected that the borrower intended to retain the property and enter into a reaffirmation agreement a public record printout was also included confirming that the property was still owned by the borrower so now we know what happened to the property that's right however there's still one more thing that is needed going back to guide section 5202.5 we can see that in addition to needing the bankruptcy papers we also need evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid and this documentation is still missing we now know that the borrower still owns the property so we must document an acceptable pay history for the most recent 12 months for that mortgage since it is no longer being recorded being reported on the credit report without this documentation an acceptable credit reputation for the borrower has not been established and the loan is still not acceptable for delivery to freddie mac now that we know the final decision what are the some of the key takeaways from the scenario the first takeaway is that a mortgage debt reported as being included or discharged in a bankruptcy on the credit report does not prove that the debt was discharged discharged the discharge must be verified with the bankruptcy papers second verification of the property disposition alone may also not be sufficient additional pay history documentation may also be required and third when a significant derogatory event is identified be sure to reference guides section 5202.5 now let's see if we have any questions from our audience related to our first scenario we will now be taking questions if you do have a question please enter it in the q a box located in the lower right hand corner of your screen looks like we do have a question and that question is can you provide more insights as to why the credit report is not sufficient to verify that a mortgage was in fact discharged and closed through a bankruptcy is a great question and that is one of the main points that we wanted to emphasize with this scenario from our example we can see that there are times when a mortgage will no longer be reported to the to the credit bureaus after a bankruptcy or other significant derogatory event therefore the credit report may not be reflecting the most recent and most accurate information relating to that obligation that's why additional research is required to determine both the disposition of the property as well as the status of the mortgage in question in our scenario we know that the bar will retain the property therefore the additional pay history documentation is required in order to verify an acceptable credit reputation if the pay history is provided and verified no late payments then the loan could have been accepted however if it did indicate recent late payments then the credit reputation would not be acceptable okay just seeing if there are any more questions coming in before we move on okay what if aus except uh eligible bankruptcy reflects discharged on the credit report with no mortgage reflecting on the credit report so this is steve let me i'm just going to reread that question in my head um what if aus except eligible bankruptcy reflects discharge on the credit report with no mortgage reflecting on the credit report um so so an lp so lpa if you get an lpa accept eligible and it reads the um the credit report and it reflects that there is a mortgage uh if if it accurately assesses that there is a bankruptcy um and i'm trying to think bankruptcy reflects discharged on the credit report with no mortgage reflecting so if there is no mortgage um and the lpa accepts it uh there's no further documentation that you need at that point you do not need to go provide the bankruptcy papers i think that's what this question is asking me you do not need to provide us the bankruptcy papers on an lpa except if there's no mortgages if there is a mortgage reflected on that credit report then we would need to see the bankruptcy papers in order to determine the final disposition of that mortgage because we have found over time that the credit report agencies are not they don't always report the proper status and final disposition of properties that's just been our experience over the last five at least the last five years we found many times where it just was not reported accurately and that the borrower did either retain it without a reaffirmation agreement just kind of a handshake with the bank to keep paying it or that they have reaffirmed it indeed and either of those situations would require an additional additional documentation potentially to make the loan eligible so hopefully that did answer the question okay they did respond and said yes that that let's see looks like we might have a few more questions coming in um here let me just all right uh the next question is do we need the bankruptcy paperwork for seven years from discharge or uh lpa will waive that so again i don't believe specifically conditions lpas i don't believe will specifically tell you if it does or doesn't need the bankruptcy papers um if you receive a caution those loans are manual you know have to run through all of our manual guidelines uh our manually underwritten guidelines do require the bankruptcy papers so any manually underwritten loan bankruptcy papers are required and again i'll fall back to if lpa gave you an accept and it read the credit report and it saw there was a bankruptcy and you still got an accept you do not necessarily need the bankruptcy papers unless there is debt on there such as a mortgage that you need to confirm the final disposition of that property and that can be done through public records or closing disclosure or an affirmation agreement uh we just have to know was there a subsequent credit event or does the borrower still own the property and do we need a payment history on that those are kind of a couple things we are looking for all right it looks like we have one last question uh the question is doesn't a mortgage stop reporting once it's included in bk so i don't want to speak generally for all different banks and different institutions will report it differently but i think part of part of the problem is most times when it's included or at least it's identified in a bankruptcy yes we don't have any more history it's not reported anymore but again what we found is many times borrowers retain these properties or retain them with a reaffirmation agreement so you can retain it again with like a handshake deal with the bank as long as you continue to pay it they won't they won't foreclose on the property or try to sell it and then when you do a full reaffirmation agreement you actually begin an entire new uh note with with the bank essentially so that's part of the problem is we don't get a full reporting after the bankruptcy as to what happened to the property attached that that mortgage was attached to so even if the borrower's obligation was extinguished through the bankruptcy the borrower can continue paying it that property may still have a could have a subsequent deed in lieu a subsequent short sale they might still own the property and they can actually re-engage that through a reaffirmation agreement they can re-engage their obligation to that property so that is again why we always need the papers when a mortgage is involved and that statement of intention becomes a critical document to to verify where the final disposition of that property went to right thanks steve at this time we'll move on to the next section and i'll turn the call over to mike zeeman mike hi thank you during our quality control reviews we sometimes see loans that are reviewed as manually underwritten loans where the seller must determine if the borrower's credit reputation is acceptable during the next few slides we will show you one such exam and afterwards we'll provide you some tips to help mike why don't we remind our audience of how freddie mac defines evaluating the borrower's credit reputation great idea george this is an excerpt from the guide as you can see for manually underwritten loans the seller must determine that each borrower individually and that all borrowers collectively must have acceptable credit reputations in this scenario we have alone submitted with loan product advisor with a risk class of caution as you can see here there are some important excerpts from the lpa feedback messaging it shows that the lpa risk class returned to caution rating in evaluating the borrower's credit reputation we would always review the credit and liabilities messaging provided in the lpa feedback the feedback messaging here shows several messages indicating a mortgage delinquency such as delinquency slash derogatory on mortgage mortgage delinquency appears on credit and time sense delinquency is too recent or unknown there's a lot of messaging provided how would we interpret all these another great question george in this case we would reference guide section 5202.5 to gain additional guidance to better interpret the credit messaging in this case we would have to identify the adverse credit and then determine whether derogatory information is significant in this scenario the borrower is refinancing their current home at 123 street which has the current mortgage reporting perfect payment history when we look further on the credit report we find a trade line that shows a different mortgage that has a history of being 120 days delinquent dating back to january 2016. in this case we know the mortgage that we are refinancing is not the same mortgage as the mortgage that is showing 120 days delinquent a property search provided in the loan file shows that the mortgage attached to our subject property at 123 street is the same as the one that we are paying off so are there other documents that we should review to help us get a better idea about this delinquent mortgage another great question george the final loan application should be reviewed to see if there were additional addresses listed and also the customer's declaration should be reviewed in this case the address is the same 123 street and no previous addresses within the past two years the declarations also show that the borrower declared not to have any outstanding judgments no declared bankruptcies foreclosures or obligated directly or indirectly to any loans that would result in foreclosure deed in lieu or judgment against the borrower well something doesn't add up the borrower has a delinquent delinquent mortgage listed on their credit report but they're they're stating they have never had any judgments bankruptcies and foreclosures that's exactly what our underwriter asked themselves this was another red flag there was nothing included in the file to explain the delinquent mortgage on credit so we issue for purchase yes this file did not contain an explanation or meet the documentation requirements outlined for manually underwritten mortgages in this case the borrower has not established an acceptable credit reputation and in this situation the seller must presume the derogatory information is significant so that's all now there's more the lender appealed the repurchase after receiving our repurchase later the seller was able to convince the borrower to provide additional documentation to explain the delinquent mortgage that was appearing on the borrower's credit report we received a separation and settlement agreement from the borrower's ex-spouse which outlines that the previous marital residence was awarded to the ex-spouse and the borrower was not liable for any judgments or liens after august 2012. as we reviewed earlier the mortgage starts showing 120 days delinquent january 2016. since our borrower was relieved of all liability of the previous marital property including the mortgage in august 2012 the delinquency that started in 2016 should not be considered in our analysis when determining the borrower's credit reputation is acceptable so it sounds like the lender addressed all the issues that were cited in our purchase letter were we able to rescind that repurchase in this situation yes the only delinquent event that was reporting against our customer was the ex-spouse's mortgage the borrower had answered all the declarations correctly and the rest of the borrower's credit met guide guidelines section 5202.5 so what's the overall takeaways here for our audience some of the takeaways always review the loan product advisor advisor credit messaging two review the credit requirements outlined in guide section 5202 the messaging on the lpa is referenced in the guide and will provide you guidance on whether the borrower's credit reputation is acceptable and three always investigate red flags in this case the borrower did not have previous residences the only derogatory found was the merge that was seriously delinquent and the bowers declaration stated they did not have any significant credit events foreclosure bankruptcy or judgments those are great points now let's see if our audience has any questions well now i'll be taking questions if you do have a question please enter it into the q a box located in the lower right hand corner of your screen we do have a question let's see the question is to be safe should we always ask for a lox for any mortgage late within seven years so this is steve again uh that's a that's a great question so i would first say look at your lpa um in this case let's let's remember the lpa returned a risk risk rating of caution uh and all of those must go through all of our manual underwriting guide underwriting guidelines um so again you have to at that point you have to address um if there's significant derogatory events or significant derogatory credit uh it must be addressed that way if you have an lpa accept and it has read the credit and lpa has read the credit report you get uh repermart relief from the credit so you are not required to do anything regarding any lates be it revolving mortgage installment only when when it's not an lpa except should you definitely be addressing supporting and documenting the borrower's acceptable credit reputation thanks steve uh looks like there are no further questions so with that i will turn the call over to kelly morocco kelly hi again thank you for attending today's presentation on affordable seconds today we will be discussing sources of affordable seconds requirements for the participation and appreciation mortgages with affordable seconds that are used to subsidize the purchase price of resale restrictive properties the accessibility of our revised affordable seconds checklist and investor featured identifiers we call them ifis lots to unpack here so with that please take it away thanks kelly it's great to be here with all of you until recently the source the affordable second was not available to a property seller or an interested party to the transaction we revised our requirements to allow non-profit or government agencies that are the property seller of an income-based resale restricted property to be the source of an affordable second we also allow seller-funded affordable seconds these requirements were effective for mortgages delivered on or after march 1st of 2020. since that time we have had significant interest in these flexibilities and wanted to give you the details today let's start with seller funded affordable seconds and let me clarify when i say seller i'm referring to our clients who are the sellers of mortgages to freddie mac the seller funded affordable second is available to sellers who meet specific criteria specifically that the seller must be a depository institution and have an established affordable seconds program that supports the community reinvestment act mandates the seller may not be the source of an affordable second that includes participation in appreciation the seller funded affordable second has certain requirements it must not be funded through the first lien mortgage transaction it may be forgivable or repayable and may be used toward the minimum down payment requirement it must also meet all of the other requirements in guide section 4204.2 for affordable seconds the first lien mortgage which is the mortgage being delivered to freddie mac must be a purchase transaction of a one unit primary residence must be a home possible mortgage and must be a retail mortgage in some specific instances the property seller may be an acceptable source of an affordable second specifically when the property seller is either a government agency or a non-profit entity and the property is subject to income-based resale restrictions affordable seconds from the property seller are permitted in two circumstances for income based resale restricted properties the first is that the property seller may be a government agency or a non-profit entity that acts as the program administrator for the government agency the nonprofit entity may also act as the property seller on behalf of the government agency in the second instance the source of the affordable second may be a non-profit entity that is also the property seller but is not affiliated with the government agency however in this case the seller must first obtain freddie mac's prior written approval to sell the related first lien mortgages to freddie mac by contacting the seller's freddie mac representative or the customer support center at 1 800 freddie a good example of this type of transaction could be an organization like habitat for humanity who is the property seller and provider of the affordable second these requirements allowing a property seller to be the source of an affordable second as well as allowing a seller-funded affordable second went into effect on march 1st of 2020 the same time that the new ifis were implemented as a reminder freddie mac buys only the first lien mortgage and not the second mortgage hey kelly would you like to review our next topic around participation and appreciation which is also known as equity sharing absolutely thanks susan when we were when we revised the section of the guide in march of 2020 we wanted to make it clear who could participate in appreciation or equity sharing we did this by adding the term subsidy provider as a party who can share an appreciation we also clarified that for-profit entities may not share an appreciation so subsidy providers can share an appreciation or profit entities may not we received feedback from both sellers and subsidy providers that our requirements for participation and appreciation were such that subsidy providers did not think that their programs would fit our requirements after much research and in an effort to appeal to providers of affordable housing programs we made the decision to change our requirements so that it would allow subsidy providers or program administrators managing income based resale restricted program to participate in appreciation we modify the terms allowing equity sharing when an affordable second exceeds the percentage of an affordable second and as you can see on the slide there is an example of a standard requirement the example here tells the story for example if you have a 90 first lane mortgage and a 10 percent affordable second it would mean that the equity sharing to the provider is limited to 10 percent not many programs would meet this requirement so we made modifications as shown on the next slide this is where it gets a little tricky so when equity sharing to the subsidy provider exceeds the percentage of the affordable second there is an exception but only if the following requirements are met you'll see that the first requirement did not change except for we added the term subsidy provider prior to the most recent revisions the agency's share of appreciation was limited to 75 we have now added a provision that would not restrict the percentage of appreciation if the provider of the affordable second is a subsidy provider or program administrator managing an income-based resale restricted program and the seller confirms that all of the special requirements for mortgages secured by properties subject to income-based resale restrictions in section 4406.2 are met and the subsidy provider or program administrator has processes in place to allow the borrower to receive a share of the proceeds of subsequent sales in instances where the subsidized resale price of the property increases at resale this slide highlights the requirement that protect the borrower's investment in the program the terms of the affordable second must allow the borrower to recover all of the following before the agency or subsidy provider is able to share an appreciation this includes down payment paid by the borrower funds customary costs incurred by the borrower for selling the property and the payment of the first lien mortgage in march of 2020 we introduced requirements specifically for our affordable seconds to be used by affordable housing program providers as a means to subsidize the sale price of a property as a result the program may impose income based resale restrictions the difference between the market value and the resale restricted price represents the subsidy amount secured by the affordable second so in this example three hundred thousand is the market value and two hundred thousand is the restricted sales price the difference between the two is a hundred thousand which is the subsidy amount that is being provided by the affordable housing program provider the typical terms of this type of affordable second include either no payment or deferred payments and the entire balance may be forgiven at some point in time in the future please note that resale restrictions may not restrict freddie mac from sale or transfer of the property once freddie mac acquired the title to the property as an reo susan is there an easy way to review whether secondary financing might meet the qualifications of an affordable second sure is kelly we've included a link to our checklist for affordable seconds in the guide section 4204.2 for quick and easy access the checklist helps to create a clear path for understanding what does and does not qualify as an affordable second this wraps up the policy portion of affordable seconds but before we move on to the next topic let's cover the key takeaways we discussed two new sources of affordable seconds which include seller-funded affordable seconds for sellers that are depository institutions and have programs established to meet cra mandates and non-profit entities that are not affiliated with the government agency remember these need a negotiated term of business we added two new ifis for the new sources of affordable seconds we revise the requirements for participation and appreciation that will line up better with affordable housing programs we discussed a type of affordable second that is used to subsidize the sales price and create a lien against the property and we have revised the affordable seconds checklist and placed a link in the guide for our final topic i'll discuss affordable seconds and differences between the data entry and loan product advisor and loan selling advisor we have had a lot of questions from our sellers regarding the correct way to enter an affordable second into loan product advisor as well as the correct way to deliver the loan when it has an affordable second today we'll provide some tips that may address some of your questions on this topic when you're reviewing a loan file it's necessary to determine what type of secondary financing is involved in the transaction one way to get an idea of whether you have an affordable second is to check who is funding the afford the secondary financing if it's a government agency or a non-profit it is likely an affordable second your file should contain the terms of secondary financing so that you can compare this to the affordable seconds requirements outlined in our guide after reviewing the terms of the secondary financing you may have concluded that you have an affordable second that meets freddie mac's requirements let's take a look at the last bullet on the slide does the affordable second require a payment before the due date of the 61st monthly payment this is an important point to answer as the answer to this question will determine how the affordable second should have been entered into loan product advisor if you're using loan product advisor version 5.0.06 or higher the terms of the affordable second must be entered into the other new mortgage loans on the property you are buying or refinancing section the monthly payment field should show zero and the yes buttons should have been selected to indicate that it is an affordable second and the payment on the affordable second is deferred on the next slide we'll see what this looks like here's what those fields will look like if they've been completed correctly if the payment on the affordable second is not deferred it's critical that the monthly payment for the affordable second field has been completed accurately and that the answer to the question about whether the affordable payment is deferred is on the next slide we'll see what that looks like here's what those fields and loan product advisor will look like when you complete those inputs in summary there are two different ways that affordable seconds could be entered into loan product advisor one way if the affordable second has deferred payments and a different way if it does not making sure that the loan has been entered correctly is critical in ensuring that the affordable second is treated properly where the repayment is concerned i think that's a wrap kelly it was great being here with all of you today and we appreciate your time as we reviewed the recent changes in affordable seconds now let's open it up for questions we will now be taking questions if you do have a question please enter it into the q a box located in the lower right hand corner of your screen all right i don't see any questions at this time so with that i'll turn the call over to george karenschak george thanks as a reminder for additional information we encourage you to take advantage of the training and resources available from the freddie mac learning center the customer the customer call center provides seller service for support monday through friday at 1 800 freddie and please visit freddie mac's single family website at sfreddiemac.com and stay current with resources there including the single family seller servicer guide at guide.readymac.com you may also find additional guidance and information including the recordings of our let's qc webinars on the single family quality control page hyperlink above and lastly for more information on duty to serve please visit freddiemac.com backslash about backslash duty to serve backslash well that ends our portion of the presentation today we hope you've enjoyed this webinar and then you found it useful steve do you have any final words yes i want to thank all of our clients who joined us today for this call and let you know that we appreciate your business now you're going to see a short four question survey on your screen we appreciate your responses to these questions so we can continue to improve and provide valuable information on these let's qc quarterly calls thank you all and enjoy the rest of your day as a reminder the recording and supporting resources will be made available on the qc webpage enjoy the rest of your day