SS Memo 08-07


Date: October 1, 2008

(Part IV)

Recent audits have revealed an alarming trend of deterioration in the underwriting of AHFC loans. Namely, many lenders are disregarding AHFC’s credit and property guidelines. Section 4000.01 of the Selling Guide states “AHFC requires that the Lender's qualified underwriter carefully evaluate the overall credit of the borrower and the property offered as security, and that the Lender's underwriter and the Lender believe that the mortgage is acceptable to private institutional investors” and “the credit documentation should clearly demonstrate the borrower's ability and willingness to repay the loan and that the subject property is adequate collateral for securing the debt.”

Although AHFC accepts loan files underwritten by automated systems such as FNMA’s Desktop Underwriter (DU) and FHLMC’s Loan Prospector (LP), Section 4000.02 cautions lenders that on Conventional, VA and RD loans, when automated underwriting findings conflict with AHFC credit guidelines, lenders should comply with AHFC guidelines. An example of this is the borrower’s FICO score. Although, AHFC does not have a minimum FICO score requirement, it clearly is an indication of the borrower’s ability and willingness to repay the loan. The Federal Deposit Insurance Corporation classifies borrowers with FICO scores of 660 or below as having relatively high default probability and are considered “subprime.” Additionally, FNMA and FHLMC have established elevated loan level price adjustments for borrower’s with FICO scores at 660 and below, which is an indication of a higher risk borrower. Another example is payment and debt-to-income ratios that exceed AHFC’s established guidelines, or otherwise limited ability to cover family living expenses. Borrowers that fall within either of the above examples do not demonstrate an ability and/or willingness to repay a loan and, as such, are not acceptable to AHFC.

Effective with commitments issued on or after October 6, 2008, when an audit file exhibits serious deviations from AHFC guidelines, the lender will be required to sign an agreement to repurchase the loan within 30 days if it becomes more than 30 days delinquent at any time within the first three years. All loans reported as an early payment default (delinquent within the first year) will be audited. If the file exhibits serious deficiencies, the lender will be required to repurchase the loan.