Freddie Mac Extenuating Circumstances

http://www.freddiemac.com/learn/pdfs/uw/caution_remind.pdf

FHLMC pg 1Ext Circ 

FHLMC pg 2Ext Circ

FHLMC pg3.better Ext Circ

FHLMC pg 4Ext Circ

 

37.7: Evaluating Borrower credit reputation (02/14/14)

http://www.allregs.com/tpl/documentPrint.aspx?did3=3ccc9b93890d4a189b1fbc3eb09ca3cd&lid=7e3f840aa03c412fbbe3319c1ee4b84b

Freddie Mac Single Family / Single-Family Seller/Servicer Guide, Bulletins and Industry Letters / Single-Family Seller/Servicer Guide, Volume 1 / Chs. 37-38: Credit Underwriting / Chapter 37: Underwriting the Borrower / 37.7: Evaluating Borrower credit reputation (02/14/14)

37.7: Evaluating Borrower credit reputation (02/14/14)

(a) Overview The Borrower’s credit reputation may be established by any of the following methods:

  • Submitting the Mortgage to Loan Prospector®
  • For Borrowers with usable Credit Scores, manually underwriting with Fair Isaac Corporation (FICO™) scores and reason codes and analyzing the information in each of the Borrower’s credit reports and other verifications as required by Section 37.6. When a minimum Indicator Score is required, it must be met or exceeded for the Mortgage to be eligible for delivery to Freddie Mac.
  • For Borrowers without usable Credit Scores, manually underwriting without FICO scores, and analyzing all information contained in each of the Borrower’s credit reports and other verifications

For an Accept Mortgage and an A-minus Mortgage, Loan Prospector has determined that the Borrower’s credit reputation is acceptable. In all other Mortgages, the Seller must thoroughly evaluate the Borrower’s credit reputation in accordance with the requirements set forth in this section and document in the Mortgage file the Seller’s conclusion the reputation is acceptable.

Because FICO scores evaluate all the information in the Borrower’s repository credit file at the time the FICO score was created, a Seller underwriting with FICO scores will find much of the evaluation of the Borrower’s credit reputation is already reflected in the FICO score and accompanying reason codes. (See Section 37.6 for more information on the review required when using FICO scores.)

When manually underwriting with FICO scores, the Seller must not use the following factors as offsets for weaknesses in the Borrower’s credit reputation because they have already been considered in creating the FICO score:

  1. The absence of, or age of, derogatory information
  2. The number/proportion of accounts paid as agreed versus delinquent
  3. The types of accounts paid as agreed versus the types of accounts that are delinquent
  4. Recent pay-down or consolidation of account balances by the Borrower
  5. The length of the Borrower’s credit history
  6. Any combinations of the above factors

What constitutes an acceptable credit reputation for Freddie Mac may vary according to the Mortgage product or type. For example, a Mortgage that has significant derogatory credit information and would not receive an Accept Risk Class from Loan Prospector may still be eligible for delivery as an A-minus Mortgage. The Seller may also be able to conclude that a Mortgage receiving a Caution Risk Class from Loan Prospector due to significant derogatory information has an acceptable credit reputation by documenting that the derogatory credit was attributable to extenuating circumstances. The requirements for establishing and documenting extenuating circumstances are set forth in Section 37.7(b).

For Manually Underwritten Mortgages, the Seller’s evaluation of the Borrower’s credit reputation must be based on the entire credit history documented in the Mortgage file. The Seller must weigh the following factors in arriving at a conclusion that the Borrower’s credit reputation is acceptable:

  1. The type and amount of credit outstanding
  2. How long the Borrower has had credit
  3. How the Borrower uses available credit, including revolving balances-to-limits
  4. Recent changes in the number of open accounts or overall amount of credit outstanding
  5. The payment history and status of all accounts
  6. Any recent inquiries shown on the credit report
  7. Any public record or collection items

If a Borrower’s credit history includes both Tradelines and Noncredit Payment References, the Seller must put more weight on the Tradelines when evaluating the Borrower’s credit reputation and cannot use Noncredit Payment References to offset derogatory credit in a Tradeline reference. If a Borrower’s credit history includes housing obligations (rental or Mortgage), the Seller should put more weight on how housing payments were made than nonhousing payments, but must not ignore any derogatory information in the credit history.

The Seller must also consider layering of risk in its evaluation of credit reputation. A stronger credit reputation may be required if either capacity or collateral is weak. (See Section 37.1 for more information on how to evaluate the overall risk of the Mortgage using the “three Cs” (credit reputation, capacity and collateral).)

(b) Adverse or derogatory credit information (requirements for establishing and documenting extenuating circumstances)

Adverse credit information in and of itself does not mean the Borrower’s credit reputation is unacceptable. When there is adverse or derogatory information in the Borrower’s credit history, the Seller must determine whether the derogatory information is significant.

For Accept Mortgages and A-minus Mortgages, the significance of the derogatory information has already been considered by Loan Prospector and the Borrower’s credit reputation has been deemed acceptable. However, regardless of the Risk Classification received from Loan Prospector, if evidence of a short sale is disclosed on a credit report or contained elsewhere in the Mortgage file, the requirements for handling significant adverse or derogatory information caused by extenuating circumstances and financial mismanagement for Manually Underwritten Mortgages in subparagraphs (i) and (ii) below related to short sales must be met.

For other Caution Mortgages with at least two Feedback Certificate messages related to nonpayment of obligations, the Seller must presume the derogatory information is significant. The Seller must document the extenuating circumstances or conclude that the difficulties were due to financial mismanagement.

Similarly, for Manually Underwritten Mortgages underwritten using FICO scores with at least two reason codes related to nonpayment of obligations, the Seller must presume the derogatory information is significant and the Seller must document the extenuating circumstances or conclude that the difficulties were due to financial mismanagement. See Section 37.6 for additional information regarding the requirements necessary to determine a Borrower has an acceptable credit reputation for Manually Underwritten Mortgages using FICO scores in underwriting.

For all other Manually Underwritten Mortgages with or without FICO scores, the Seller must weigh the amount of derogatory information against the rest of the credit history and decide whether it is significant. In making its determination, the Seller should not ignore any derogatory credit, but must give more weight to late housing payments and to derogatory information or late payments occurring within the past two years. Generally, the more recent the adverse or derogatory credit information, the more likely it is significant. The Seller must consider all of the following:

  • The number, timing and extent of the adverse or derogatory credit information
  • The number, type and size of accounts with adverse or derogatory credit information
  • Public record information, such as judgments and collection accounts
  • Other characteristics listed in this section

For example, Freddie Mac considers a 30-day late housing payment to have more weight than a 30-day late nonhousing payment, and a collection account to have more weight than a 30-day late payment on a revolving account.

Although there may be many situations involving derogatory credit information that are less clear, especially when disputes about obligations are involved, the derogatory credit information is not significant when it consists only of isolated late payments, even if several accounts show sporadic late payments, provided all of the following exist:

  • The late payments were not recent
  • The late payments did not extend beyond one month
  • The number and size of delinquent accounts is not large in relation to the overall credit
  • The credit history does not show multiple revolving accounts with high balances-to-limits or high overall utilization of revolving credit
  • All other credit has been paid as agreed

However, the derogatory information is significant if any of the following exist:

  • There are several accounts showing recent late payments
  • There are multiple 60- or 90-day late payments
  • There is more than one 30-day late housing payment in the last 12 months
  • There are more than two 30-day or more than one 60-day late housing payments within the most recent two years
  • The number and size of the delinquent accounts are large in relation to the overall credit
  • There are multiple episodes of late payments extending over a period of time
  • The credit history shows derogatory credit information within the two most recent years combined with multiple revolving accounts with high balances-to-limits
  • The public record information reveals several occurrences of derogatory credit information, including judgments, tax liens and/or collection accounts
  • There is a bankruptcy, foreclosure, deed-in-lieu of foreclosure, or short sale within the last seven years that is disclosed on a credit report, disclosed by the Borrower on the Form 65, Uniform Residential Loan Application, or is evidenced by other documentation contained in the Mortgage file

If the Seller decides that the derogatory information is not significant, it must provide documentation supporting its conclusion in the Mortgage file. If the Seller decides that the derogatory information is significant, it must determine whether the problems were due to extenuating circumstances or to financial mismanagement.

(i) Handling significant adverse or derogatory information caused by extenuating circumstances for Manually Underwritten Mortgages

Freddie Mac considers an extenuating circumstance to be a nonrecurring or isolated circumstance, or set of circumstances, that was beyond the Borrower’s control and that significantly reduced income and/or increased expenses and rendered the Borrower unable to repay obligations as agreed, resulting in significant adverse or derogatory credit information.

In addition, if the Borrower’s credit history includes significant adverse or derogatory credit within the most recent two years, even if it was caused by extenuating circumstances, the Borrower’s credit reputation cannot be considered acceptable.

When the Seller uses extenuating circumstances to justify that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information, the Seller must confirm the extenuating circumstances and that the Borrower has reestablished an acceptable credit reputation. If the Seller cannot obtain third-party documentation confirming the extenuating circumstances and reestablishment of credit, it cannot consider the extenuating circumstance as an acceptable offset to significant adverse or derogatory credit information.

The Mortgage file must contain all of the following documentation:

  • A written statement from the Borrower attributing the cause of the financial difficulties to outside factors beyond the Borrower’s control that are not ongoing and are unlikely to recur
  • Third-party documentation confirming that the events related by the Borrower in the explanation were an isolated occurrence and significantly reduced the Borrower’s income and/or increased expenses and rendered the Borrower unable to repay as agreed
  • An underwriting analysis on Form 1077, Uniform Underwriting and Transmittal Summary, or on a separate document in the Mortgage file, relating the Borrower’s explanation to the Mortgage file documentation and leading to a reasonable conclusion that:
  • The events causing the financial difficulties were beyond the Borrower’s control, are not ongoing and are unlikely to recur; and
  • The Borrower has reestablished an acceptable credit reputation
  • Evidence on the credit report and other documentation in the Mortgage file of the length of time since completion of the significant derogatory event to the date of application and of completion of the recovery time period requirements below. In addition to the recovery time period requirements, the following additional requirements below must also be met:

 

Significant Derogatory Event Recovery Time Periods for Reestablishment of Credit with Extenuating Circumstances Additional Requirements
Foreclosure 36 months from the completion date as reported on the credit report Whenever a Borrower has had a previous foreclosure, deed-in-lieu of foreclosure or a short sale within the last seven years, the Mortgage must either be:

  • A purchase transaction Mortgage secured by a Primary Residence with a maximum loan-to-value (LTV)/total LTV (TLTV)/Home Equity Line of Credit TLTV (HTLTV) ratio of the lesser of 90% or the maximum LTV/TLTV/HTLTV ratio for the transaction, or
  • A “no cash-out” refinance Mortgage that meets the requirements of Chapter 24

Additionally, the Mortgage file must contain evidence of the completion of the foreclosure, deed-in-lieu of foreclosure or short sale.

Deed-in-lieu of foreclosure 24 months from the execution date
Short sale 24 months from the completion date
Bankruptcy (all bankruptcy actions) 24 months from the discharge or dismissal date 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 reestablished and maintained an acceptable credit reputation
Other significant adverse or derogatory credit information 24 months from the most recent significant adverse or derogatory credit information N/A

 

(ii) Handling significant adverse or derogatory information caused by financial mismanagement for Manually Underwritten Mortgages

If the Seller is unable to document extenuating circumstances in accordance with Freddie Mac’s requirements, then it must conclude that the problems were due to financial mismanagement.

In order to conclude that the Borrower’s credit reputation is still acceptable despite the previous financial mismanagement, the Seller must explain on Form 1077 or on a separate document in the Mortgage file, the rationale supporting its determination that the financial mismanagement is unlikely to recur and the Borrower’s credit reputation is acceptable. Making a case that the Borrower is sufficiently willing to repay obligations when significant derogatory information was caused by financial mismanagement is very difficult. It will take a longer and more convincing reestablishment period to overcome derogatory information caused by financial mismanagement than would be needed if the Borrower had experienced financial difficulties due to extenuating circumstances. When the Seller determines that the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information caused by financial mismanagement, the Mortgage file must contain all of the following documentation:

  • Evidence that the Borrower has reestablished an acceptable credit reputation as required in this chapter for Manually Underwritten Mortgages
  • Evidence on the credit report and other credit documentation in the Mortgage file of the length of time since completion of the significant derogatory event to the date of the application, and of completion of the recovery time period requirements below. In addition to the recovery time period requirements, the following additional requirements below must also be met:
Significant Derogatory Event Recovery Time Periods for Reestablishment of Credit with Financial Mismanagement Additional Requirements
Foreclosure 84 months from the completion date as reported on the credit report N/A
Deed-in-lieu of foreclosure 48 months from the execution date Whenever a Borrower has had a previous deed-in-lieu of foreclosure or a short sale within the last seven years, the Mortgage must either be:

  • A purchase transaction Mortgage secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the lesser of 90%, or the maximum LTV/TLTV/HTLTV ratio for the transaction, or
  • A “no cash-out” refinance Mortgage that meets the requirements of Chapter 24

Additionally, the Mortgage file must contain evidence of the completion of the foreclosure, deed-in-lieu of foreclosure or short sale.

Short sale 48 months from the completion date
Bankruptcy (other than a Chapter 13 bankruptcy) 48 months from the discharge or dismissal date 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 reestablished and maintained an acceptable credit reputation
Chapter 13 bankruptcy 24 months after the discharge date 48 months from the dismissal date
Multiple bankruptcy filings in the past seven years 60 months from the most recent discharge or dismissal date
Other significant adverse or derogatory credit information 48 months from the most recent significant adverse or derogatory credit information N/A

 


Additional information on Extenuating Circumstances….

FHLMC.UW Reminders.LP Caution header

Extenuating Circumstances

http://www.freddiemac.com/learn/pdfs/uw/caution_remind.pdf

Evaluating Credit Reputation

Freddie Mac considers an extenuating circumstance to be a nonrecurring or isolated circumstance, or set of circumstances that:

·         Was beyond the Borrower’s control,

·         Significantly reduced income and/or increased expenses, and

·         Rendered the Borrower unable to repay obligations as agreed, resulting in significant adverse or derogatory credit information.

In addition, if the Borrower’s credit history includes significant adverse or derogatory credit within the most recent two years, even if it was caused by extenuating circumstances, the Borrower’s credit reputation cannot be considered acceptable.

When the Seller uses extenuating circumstances to justify the Borrower’s credit reputation is acceptable despite significant adverse or derogatory information, the Seller must confirm the extenuating circumstances and that the Borrower has reestablished an acceptable credit reputation.

If the Seller cannot obtain third-party documentation confirming the extenuating circumstances and reestablishment of credit, it cannot consider the extenuating circumstance as an acceptable offset to significant adverse or derogatory credit information.

Recovery Time Periods for Reestablishing Credit

Must have reestablished an acceptable credit reputation for a period of at least:

·         36 months for a previous foreclosure*

·         24 months from the execution date of a deed- in-lieu of foreclosure*

·         24 months from the completion date of any short sale*

·         24 months after the discharge or dismissal of a bankruptcy,

·         24 months for all other significant adverse or derogatory credit information

*For a previous foreclosure, deed-in-lieu of foreclosure or short sale within the last seven years, the Mortgage must be either:

·         A purchase transaction secured by a Primary Residence with a maximum LTV/TLTV/HTLTV ratio of the lesser of 90% or the maximum LTV/TLTV/HTLTV ratio for the transaction, or

·         A “no cash-out” refinance Mortgage meeting the requirements of Guide Chapter 24.

Mortgage file must contain:

·         A written statement from the Borrower regarding the cause of the financial difficulties to outside factors beyond the Borrower’s control

·         Third-party documentation confirming that the events related by the Borrower in the explanation were an isolated occurrence and significantly reduced the Borrower’s income and/or increased expenses and rendered the Borrower unable to repay as agreed

·         Evidence on the credit report and other documentation in the Mortgage file of the length of time since completion of the significant derogatory event to the date of application and of completion of the recovery time period requirements.

Underwriting Analysis (Form 1077)

The Seller must explain on the Form 1077 (or other document in the file) the rationale supporting its determination that:

·         The events causing the financial difficulties were beyond the Borrower’s control, are not ongoing, and are unlikely to recur

·         An acceptable credit reputation has been reestablished

Freddie Mac also recommends that you provide calculations for significant qualifying data (income, assets, debts, reserves) and the reasoning for your lending decision.

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