The CLUE Report: Is it Col. Mustard in the Library with the Rope?

I’ll admit, at this point I’m pretty much mystified by the frequently-discussed yet rarely-seen “CLUE Report.” For those of you even more in the dark than me, “CLUE” is an acronym for “Comprehensive Loss Underwriting Exchange.” Basically its a national database maintained cooperatively by insurers to track claims made on particular properties, as well as claims made by particular persons. Before an insurer will write a policy on a particular property, it will check this database to confirm that the risk assumed by the insurer is reasonable. The insurer will not write a policy for a property with an existing and extensive claim history because the property is a “lemon” on which the insurer will lose money.

To date, I have typically counseled my buyer clients to call their insurance agent to obtain a copy of the CLUE report for the property. Lately it seems that my clients are unable to do so. Some insurers (Geico) have indicated that they don’t even know what a CLUE report is, apparently because some insurers are not members of the Exchange (the “E” in CLUE). Some insurers (most recently Allstate) have told the client to purchase the report at LexisNexis, but apparently you can only purchase a report for the home you currently own.

So my question to the RCG community: How do other agents address this issue? Do you invest the time and energy speaking with the buyer’s selected insurer to eventually obtain a CLUE report? Do you not even tell your clients about CLUE reports because they are of little or no value? Something in between? And are any sellers taking the advice of LexisNexis (which of course sells the reports) and obtaining a CLUE report to be given to poential buyers? Thanks in advance for any insight you care to provide.

Ardell, I look forward to your insightful and informative response; David, I look forward to a tangential point that illuminates some as-yet-unappreciated aspect of the Real Estates; Ray, I look forward to more rank bashing of my brokerage business model.

Major Bank No Longer Accepting Third Party Underwriting (aka pmi)

toastEarlier this month, I learned that a big bank is no longer accepting “third party underwriting”.  Third party or contract underwriting is “private mortgage insurance”.  Private mortgage insurance is often used when a borrower has less than 20% equity (or down payment) in a property.  When a private mortgage insurance company is issuing mortgage insurance to the the lender, they are underwriting the transaction.  Sometimes mortgage companies may use private mortgage insurance companies to underwrite files even when no private mortgage insurance is required.

From the memo:

“The clerical and support duty exemption to licensing under the SAFE Act (and other proposed regulations) for loan processors or underwriters who are employees taking direction and subject to supervision and instruction of licensed persons, does not apply to contract underwriters.

For all underwriters who do not qualify for exemption to licensing, including contract underwriters, compliance requires that anyone who is performing credit underwriting in connection with a residential mortgage be licensed as a mortgage loan originator….to perform credit underwriting tasks, each individual independent underwriter must have the applicable state license.”

It will be interesting to see if private mortgage insurance companies move forward with having their underwriters become licensed mortgage originators.  If other banks follow and pmi companies do not license their underwriters, it would appear they’re toast.   This bank is no longer accepting loans underwritten by pmi companies effective July 5, 2011.

Borrowers would need 20% down payment to obtain conventional financing, if pmi ceases to exist or consider FHA, USDA, VA financing or a combo mortgage (yes, second mortgages are starting to come back).

Update:  Some lenders may still underwrite the loans with higher loan to values – some banks are are firing warning shots that they will not accept loans only underwritten by a private mortgage insurance company if their underwriters are not MLO licensed.  It’s going to be interesting to watch this evolve.

Photo credit: John McClumpha via Flickr

Notice of Trustee Sales v. Trustee Deeds

Each month, Alan from Seattle Bubble religiously posts the Notice of Trustee Sale (NTS) numbers for King County. I’m very appreciative of his work because it saves me time each month so thanks again, Alan.  Cruising SB last night, I found Alan’s numbers alarming for June:  1615 NTS were filed.  Here are more numbers from Alan:

King County Notice of Trustee Sales

6/2009 – 1615
6/2008 – 576
6/2007 – 304
6/2006 – 299

180% YOY (280% of last year)

The last few months:
6/2009 – 1615
5/2009 – 992
4/2009 – 938
3/2009: 1089
2/2009: 838
1/2009: 909
12/2008: 660
11/2008: 540
10/2008: 643
9/2008: 607
8/2008: 575
7/2008: 728

If we’re seeing 180% increase year over year with notice of trustee sale filings, then where are the REOs? Well as it turns out, if you compare the trustee deed filings for the same month, you’ll see that a low percentage of Notice of Trustee Sales actually go all the way through the auction process. Here’s comparison data courtesy of Jess and Julie Lyda, which gives us a visual comparing NTS v. Trustee Deeds, which means title changed hands from the owner in default to a new owner. That new owner could be the bank/lender or someone who was the high bidder at the trustee sale. Here’s a link to a larger image of the graph.

So what assumptions can we make given facts that we already know? We already know that banks and lenders are postponing the majority of trustee sales in King County. We don’t have any data as to how long postponements are lasting.  If a homeowner is trying for a short sale or loan modification, we do know that the average wait time for banks to process these requests could easily be months based on nationwide reports from Realtors, home buyers and homeowners.  We also know that there are many banks who have turned into zombies, waiting for their number to be called and the regulators to show up on a Friday afternoon.  Postponing the losses from a foreclosure means the bankers can collect a paycheck for a few more months.

We also know that 50% of all loan modifications re-default by the 6 month mark. This pushes the foreclosure out longer and increases the overall losses to the bank/lender.  Another assumption we can make comparing data from Alan and Julie is that hundreds of REOs will be coming back on the market each month, which will put further pressure on home values.  Prime delinquencies are starting to surge and so are delinquencies in the upper home price ranges.

With what we know, home values will continue to feel pressure from many angles including higher inventory levels, continued tightening of underwriting guidelines, the lower prices of REO resales and short sales.

More on home price declines:

House Prices: The Long Tail from Calculated Risk
Case Shiller: Anemic Spring Bounce in April from Seattle Bubble
CR explains the difference between a bottom in housing starts and new construction homes and a bottom in residential resale homes in this post; Housing: Two Bottoms.

Calculating Income of Employed W2 Borrowers for Mortgage Qualifying

Jillayne wrote a post about the upcoming national licensing exam that mortgage originators will have to take and pass (unless they work for a depository institution) due to the SAFE Act.   She provided examples of questions that may be on the exam.  One of them is how to calculate income–which is receiving quite a few comments on her post.

If an applicant works 40 hours every week and is paid $13.52 per hour, what is the applicant’s
monthly income?
(A) $2,163.20
(B) $2,343.47
(C) $2,379.52
(D) $2,487.68

The correct way to calculate this is 13.52 x 40 hours x 52 weeks divided by 12 months = (B) $2,343.47.   The mortgage originator should also review the last two years W2’s to make sure the income is steady or increasing.   If it’s decreasing, this will need to be explained and the income may be averaged or a lower income may be used.   For example, if the borrower recently had their hours cut due to the economy, the new lower figure will most likely be used.   What’s most important is steady hours for the hourly employee…a recent jump in hours may not be considered either.

It’s important that the borrower has a minimum of a two year history in their line of work in order to be able to use the income (secondary education may be able to count towards the two year requirement).   If someone started a second job one year ago as a waitress for supplemental income, it might not meet the criteria to be factored towards income unless the borrower had a second job in the same industry over the past two years.

Overtime and bonus income needs to be received for the past two years to be factored for qualifying as well.   Again, this boils down to stability and trends with income are heavily considered.    

Commission incomes (W2) requires a two year history as well and the income is averaged.  If a borrower’s commission income is more than 25% of their annual income, they’re treated more like a self-employed borrower.  They’ll need to provide their last two years complete tax returns and non-reimbursed business expenses that are claimed on the tax return will be deducted from the gross income (they’re treated more like a self-employed borrower).  A situation that I’ve seen is where a borrower was paid a salary and then received a promotion where they had greater earning potential.   The employer reduced their base and added a commission structure.   Because the commission was a new feature to the income, only new lower base income was used for qualifying.

It all pretty much boils down to showing stability over the past 24 months and recent trends when calculating income.   Also be prepared to complete a Form 4506–even if you’re paid salary–as a measure to prevent fraud.   Lenders may also require a Verification of Employment with your employer to confirm the information provided regarding employment, income is accurate and that employment is likely to continue prior to funding your new mortgage.

There are many other types of income–for purposes of keeping this post short, sweet and simple, I’ve stuck to income that’s reported via a W2 and a “full doc” loan.  

Hopefully you’re working with a Mortgage Professional who reviews your income documentation upfront and calculates it correctly…and I hope you’re quickly providing the information that is being requested so that you’re properly qualified in the beginning of the process.   Nobody likes to get involved with a transaction to find out that the underwriter is not going to use the income that was used on the application because it was figured incorrectly.

Questions?  Ask!  🙂

More Upcoming Changes to Underwriting

Fannie Mae issued Announcement 09-19 amending some very basic underwriting guidelines that will not only impact conventional financing; it will apply to FHA insured loans that are underwriting using Fannie Mae’s DU.   You can read the entire announcement by clicking  here.

Here are some of the changes:

  • Credit documents will be valid for 90 days instead of the current 120 for existing construction.   The age of the document is measured from the date of the document to the date the Note is signed.
  • IRS Forms 4506 or 4506-T is required at application and at closing.  This is due to fraud (misrepresentation of income).
  • Age of appraisal is reduced from 6 months to 4 months.
  • Trailing Secondary Wage Earner Income is eliminated.   Now with a relocation, only the income of the spouse with actual employment may be considered.  Previously, it was possible to use the relocating spouse’s income from their employment prior to the relo without having an actual job.
  • Verbal Verification of Employment required within 10 days of signing the Note for employment income and within 30 days for self-employed income.  (Our company has always performed a verbal VOE prior to funding).
  • Stocks, bonds and mutual funds now valued at 70% instead of 100% to be used as reserves.   Due to market volatility, Fannie Mae is devaluing your portfolio.   This means that if you provide your mortgage originator with a stock, bond or mutual fund statement showing an ending balance of $10,000; the figure used for qualifying and on the application will be $7,000 (70% of the value).   Stock options and non-vested restricted stocks are no longer eligible to use as reserves.
  • Retirement accounts valued at 60% instead of 70% to be used as reserves.  

Fannie Mae’s effective dates are to follow…if the loan is manually underwritten, this applies to applications dated on or after September 1, 2009.   However, expect to see lenders and banks to adopt these guidelines early.

When is a Second Appraisal required on FHA Jumbos?

The last few FHA High Balance (aka FHA Jumbo) purchases that I’ve closed, the buyers and agents thought a second appraisal was automatically required.  FHA did adopt conforming appraisal guidelines for declining markets at the beginning of this month, but that does not guarantee a second appraisal.

What triggers a second appraisal for FHA?

  • base loan amount over $417,000; and
  • loan to value equals or exceeds 95%; and
  • the appraisal indicates it’s a declining market; and/or
  • if the wholesale lender/bank decides the area is in a declining market.  

Per Mortgagee Letter 2009-09, FHA defines a declining market as:

“…any neighborhood, market area or region that demonstrates a decline in prices or deterioration in other market conditions as evidenced by an oversupply of existing inventory or extended marketing times.”

Appraisers are having to determine overall trends for market areas including analyzing the current supply and demand, days on market, absorption rate and the prevalence seller concessions.    For FHA and conventional loans, this is documented on Fannie Mae Form 1004MC which FHA adopted effective April 1, 2009.








Please note that conventional, FHA  and VA appraisals require this new form.   FHA does have additional requirements:

  • At least two of the three recent sales (comparables aka comps) must be within the last 90 days of the effective date of the appraisal.  Plus,
  • A minimum of two active listings or pending sales.   The appraiser must insure the active listings and pending sales have “reasonable market exposure to avoid use of overpriced properties as comparables”.

If  a home buyer is using a FHA mortgage with a base loan amount over $417,000, they may want to consider saving up for that extra 1.51% down so that they are at a 94.99% loan to value and therefore (currently) avoid the potential second appraisal issue and make sure that the lender you’re working with does not have underwriting “overlays” that will impact you.   FHA’s second mortgage requirements can be found on Mortgagee Letter 2009-09.

Regardless of what type of financing you’re doing, know that the underwriter is going over the appraisal with a fine tooth comb.  It’s quite possible that if they don’t require a second appraisal, they may request additional information or comps from the appraiser which could take more time for your transaction to close.   Since this post is based on FHA transactions–we won’t even venture into HVCC here…that’s a whole other can of worms.

Underwriting Update for Financing of Investment Property with Fannie Mae

Last Friday, when Fannie adjusted the allowance for the amount of financed properties owned from 4 to 10, other underwriting requirements on investment and second home borrowers were updated as well.  (Freddie Mac still has the 4 financed property limit).

Reserve requirements vary depending on the number of financed properties owned (including primary residence):

1-4 financed properties 0wned:

  • 2 months of reserves on the subject property if it’s a second home.
  • 6 months reserves on subj. property if it’s an investment property plus 2 months reserves on each other second home or investment property.

5-10 financed properties owned:

  • 2 months of reserves on the subject property if it’s a second home.
  • 6 months of reserves on the subject property if it’s an investment property plus 6 months reserves on each other financed second home or investment property.

Note:  Freddie Mac’s guidelines are *currently* 6 months PITI.

Other underwriting changes for investment properties include:

  • 70% LTV for purchase of 1-unit and 70% for 2-4 units.
  • 720 minimum low-mid credit score. 
  • No history bankruptcy or foreclosure in the past 7 years.
  • Rental income must be documented with two years tax returns.
  • Borrowers required to sign form 4506 (which you can expect on ALL loans these days–including owner occupied).

Don’t forget that there is a significant price hit of 0.75% to fee from Fannie and Freddie with investment properties on top of the credit score/loan to value adds (LLPA).    Seller contribution is limited to 2% of the sales price with investment property.