AllRegs Compliance Commentary: Fannie Mae Clarifies Loan to Value Ratios in the Selling Guide

by Anna DeSimone*

Related Topics: mortgage compliance, mortgage insurance, refinance, subordinate financing,  Fannie Mae Underwriting Guidelines

On March 31, 2011, Fannie Mae updated the Selling Guide to clarify policy changes made regarding the calculations of ratios. The Selling Guide contains a number of references to the calculation of LTV, CLTV, and HCLTV ratios and the vast majority of these references indicated that ratio calculations were to be based on the "loan amount." However, in other instances, the Guide referenced "unpaid principal balance" to be used in calculations.  

Fannie Mae has updated the Guide in an effort to provide consistency and clarity within the Guide and to match Fannie Mae's current loan delivery requirements. The Selling Guide now reflects "original loan amount" in all references to these ratio calculations. Lenders should refer to Fannie Mae's Eligibility Matrix for allowable CLTV ratios.

Calculation of the Loan-to-Value (LTV) Ratios  

The maximum allowable LTV ratio for a first mortgage is based on a number of factors, including the representative credit score, the type of mortgage product, the number of dwelling units, and the occupancy status of the property. Fannie Mae publishes the following table to describe the requirements for calculating LTV ratios for a first mortgage transaction. The result of these calculations must be truncated (shortened) to two decimal places, then rounded up to the nearest whole percent. For example:

• 96.01% will be delivered as 97%
• 80.001% will be delivered as 80%

The rounding rules noted above also apply to the CLTV and HCLTV ratio calculations. Lenders' systems must contain rounding methodology that results in the same or a higher LTV ratio.

Sales Price and Appraised Value Used by Desktop Underwriter® (DU)  

DU uses information in the online loan application to obtain the sales price and appraised value to calculate the LTV, CLTV, and HCLTV ratios.  To determine the sales price and appraised value, DU uses the amounts entered in the following data fields:

Sales price = Line a + Line b + Line c in Section VII, where: 

• Line a = Purchase price (the sales price for purchase transactions, or the cost of construction for construction transactions).
• Line b = Alterations, improvements, repairs (for HomeStyle Renovation transactions, the cost of alterations, improvements or repairs).
• Line c = For construction transactions, the cost or value of the land if the borrower acquired the lot separately.

Appraised value = Property Appraised Value in the Additional Data screen.

Note: If the estimated value that was submitted to DU differs from the actual value, the lender must correct the information in DU and resubmit the loan case file.

Loan-Level Price Adjustments (LLPA) 

An LLPA may apply to certain mortgages based on the LTV ratio and representative credit score. These LLPAs are in addition to any other price adjustments that are otherwise applicable to the particular transaction. Lenders must refer to the Loan-Level Price Adjustment (LLPA) Matrix and Adverse Market Delivery Charge (AMDC) Information.

Calculation of the CLTV Ratio   

For first mortgage loans that are subject to subordinate financing, the lender must calculate the LTV ratio and the CLTV ratio. The CLTV ratio is determined by dividing the sum of the items listed below by the lesser of the sales price or the appraised value of the property.

• The original loan amount of the first mortgage,
• The drawn portion (outstanding principal balance) of a HELOC, and
• The unpaid principal balance of all closed-end subordinate financing. (With a closed-end loan, a borrower draws down all funds on day one and may not make any payment plan changes or access any paid-down principal once the loan is closed.) 

Note: For each subordinate liability, in order for the lender to accurately calculate the CLTV ratio for eligibility and underwriting purposes, the lender must determine the drawn portion of all HELOCs, if applicable, and the unpaid principal balance for all closed-end subordinate financing. If any subordinate financing is not shown on a credit report, the lender must obtain documentation from the borrower or creditor.

If the borrower discloses, or the lender discovers, new (or increased) subordinate financing after the underwriting decision has been made, up to and concurrent with closing, the lender must re-underwrite the mortgage loan.  Lenders should refer to the Eligibility Matrix for allowable CLTV ratios.

Home Equity Combined Loan-to-Value (HCLTV) Ratios

For first mortgages that have subordinate financing under a HELOC, the lender must calculate the HCLTV ratio. This is determined by dividing the sum of the items listed below by the lesser of the sales price or appraised value of the property.

• The original loan amount of the first mortgage,
• The full amount of any HELOCs (whether or not funds have been drawn), and 
• The unpaid principal balance of all closed-end subordinate financing.

Note: For each subordinate liability, in order for the lender to accurately calculate the HCLTV ratio for eligibility and underwriting purposes, the lender must determine the maximum credit line for all HELOCs, if applicable, and the unpaid principal balance for all closed-end subordinate financing. If any subordinate financing is not shown on a credit report, the lender must obtain documentation from the borrower or creditor.

If the borrower discloses, or the lender discovers, new (or increased) subordinate financing after the underwriting decision has been made, up to and concurrent with closing, the lender must re-underwrite the mortgage loan. Lenders should refer to the Eligibility Matrix for allowable HCLTV ratios.  

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*Anna DeSimone is President of Bankers Advisory, Inc., Belmont, Massachusetts. She authors Policy Manual Templates for AllRegs and her company authors and updates AllRegs’ State Rules Matrices, Permissible Fee Matrix and Compliance Checklists for 50 states.

Disclaimer: The information presented in this article represents the opinion of the author and not that of AllRegs. This article is not meant to be nor should it be construed as advice of legal counsel. The applicability of the information contained herein will vary based on the nature of each lending institution's business, under what law it was created, and its loan products and procedures. Readers are strongly urged to consult with their legal counsel and/or contact local counsel as appropriate in the various states and jurisdictions to determine the applicability of the materials contained herein to the specific facts and circumstances of each organization's programs and products and to identify other law applicable to its business operations. The information contained herein was not reviewed or approved by counsel in the respective jurisdictions.