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   ARTICLE   |   From Scotsman Guide Residential Edition   |   January 2017

Opening the Box on DU 10.0

Fannie Mae's latest Desktop Underwriter program promises a bright future

Opening the Box on DU 10.0

For more than 20 years, Desktop Underwriter (DU) has been the automated-software program used to qualify borrowers for loans deliverable to Fannie Mae. After a launch this past June, the most recent iteration, DU 10.0, is now fully active, replacing the outdated version DU 9.3.

Key changes in the new version will give consumers greater credit flexibility, which should increase the potential loan pool. Other features likely will make the origination process more seamless for everyone. In short, DU 10.0 promises to deliver more loans and to be easier to use than ever before.

Before digging into the key points of Desktop Underwriter 10.0 and examining where these changes may be most useful, it is important to understand the reasons behind changes made in DU 10.0 in relation to credit-qualifying borrowers.

Fannie Mae and Freddie Mac have been under increasing pressure to adopt an updated credit-scoring model to replace the FICO Classic Score, which was released well over a decade ago in 2004. Since then, FICO has released two newer versions, FICO 8 and FICO 9. Another credit-scoring model created by the big three — Equifax, TransUnion and Experian — through VantageScore Solutions is on its third iteration: VantageScore 3.0.

Consumer-rights groups, VantageScore and the Consumer Financial Protection Bureau all have urged Fannie and Freddie to adopt one of these newer models, but the government-sponsored enterprises (GSEs) have been hesitant to adopt a newer model, possibly due to the massive undertaking required to implement a new model and the opinion that the classic version accurately predicts credit risk in regards to mortgage performance.

A scoring-model change may happen in the future, but as of October 2016, Fannie Mae’s Selling Guide page still stated that the GSE requires the FICO Classic Model for both DU and manually underwritten mortgage loans. DU 10.0 does deliver an alternative, however, in the form of trended credit data.

Trended data

The newest, shiniest object in underwriting is trended data, which is designed to drill deeper into the revolving credit habits of consumers. On a high level, it identifies if borrowers are transactors or revolvers. Transactors are those people who pay their balances in full before the statement date, while revolvers make minimum or small principal payments each month.

Until now, credit-reporting agencies, or CRAs,  collected information on balances, limits, payment histories, minimum payments and ages of accounts. If borrowers paid their balances in full before the statement date, there was no way to see the activity on that account. So transactors who paid in full each month were not getting full value on their credit reporting.

Trended data allows TransUnion and Equifax to compile the amount paid and the date it was paid over a 24-month period, as long as the furnisher provides the data. This is important because research has shown that borrowers who pay off their credit cards every month are 60 percent less likely to become delinquent on a mortgage than borrowers who only make minimum payments.

At this time, trended credit data has no impact on FICO credit scores, but DU 10.0 does consider this information in its decision-making process. Fannie Mae has not said specifically how this will work other than that it could potentially lessen the impact of a recent late payment. It also may help when debt ratios are higher than normal or reserves are tight. Trended credit is so new that it may be some time before actual benefits are fully outlined.

Nontraditional credit

In circumstances where borrowers have no credit score or limited credit files, Fannie Mae has allowed nontraditional credit to be considered for the approval. Before DU 10.0 these case files had to be manually underwritten. Desktop Underwriter 10.0 allows lenders to get automated approval for these borrowers.

Automating the process reduces risk, lowers cost and streamlines the process. This is a significant enhancement that should offer meaningful improvement for borrowers with young or thin files. Of course there are requirements for building files. First, each borrower must provide a 12-month documented payment history on two credit sources, one of which must be housing related — which can include rent paid. The same account may be used for each borrower if they are both signers on that account.

This automated process is valid only for primary single-family residences. It cannot be used for manufactured home loans. In addition, loan-to-value ratios are restricted to 90 percent, The debt-to-income ratio cannot exceed 40 percent, and this process is only available for fixed-rate products. Desktop Underwriter will consider the borrowers’ reserves as part of the approval process.

It also should be noted that if DU does not approve the loan, it is still eligible for manual underwriting, although many lenders likely will be more tentative in going that route.

Credit history

In previous versions of the program, DU considered a late payment on a mortgage to be more adverse than a late payment on a credit card or other installment loan. DU 10.0 no longer makes that assessment. Moving forward, a mortgage late payment will be considered to have the same risk level as a late payment on a car loan or other installment debt.

In addition, in the past, DU considered borrowers with no history of having a mortgage to be a higher risk than those who had a mortgage and demonstrated the ability to repay that debt in a timely fashion. This consideration could lower the ability for first-time homebuyers to get financing for their first property purchase.

DU 10.0 no longer draws this conclusion either. Instead, the program will evaluate how the borrower manages all installment loans, like cars, student loans and other term loans if no mortgage history is reported.

Credit inquiries

Previous versions of DU would consider multiple mortgage credit inquires as a potential yellow or red flag. Desktop Underwriter 10.0, however, now considers credit inquiries much like credit-reporting agencies do under their deduplication protocol.

With the deduplication process, it is generally understood that consumers have the right to shop for the best financial products available when it comes to financing homes, cars and student loans. The FICO scoring model allows people to shop for loans through multiple lenders within a 45-day period and only considers the first hard inquiry in its credit score.

Desktop Underwriter 10.0 will now consider multiple inquiries as one inquiry, just like the FICO model. This should help loan shoppers who ultimately find their way to your door to get their loans approved.

Validation requirements

It goes without saying that income, asset and employment documentation reviews are integral to the underwriting process, and that it can be challenging at times to obtain adequate and timely information from borrowers. This is further complicated when a loan takes longer than expected to complete, making it necessary to update this information.

As of this past December, DU 10.0 has automated these processes in an effort to streamline validation requirements. By utilizing third-party services like The Work Number, Equifax’s 4506-T Transcript service or the asset-verification service Account Check, DU can now validate a borrower’s income, asset and employment information automatically.

Findings may indicate that additional documentation is required, but automatic-income, asset and employment validation should make it easier to get loans funded and simplify the process for borrowers. To use these features, mortgage companies and lenders must activate the services for at least one of the vendors.

Bad loans are bad loans

The one piece of bad news for borrowers and originators under DU 10.0 is in the area of short sales and mortgage charge-offs that were byproducts of mortgage defaults (e.g., on a second mortgage after a foreclosure). Previous versions of Desktop Underwriter did not put the same weight on short sales and charge-offs as was placed on foreclosure events.

In DU 10.0, these transactions are now considered to be significant derogatory events, much like a foreclosure. Simply put, all of these events will be considered equally bad on your credit.

•  •  •

As with any new technology, only time will tell what effect the changes in DU 10.0 will have on the industry. There are certain to be kinks to iron out, as well as a learning curve on the part of originators and processors to maximize the new features. But even after two decades, it looks like Desktop Underwriter will continue evolving to simplify the loan process.


 
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