Chapter 14 — Exercises

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Chapter 14 — Exercises

Work these with the Selling Guide or the Seller/Servicer Guide open in another window wherever a question turns on a published requirement. Several of these deliberately cannot be answered from the chapter alone — that is the point of §14.1. Where a question asks for a guideline value, write down where you found it and the date you looked, because that is the professional habit the whole chapter exists to build.

Items marked † have worked solutions in the answers appendix.

A. Recall and definitions

1. Name the two published conventional rulebooks, state which entity publishes each, and state what each one is a set of terms for.

2. In one sentence each, distinguish eligibility from creditworthiness.

3. A colleague says, "compensating factors got that file approved." Under what circumstance is that sentence necessarily false, no matter how strong the factors were?

4. Define guideline overlay. Then name three separate business pressures that produce overlays, and for each one say whether it makes an exception more or less likely.

5. State the four moving parts of any credit-event waiting period.

6. What does the Uniform Underwriting and Transmittal Summary (Form 1008 / Form 1077) contain, and at what moment in the file's life is it produced?

7. Define layered risk in a way that distinguishes it from "this file has several problems."

8. What is a representation and warranty, who makes it, to whom, and at what moment?

9. Name three of the commonly cited life-of-loan exclusions from rep-and-warrant relief, and say why the first one on your list is the one a loan officer should care about most.

10. What is the debt-to-housing gap ratio on a 1008, and what does a narrow gap tell an underwriter that the back-end ratio alone does not?

B. Eligibility vs. creditworthiness — the sorting set

11. † Sort each of the following into ELIGIBILITY or CREDITWORTHINESS. For any item you believe sits on the boundary, say which side it falls on for the specific file described and why.

a. The borrower's representative score is 612 on a conventional purchase.
b. The back-end debt-to-income ratio is 47.2%.
c. The subject property is a 40-acre parcel with a residence on it.
d. The borrower has 0.8 months of reserves after closing.
e. The borrower is a permanent resident alien.
f. The loan amount exceeds the one-unit conforming limit for the county by \$14,000.
g. The borrower had a deed-in-lieu of foreclosure sixteen months ago.
h. The borrower is buying a second home and intends to rent it out on weekends.
i. Two 30-day consumer lates in the last twelve months.
j. The property is a condominium unit in a project where a single entity owns 60% of the units.
k. The borrower's employment is 100% commission with fourteen months of history.
l. The transaction is a cash-out refinance at 82% loan-to-value on a primary residence.

12. For three of the items in Exercise 11 that you classified as eligibility, write the sentence you would actually say to the borrower. Do not use the words "guideline," "overlay," or "underwriting."

13. † A loan officer sends the underwriter a two-page letter describing the borrowers' twelve years of perfect rent history, their two children's college funds, and their standing in the community. The decline was for a property type the lender does not lend on. Explain, in three sentences, exactly what was wasted and what should have been done in the same amount of time.

C. Layered risk

14. † Build the layered-risk inventory for the following constructed file. List the flags, list the offsets, state which flag each offset actually engages, and finish with the sentence the chapter insists on: which flag has no offset?

FILE: constructed teaching example
  Purchase, primary residence, single-family detached, conventional 30-year fixed
  Gross monthly qualifying income ......... $7,800.00
  Proposed PITI + MI ...................... $2,262.00
  All other monthly debts ................. $690.00
  Loan-to-value ........................... 90.00%
  Representative score .................... 688
  Verified assets remaining after closing . $9,800.00
  Current rent ............................ $1,425.00
  Employment .............................. 22 months, current employer;
                                            prior employer 6 years, same field
  Credit .................................. one 30-day consumer late 19 months
                                            ago; no other derogatory
  Borrower type ........................... first-time buyer
  Income composition ...................... 100% W-2 salary, no variable income

15. For the file in Exercise 14, compute: the housing ratio, the back-end ratio, the months of reserves, and the payment shock expressed both as a multiple and as a percentage increase. Show the numerator and the denominator for each.

16. † Take the file in Exercise 14 and change one characteristic to make it materially stronger. You may change only one. Justify your choice using the compounding argument from §14.6 — that is, explain why the layer you removed was the one whose removal changes the most, rather than the one that looked worst.

17. The chapter's illustrative arithmetic shows four factors each raising risk 40%: additive gives 2.60 units, compound gives 3.84. Redo it for three factors at 40%, and then for four factors at 25%. What does the comparison tell you about whether the number of layers or the severity of each layer matters more?

18. Explain to a real estate agent, in under sixty seconds and without arithmetic, why their buyer with "a 700 score, three percent down, a 44 debt-to-income, and two months of reserves" is a harder file than a buyer with any one of those characteristics alone.

D. "Which of these is an overlay?" — the diagnostic

19. † For each statement below, decide whether it is most likely an agency guideline, a lender overlay, a mortgage insurer requirement, or a federal legal requirement — and state the single question you would ask to confirm it.

a. "We don't do manufactured housing."
b. "You can't count that bonus; there's no two-year history."
c. "We cap DTI at 45% on everything, no exceptions under a 700 score."
d. "You have to give them a Loan Estimate within three business days of application."
e. "This condo project has to go through full review even though the loan qualifies for a limited review."
f. "The borrower has to contribute 5% of their own funds before we'll allow the gift."
g. "We won't insure above 95% loan-to-value for a self-employed borrower on this product."
h. "You cannot ask the applicant whether they intend to have children."
i. "Anything above 90% needs two months of reserves in this shop."
j. "The appraisal has to be done by a licensed or certified appraiser."

20. You are told a file is declined. Write out, verbatim, the first two questions you ask, in order. Then write what you do in each of the four possible combinations of answers.

21. † A borrower was declined by your employer for a reason you have confirmed is an overlay, not an agency guideline. You are a retail loan officer. Write the four things you do next, in order, and state which of them you would do before calling the borrower.

22. Same scenario, but you are a broker. What changes, what does not change, and what specifically must travel with the file to the second lender?

23. A branch manager says: "Just don't disclose the second job — it's part-time and it'll confuse underwriting, and the file works without it anyway." Identify every problem with that instruction and state what you do.

24. Your shop grants an overlay exception for one borrower and declines an essentially identical request from another. Name the exposure this creates, name the chapter that covers it, and state what a defensible exception process must produce as a record.

E. Credit events and waiting periods

25. A borrower reports "a bankruptcy in 2022." List, in order, the five questions you ask before you say anything about timing.

26. † For each of the following, name the specific document you would request to establish the measuring date, and name the party who would have it:

a. Chapter 7 bankruptcy
b. Chapter 13 bankruptcy that was dismissed
c. Completed foreclosure
d. Short sale
e. Deed-in-lieu of foreclosure

27. A borrower's waiting period will be satisfied on the 14th of a month. The contract closing date is the 9th, and the seller has already agreed to one extension. Explain the problem precisely, and write the two sentences you say to the buyer's agent today.

28. A borrower says their divorce caused the foreclosure and asks whether that counts as extenuating circumstances. Answer honestly, in the borrower's language, without promising an outcome and without being dismissive.

29. Look up the current conventional waiting period for a preforeclosure sale in both the Fannie Mae Selling Guide and the Freddie Mac Seller/Servicer Guide. Record: the value, the topic identifier or section, the effective date, and the date you looked. Then state, in one sentence, whether the two guides agree.

F. Compensating factors and the exception request

30. † Build a compensating-factor inventory for the Linden Street file as if you were submitting it manually. For each factor: name it, name the document that proves it, and name the specific flag it is aimed at. Then strike out any factor that is actually a requirement being offered as a strength.

31. Five loan officers each offer one of the following in support of a close file. Rank them from most to least useful to an underwriter, and say why the bottom two are worth nothing.

a. "They have eleven months of reserves after closing, verified."
b. "Their payment is going up only \$80 a month from what they pay in rent now."
c. "He's been at the same company nine years."
d. "They're going to get a bonus in March."
e. "The house appraised for \$12,000 over contract."

32. † Write the exception request. Using the six-part structure in §14.9, draft a complete memo for this constructed file. Keep it under 400 words.

FILE: constructed teaching example
  Purchase, primary residence, conventional, 85% loan-to-value
  Qualifying income ........... $9,240.00/month
  PITI + MI ................... $2,530.00
  Other monthly debts ......... $1,780.00
  Representative score ........ 731
  Reserves after closing ...... $27,900.00
  Employment .................. 11 years, same employer, W-2 salary
  Housing history ............. 84 months, mortgage on prior home, no lates
  Current rent ................ $2,410.00
  THE PROBLEM: your employer's overlay caps back-end DTI at 45% for scores
  under 740. Compute this file's back-end ratio before you write the memo.

33. Rewrite the following opening line of an exception request so that it would actually get read: "I'm hoping we can get some consideration on this one, the borrowers are great and I've known the agent for years."

34. Section 5 of the memo structure asks you to name the residual risk the offsets do not cover. Explain why an experienced credit officer trusts a memo more when it contains that section, and what they conclude about a memo that omits it.

G. Reps, warrants, and judgment

35. † A loan you closed twenty-eight months ago goes sixty days delinquent. A quality-control review finds that the borrower's overtime income was averaged over 18 months rather than the required period, and that the correct figure would have pushed the back-end ratio above the applicable maximum. Walk through what happens next, who bears the cost, and whether the passage of twenty-eight months helps.

36. Same loan, but the finding is instead that the borrower never occupied the property and rented it out from month one. Explain why the analysis is completely different, and name the two chapters that cover the consequences.

37. Explain, in the words you would use with a first-week loan officer, why an underwriter who shrugs at a judgment call becomes immovable about a missing page of a bank statement.

38. A processor asks you: "Why do we re-pull credit three days before closing? We already approved them." Answer in four sentences, connecting the practice to §14.10.

39. Judgment. Your borrower's file is approved. On day 40, in casual conversation, they mention they are "probably going to have the in-laws living there and paying us some rent, which will help with the payment." Nothing in the file says this. Identify what — if anything — has just changed, what you are obligated to do, what you must not do, and how you handle the conversation without treating the borrower as a suspect.

40. † Loan File extension. Return to the Chapter 14 flag-and-offset table for the Linden Street file. Add the day-44 event: a new \$611.00 monthly obligation, taking the back-end ratio to 48.48%. Do not solve the problem — that is Chapter 19. Instead, answer the analytical question: which of the seven rows in that table changed, and which one changed most? Then state what the day-44 event proves about the difference between a file with layers and a file with margin.