Chapter 15 — Exercises
Work these with a calculator and the chapter open. Items marked † have worked solutions in the answers appendix; the rest are for your own reasoning, your study group, or your manager. No answers appear in this file.
Where an exercise gives you a guideline figure, treat it as illustrative for the exercise only. Loan limits, LTV maximums, DTI maximums, ratio benchmarks, and waiver criteria are set by the agencies and by HUD and they change. In practice, verify every one of them at the source.
A. Recall and definitions
15.1 In one sentence each, define: automated underwriting system, findings report, verification message, re-run.
15.2 Name the owner of each system: Desktop Underwriter, Loan Product Advisor, TOTAL Scorecard. For each, name the authority document that stands behind it.
15.3 Give Loan Product Advisor's equivalent term for each of these DU words: Approve, Refer.
15.4 What does the acronym TOTAL stand for, and what is the single structural fact about TOTAL that distinguishes it from DU and LPA?
15.5 A findings report has six recognizable parts. List them, and state the reading order the chapter recommends and why page 1 is read last.
15.6 Name the five figures on the underwriting-analysis page that you should reconcile against your own worksheet every time, before reading anything else.
15.7 † Fannie Mae now calls it value acceptance; the industry still says appraisal waiver. Freddie Mac's version has a different name again. Write a two-sentence explanation of the concept that would be accurate in five years, when all three names may have changed.
15.8 State, in your own words, the difference between the deterministic rule-checking half of an AUS and the statistical model half. Which half can you look up? Which half can you not?
B. Applied reasoning
15.9 † A loan officer says: "I know exactly how DU weighs credit score against DTI — a 20-point score bump is worth about a point and a half of DTI." Evaluate that claim. What part of it is knowable, what part is not, and how should a professional talk about model behavior they cannot verify?
15.10 Your file returns Refer. List, in the order you would actually work them, the five things you would do next. Justify why the first one is first.
15.11 A borrower's findings come back Approve/Eligible. The borrower asks whether they are approved. Write the three-sentence answer you would actually say out loud.
15.12 † Explain to a real estate agent, in under forty-five seconds and without using the word "algorithm," why a Refer on an FHA case is not a decline.
15.13 A colleague argues that running a Refer file through the other agency's system is "shopping for an answer" and therefore improper. Rebut or agree, and state clearly what would make it improper.
15.14 The chapter says occupancy and property type "are not levers — they are facts." Explain what would be true of a loan officer who treated them as levers, and name the chapter that covers the consequences.
C. Ratios, structure, and the numbers
15.15 A single borrower earns \$7,200.00 a month. The proposed housing expense including mortgage insurance is \$1,980.00. Other monthly debts total \$690.00. Compute the housing ratio and the total debt-to-income ratio to two decimals. State what each one means in a sentence a borrower would understand.
15.16 † The Harlow Street benchmark, worked from scratch. Income \$4,150.00 a month, existing debts \$395.00 a month, proposed housing payment \$1,721.57.
(a) Compute both ratios to two decimals. (b) Compute the maximum housing payment and maximum total obligations permitted by a 31% / 43% manual benchmark. (c) State the dollar amount by which each proposed figure exceeds its benchmark. (d) In two sentences, say what an Accept from the TOTAL Scorecard is doing for this borrower that the benchmark cannot.
15.17 † Which input would change this recommendation? A conventional purchase returns Refer. The file:
CONSTRUCTED TEACHING FILE [constructed teaching example]
Qualifying income (monthly) $6,400.00
Proposed housing expense (with MI) $2,050.00
Other monthly debts $1,310.00
auto $395.00 8 payments remaining
student loan $260.00
personal loan $405.00 26 payments remaining
revolving minimums $250.00 on balances of $6,200.00
Total monthly obligations $3,360.00
Verified assets after closing $9,100.00
For each candidate change below, state (i) whether it changes any input to the AUS, (ii) the new back-end ratio to two decimals if it does, and (iii) whether you would actually pursue it and why.
(a) Re-submit the file unchanged. (b) Exclude the \$395.00 auto payment because only 8 payments remain. (c) Pay the \$6,200.00 of revolving balances to zero. (d) Pay off the \$405.00 personal loan. (e) Do both (b) and (d). (f) Increase the down payment by \$10,000.00. (g) Wait two weeks and re-run.
Then answer: which single change gives the most DTI improvement per dollar of the borrower's cash, and what does that change do to the reserves line?
15.18 † The typo, both directions. On the Linden Street file (income \$10,500.00, housing expense \$3,033.72, total obligations \$4,479.72):
(a) Compute both ratios if income is mistakenly entered as \$12,300.00. (b) Compute both ratios if income is mistakenly entered as \$10,050.00. (c) Compute both ratios if the \$318.00 student loan payment is omitted entirely. (d) For each of the three, say who is likely to discover the error, on approximately what day, and what it costs.
15.19 Approve/Ineligible diagnosis set. † For each of the five files below, state (i) which half of the recommendation failed, (ii) the specific parameter that broke, (iii) at least one structural fix, and (iv) the dollar amount of additional borrower cash the fix requires, where the facts permit you to compute it. All limits below are illustrative for this exercise; verify current figures at the source.
(a) Primary residence purchase, \$1,007,500 price, \$201,500 down, loan \$806,000. Assume the county's one-unit conforming limit is \$766,550. (b) Second home purchase, \$450,000 price, \$36,000 down, loan \$414,000. Assume a 90% maximum LTV for a fixed-rate second-home purchase. (c) Primary residence purchase, \$300,000 price, first mortgage \$240,000, plus a \$45,000 down-payment-assistance second lien. Assume the product caps CLTV at 90%. (d) Primary residence purchase of a condominium unit; the findings state the project does not meet review requirements. (e) Primary residence purchase, \$260,000 price, \$7,800 down, loan \$252,200, under a 97% LTV product that requires at least one first-time homebuyer. Neither borrower is a first-time homebuyer.
15.20 The Fulton Avenue borrower's cash-flow analysis yields \$9,020.83 (24-month average) and \$8,916.67 (most recent year), and the underwriter uses the lower figure because income declined 2.3%. On a hypothetical file with \$3,870.00 of total monthly obligations, compute the back-end ratio at each income figure and state the difference in percentage points. Then answer: what did the AUS contribute to the decision about which figure to use?
D. Read the document and find the problem
15.21 † Read these findings and write the document list. Below is the verification-message block from a constructed findings report. Produce a borrower-facing document request: plain English, one line per item, a named owner for each (the borrower, a third party, or you), and a due date assuming today is day 4 of a 40-day contract. Then, underneath, list the items whose turn time you do not control, and state what that number tells you about the file's real critical path.
AUTOMATED UNDERWRITING FINDINGS — VERIFICATION MESSAGES [constructed teaching example]
Recommendation: Approve / Eligible. Purchase, primary residence, 1 unit detached.
Two borrowers.
EMPLOYMENT AND INCOME
1 Borrower 1 is self-employed (sole proprietorship, reported 4 years).
Obtain the most recent two years of personal federal income tax returns
with all schedules, and a year-to-date profit and loss statement.
2 Borrower 1: verify the existence of the business within the period before
the note date required by the applicable guide.
3 Borrower 2, base income of $3,150.00 per month: obtain the most recent
paystub showing year-to-date earnings and W-2 forms for the most recent
two years.
4 Borrower 2, bonus income of $425.00 per month: obtain a written
verification of employment documenting bonus earnings for the most recent
two years and year-to-date.
ASSETS AND FUNDS TO CLOSE
5 Depository account, reported balance $18,750.00: obtain statements
covering the most recent two months.
6 Retirement account, reported vested balance $52,000.00, of which
$12,000.00 is being borrowed for the down payment: obtain the most recent
statement, evidence of the terms of the loan, and evidence of receipt of
funds.
7 Funds required to close of $23,880.00 must be verified.
CREDIT AND LIABILITIES
8 The liabilities below are included in the debt-to-income ratio at the
payments shown. Verify each; document any omitted debt.
installment (auto) $528.00 40 payments remaining
installment (retirement loan, new) $ 0.00 — see message 6
revolving minimums $186.00 on balances of $5,900.00
9 Verify the housing payment history reported for the current residence
(24 months).
PROPERTY, TITLE, AND CLOSING
10 An appraisal on the applicable form is required.
11 Obtain a title commitment showing the lender in first lien position.
12 Obtain evidence of hazard insurance meeting guide requirements.
15.22 † Data-integrity audit. The fact sheet below is the truth about a file. The rendered application data page after it is what the loan officer actually submitted. Find at least six errors, state the effect of each on the recommendation, and then compute both ratios twice — once as entered, once as they should have been.
THE FACTS [constructed teaching example]
Purchase, PRIMARY RESIDENCE. Attached townhome in a planned unit development,
1 unit. Price $318,000. Down payment $31,800 (10%). Loan $286,200.
Conventional 30-year fixed. No appraisal ordered yet.
ONE borrower. W-2 salary, base only, no bonus or overtime, 5 years with the
same employer. Gross monthly base income $5,950.00.
Proposed housing expense including mortgage insurance: $1,914.00.
Credit report liabilities:
auto loan $362.00/month 44 payments remaining
student loan $189.00/month
revolving minimums $95.00/month on balances of $2,300
Disclosed by the borrower at application, NOT on the credit report:
loan from a family member, $150.00/month, 3 years remaining
Assets: checking $9,400 · savings $26,100 · 401(k) vested balance $41,000
(retirement account; not being liquidated or borrowed against)
Housing history: renting 27 months at the current address, $1,450/month
WHAT WAS SUBMITTED [constructed teaching example]
LOAN DATA
Loan purpose Purchase
Occupancy Second home
Property type 1 unit, detached, site-built
Sales price $318,000.00
Estimated value $321,500.00
Loan amount $286,200.00
LTV 89.02%
Product Conventional, fixed, 360 months
INCOME
Borrower 1, base $5,590.00
LIABILITIES
installment (auto) $362.00 44 payments remaining
revolving minimums $95.00 on balances of $2,300.00
total other obligations $457.00
ASSETS
Depository — checking $9,400.00
Depository — savings $26,100.00
Depository — 401(k) $41,000.00
total verified assets $76,500.00
15.23 Look again at message 8 in exercise 15.21. It prints the liabilities the system counted, at the payments it counted them at. Name three distinct things you can learn from that block that you cannot learn anywhere else on the report.
15.24 A findings report shows total verified assets of \$61,300 and reserves after closing of \$1,100 — about a third of a month. The recommendation is Approve/Eligible. Is anything wrong? What would you want to look at, and what would you say to the borrower?
E. Write it
15.25 † Write the email you would send a borrower at 5:20 p.m. on the day the findings come back Approve/Eligible, converting the fourteen Linden Street verification messages into a request. Plain English, no jargon, a due date on every item, and a first paragraph that sets expectations honestly about what "Approve/Eligible" means. Maximum 350 words.
15.26 Write the internal note you would put in the file when you re-run an AUS. It should record what changed in the data, why, what document supports the change, and what the new recommendation was. Three to five lines. This is a habit worth building; write the template you would actually use.
15.27 A borrower asks, in writing, why their loan was declined after they were told they were "approved" on day 6. Draft your reply. Be accurate about what the day-6 findings were and were not, be accurate about who declined the loan, and do not blame the borrower, the underwriter, or the software. Maximum 250 words.
15.28 Write a one-page pre-submission data audit checklist for your own use, adapted from §15.9 to whatever products you actually originate. Include the post-submission reconciliation step.
F. Judgment and ethics
15.29 A file returns Refer at a 51% back-end ratio. The borrower mentions they "sometimes" get overtime that is not on the paystub yet. Your branch manager suggests entering \$400 a month of overtime income and re-running, "and we'll get the VOE later to back it up." Walk through what is wrong with that, what you would say, and what you would do instead. Name the chapter that covers the exposure.
15.30 † A loan officer discovers on day 30 that they coded a condominium as a detached single-family home on the day-6 submission. The file has an approval, an appraisal, and a closing in eleven days. What are the options, what is the honest one, and who needs to be told first?
15.31 Your lender's overlay is a 640 minimum score on a product where the agency guideline is 620. A borrower with a 628 gets an Approve/Eligible. A competitor down the street has no overlay. What do you tell the borrower? Is there a version of that conversation that is dishonest, and what makes it so?
15.32 The chapter says the Harlow Street borrower gets a house because of a model whose reasoning is not published. Write two paragraphs: one defending that arrangement, one criticizing it. Then state which you actually believe and what would change your mind.
G. Exam-style and Loan File extension
15.33 NMLS-style. Answer each and, more importantly, write one sentence explaining the distinction the question is testing.
(a) A conventional loan receives an Approve/Ineligible. This most likely means: (1) the borrower's credit is insufficient; (2) the loan does not meet a product or program parameter; (3) the file must be manually underwritten; (4) the lender has denied the application. (b) Which system returns a result of "Caution"? (c) The FHA TOTAL Scorecard returns a Refer. The loan: (1) has been denied; (2) must be manually underwritten; (3) must be resubmitted through the other agency's system; (4) is ineligible for FHA insurance. (d) An AUS recommendation of Approve/Eligible means the loan has been approved by: (1) Fannie Mae; (2) the automated underwriting system; (3) no one — the lender approves loans; (4) the loan officer. (e) A loan officer re-submits an unchanged file to the same AUS on the same day. The most likely result is: (1) a better recommendation; (2) an identical recommendation; (3) an error; (4) a worse recommendation.
15.34 † Loan File extension. Using the Linden Street facts:
(a) Reproduce the day-6 reconciliation table (five figures, worksheet versus findings) and confirm each one from the frozen figures in this book. (b) Compute the day-44 back-end ratio from first principles, showing the addition of the \$611.00 payment. (c) Compute the day-47 back-end ratio after the account is paid and closed. (d) Compute reserves in dollars and in months after \$5,200.00 is paid out of verified funds, and state whether you would have made that trade if the ratio problem had been smaller. (e) Write the two new verification messages you would expect the day-47 re-run to generate, in the style of the ones in §15.6. (f) Name one thing the day-47 re-run did not re-verify, and say why that matters. (g) The debt was paid on day 46 and the file was re-run on day 47. What would the day-47 re-run have returned if it had been run on day 44 instead, and what does that tell you about the order of operations in §15.8?