Packaging a Loan

A Mortgage Direct Continuing Education Presentation

A Sales Perspective

What is Packaging?

My Definition:

Building Strength by Pre-Assessing RISK to

Help your underwriter TRUST your file!

Build A Strong Story…

OBJECTIVE: Provide a reasonable scenario which will eliminate as many underwriting questions as possible.

Must know your underwriter• Typical information requested• Aggressive or Passive?

Must know your Transaction• What are the details?

Must Know you Borrower• Are they strong or Weak?• Can I make a case for them?

Must know your Property• Is it a risky property?• Can we get the value?

Goal of Packaging…

Closing Opportunities

Aggravation & Risk

What is Risk?

Definition:

The chance or possibility for loss.

Loan Decisions are based upon overall risk?

o Delinquency Risk:• What is the probability that the borrower will repay their loan

on a timely basis?o Foreclosure Risk:

• If we are forced to take the home, is the property value sufficient to cover the loan and all associated costs of the foreclosure, and the subsequent sale?

Questions to Ponder…

Based on the information I have gathered, and now know about my borrower:

o Does it appear that my borrower has the willingness to repay their loan?

o Does it appear that my borrower has the ability to repay their loan?

o Is my borrower’s property sufficient collateral for the loan, in the event of non-payment?

Balancing Your Transaction…

TRANSACTIONFramework/Structure of Loan

• Purchase / Re-finance

• Owner / Non-Owner

• Loan–To-Value

• Debt-to-Income

BORROWERCommitment/Repayment of funds

• Income

• Credit

• Assets

PROPERTY

Security/Collateral for the loan

• Property Type

• Market Value

• Marketability

Evaluating Risk

P A C I T

If You PACIT effectively, you will get faster, better mortgage loan decisions.

P A C I TProperty Assets Credit Income Transaction• Units

• Acreage

• Material

• Age

• Location

• Surroundings

• Checking

• Savings

• Retirement

• Investments

• Property

• Other

• FICO

• Mortgage

• Payment

• Judgments

• Collections

• Other

• Stated

• Employment

• Commission

• Bonus

• Rental

• Other

• Purchase

• Refinance

• OO/NOO

• LTV

• DTI

• SISA/Full Doc

How To Look At PACIT…Can strengths of the transaction offset weaknesses?EXAMPLE: High DTI ratios may be balanced by significant verified assets, excellent credit, and a low LTV.

Transaction Income Credit Assets Property

Excessive High Medium Low Compensating

(Poor) (Fair) (Acceptable) (Good) (Excellent)

Examine the Risk…While probing your borrower and taking the application,

be aware of the potential risks of your transaction.

Keep these thoughts in mind:

• What are the risks involved?

• Are there potential compensating factors?

• How can I paint a picture that will make sense to my underwriters?

• Does this transaction make sense to me - If this were my company, would I loan this borrower money?

How Do My Categories Look?TRANSACTION

Risk is relative. Which of the following components is riskier to the transaction?

Purchase • Refinance

Arm’s Length • Non-Arm’s Length

Owner Occupied • Non-Owner Occupied

Stated Income • Full Documentation

Cash-Out • Rate & Term

< 80% LTV • > 80% LTV

Corporate Vesting • Individual Vesting

Single Family Detached • Condominium

How Do My Categories Look?INCOME – Ability to Repay

RSVP Your Borrower!

• REASONABLE

- If Stated, does it make sense?

• STABLE

- Has the borrower received this income for 2 years +? • VERIFIABLE

- If necessary, can we verify the employment?• PREDICTABLE

- Is it likely your borrower will continue to make this in the future?

How Do My Categories Look?INCOME – Ability to Repay

Is your borrower’s income constant every month or does it fluctuate?

• FIXED INCOME SOURCES

- Salary

- Child Support

- Alimony

- Rental Income

- Disability

- Trust Income

- Retirement/SS/Pension

• VARIABLE INCOME SOURCES

- Overtime

- Bonus

- Commission

- Part-Time Job

- 2nd Job

- Self Employment

How Do My Categories Look?INCOME – Ability to Repay

Debt-To-Income (DTI) Ratios

• Housing Debt

- PITI

- 1st, 2nd, 3rd, etc. mortgages

- HOA

- Mortgage Insurance

- Flood Insurance, etc.

- Guideline: 33% of Gross

• Total Debt

- Housing, plus all other monthly

- Installment, Revolving

- Alimony, Child Support, etc.

- 2nd Home, Rental Neg. Cash flow

- Guideline: 45% of Gross

How Do My Categories Look?CREDIT – Willingness to Repay

We need to explore and be prepared to explain…

• The Credit Payment History

- Evaluate the type and severity of derogatories

- 80% or lower CLTV, we generally do not use credit scores for SISA transactions – Has to make sense.

- Above 80% CLTV, secondary market (MI) requires credit scores

- Past and Present extent of use and management of debt

How Do My Categories Look?CREDIT – Willingness to Repay

What does derogatory credit look like?• Patterns & Dates of derogatory items

• How recent are the late items? Is there a visible pattern?

• Types of derogatory items• Mortgage vs. Installment vs. Revolving

• Severity of derogatory items• 30, 60, 90 days late or charge-off/collection

• Current Status of derogatory items• Have the late accounts been brought up to date?

• Borrower’s explanations• Did the derogatory items with a major life event?

NOTE: There are NO compensating factors that

can balance out bad credit. A customer’s letter of explanation can often

times help the underwriter to look beyond the credit

for a decision.

How Do My Categories Look?CREDIT – Willingness to Repay

How does the borrower manager their debt?

• How much revolving debt do they have?

• Are there any new accounts within the last 12 months?

• Can you balance the debt with assets?

How Do My Categories Look?ASSETS

• What is your borrower’s ability to save? Stable savings are a stronger indication of borrower’s strength than “windfall” funds.

• Does the borrower have any assets to speak of?

• How much in assets do they have?

• If transaction is a purchase, where is the down payment coming from?

• How are your borrower’s assets allocated?• Retirement?• Investments?• Savings / Checking?• Other?

The borrower’s down payment or equity is there commitment to the transaction. Can they be verified if needed?

How Do My Categories Look?PROPERTY

Get a good sense of the property and surroundings from your borrower during your probing phase of your sales process.

• Does the property conform to other near properties?

• Where is the property located – Urban, Rural, etc.?

• What condition is the property currently in?

• What type of property is it – SFR, Condo, 2-4 Unit?

• What are the surrounding properties – Other homes, major streets, schools, industry, airports/railroads, commercial, water front, etc?

How Would I Rate The Risk?Scenario #1

TRANSACTION

$150,000 Loan, 50% Loan-To-Value, Purchase, Owner-Occupied, Full Doc

INCOME

Police Officer, salaried, 12 years on the job

CREDIT

Payment history good, minimal use of revolving debt

ASSETS

Down payment coming from sale of current home, 6 months reserves after closing

PROPERTY

$300,000 value, Low Risk, Conforming Tract Home

Scenario #1 – How Did You Do?

Transaction Income Credit Assets Property

Risk Scale

Excessive High Medium Low Compensating

(Poor) (Fair) (Acceptable) (Good) (Excellent)

Scenario #1: low risk transaction, excellent stability with very good credit and debt management, excellent commitment and savings, low risk property

How Would I Rate The Risk?Scenario #2 – From our floor

TRANSACTION

$300,000 Loan, 90% Loan-To-Value, 68% DTI, Purchase, Owner-Occupied, SISA

INCOME

TV Producer in Burbank, $238,000 annual salary, 1.2 years on the job,

CREDIT

720 Mid FICO, Good Mortgage History, Good debt payment history

ASSETS

$325,000, Down payment coming from Retirement Account

PROPERTY

$335,000 value, 1 block from elementary school, Conforming Tract Home

Scenario #2 – How Did You Do?

Transaction Income Credit Assets Property

Risk Scale

Excessive High Medium Low Compensating

(Poor) (Fair) (Acceptable) (Good) (Excellent)

Scenario #2: medium risk transaction, good quality with very good credit and debt management, fair commitment, medium risk property

Scenario #2 – How Did You Do?

Transaction Income Credit Assets Property

Risk Scale

Excessive High Medium Low Compensating

(Poor) (Fair) (Acceptable) (Good) (Excellent)

Scenario #2: When reviewed, there was information that was left out that when put in, made a difference in the decision. High DTI. Assets were primarily liquid, and allocated in various retirement, 401K and investment accounts.

How Would I Rate The Risk?Scenario #3 – From our floor

TRANSACTION

$450,000 Loan, 80% Loan-To-Value, Refinance, Owner-Occupied, QQ (SISA)

INCOME

W2 employee, $120,000 annually salary, 6 years with current company

CREDIT

695 FICO, Mortgage history good, medium use of revolving debt, 50% DTI

ASSETS

$75,000

PROPERTY

$563,000 value, 12 acres, biggest home with most land in subdivision

Scenario #3 – How Did You Do?

Transaction Income Credit Assets Property

Risk Scale

Excessive High Medium Low Compensating

(Poor) (Fair) (Acceptable) (Good) (Excellent)

Scenario #3: High risk transaction, stable with ok credit and debt management, fair commitment of equity, high risk property

Scenario #3 – How Did You Do?

Transaction Income Credit Assets Property

Risk Scale

Excessive High Medium Low Compensating

(Poor) (Fair) (Acceptable) (Good) (Excellent)

Scenario #3: When reviewed, there was information that was left out that when put in, made a difference in the decision. High DTI. Assets were primarily liquid, and allocated in various retirement, 401K and investment accounts.

Re-CapPACKAGING

The object of packaging a loan is to be able to paint a picture that will make sense to your underwriter...

Think about the transaction:

• Can you build a strong case for SISA?

• Do you have compensating factors to effectively offset weak factors?

• Can you match life events to “red flags”?

• Do you have all of the information filled out on your BRF?

• If you were the lender, would you lend the borrower money?

• If you would not lend them money, is there anything you can see in the transaction, that if presently differently, might cause you to reconsider your decision?

ConclusionPACIT

By effectively using the PACIT system, you will be able to get a much better feel for your borrower’s situation. Fully understanding your loan scenario will allow you to formulate and be creative in your presentation to your underwriting staff.

Eliminate as much stress, aggravation, and wasted time by making your file as strong as possible before your submit it. By doing so, you will not only better internal and external customer service, you will also close more loans and…

MAKE MORE MONEY!

Questions

Thank You!