As lenders, we have all heard of reps and warrants and programs like Day One Certainty (D1C), but do we really understand them? Lenders rightfully seek out reps and warrant relief where possible to shift risk away from their business, but some lenders are unclear or misinformed on how to truly get the relief they are seeking. Many times people say reps and warrants, and the inference is the entire loan is rep and warranted. However, when you dig more deeply, you will see that is not what is actually provided. If you as a leader want to seek out as much rep and warrant relief as possible, there are three main challenges you will find.
What is Covered?
First, programs like Fannie Mae’s D1C, and the new FNMA Income Calculator and FHLMC AIM program offer income by income relief, not a blanket “all” income relief. These programs operate on verifying each type of income, for example, employment verified by VOI or self-employed income verified by tax data vendors. You only get relief for the income sources that have gone through the program. If you have additional sources of income not supported by these programs, your rep and warrant coverage for the loan is limited. As illustrated in the diagram below, it might be that one income that isn’t rep and warranted that can bring you down, so coverage is key.
Covered Loan Scenarios
Second, not all loan scenarios will work with these tools due to limitations of 3rd party data. For example, business returns that are not provided by the borrower, but a validated 3rd party provider. The second issue is these programs tend to use conservative calculations. As a result, if the income calculation is conservatively low, this pushes some borrowers over the DTI threshold. Many people in the mortgage business think this income is the final decision, but in fact, standard underwriting rules may result in a higher income that meets all guidelines.
Data Entry Errors
Thirdly, lenders will still be on the hook if data entry errors are made. Imagine you are using an approved program, and an error is made in the data entry. In the end, the liability for that will fall to the lender, not the agency.
While these challenges can be limiting, there is a great opportunity through seeking these rep and warrant reliefs and de-risking your operations. Having the peace of mind that you have rep and warrant relief across all incomes, such as what IncomeXpert provides, and not a fractional patchwork of coverage for elements of the loan files will help lenders sleep better at night.
How to maximize reps/warrants coverage
In reality, no company can cover every income and every issue, but this does not mean to wait for that day to come. There is a saying many people have heard: “Don’t let perfect stop you from great.” We have seen lenders pass up massive improvements to their workflow because they analyze a solution they admit has 85% improvement on what they are currently doing, but they want to “buy 100% only.” Any business coach will tell you the key to a great business is the process of continually improving that business each and every day, so take the “wins” everywhere you can. Consider these next steps to get started on your income analysis improvements, and you will see that there is a lot more coverage using this system than just relying on a single rep and warrant provider.
First, lenders must leverage all of the available programs from the major agencies that provide rep and warrant relief. This forms a baseline threshold for lenders to qualify income on loans. And since the agencies are the biggest and have the best coverage, if their income gets you an approval, you can stop here. If not, lenders must move to the second level.
The second step is leveraging a 3rd party such as Blueprint and their IncomeXpert product to evaluate the scenario. IncomeXpert will provide guideline compliant income calculations that are typically higher than the conservative results offered by the agency programs. Furthermore, IncomeXpert supports all agency income sources and offers reps and warrants across all income types.
The third step is getting rep and warrant relief on data entry errors by using an automated scanning and data entry software like IncomeXpert PLUS. IncomeXpert PLUS will automatically scan and populate the loan file with data from the uploaded documents, eliminating the data entry errors. Furthermore, Blueprint provides rep and warrant relief on the data entry.
Summary
At Blueprint, we frequently have clients using this three-tier approach to get more loans approved with a compliant qualifying income. Lenders use the Fannie / Freddie values where they can, utilize the higher IncomeXpert values where needed, and leverage IncomeXpert PLUS to get the relief on data entry to result in more loans through the system with full rep and warrant relief.
As you might expect, the misunderstandings of agency guidelines are as plentiful as the misunderstandings about reps and warrants. Through the 3 million loans Blueprint has processed, we looked back at the most common errors and guideline mistakes lenders made. We created this report to help lenders see if they are susceptible to these issues. If you would like a copy of this report, click the link below and we will send you a copy.