Updated 07/15/2018 to correct All Regs References For Freddie Mac
One thing about the mortgage business you can count on is change, but not everything changes year by year! For example, the core principals of underwriting have always been the “4 C’s of underwriting” which are credit, capacity, capital, and collateral. Some could argue that the thought process of each one of the C’s has slightly changed, but the message is still intact, you need these 4 c’s to make a good loan.
Another oldie but goodie is Fannie Mae Form 1088, no that is not a typo, I did not mean the 1084 from. Form 1088 is the Comparative Income Analysis form, it’s been the same since 1996. The 1088 is part of the three steps an underwriter is supposed to complete to properly analyze a self-employed borrowers income.
These three steps are:
1) Determine if the business shows stable and steady revenues, and stable and steady expenses resulting in stable and steady net taxable income.
2) Determine if the business is solvent
3) Determine the borrower’s income from the business.
Reference FNMA AllRegs
B3-32.2-02 Analyzing Returns for an S corporation
B3-3.2.2-03 Analyzing Returns for a corporation
B3-3.2-1-08 Income or loss for form 1065
Reference for FHLMC Allregs
Freddie Mac Allregs section 5304.1
When I was in auditing we often found loans that underwriters just skipped to step 3 and missed the 500-pound gorilla in the room. That gorilla I am talking about was the borrower’s income seemed level but the business was running out of steam and would not be able to provide the same level of income going forward. This oversight would cause repurchase demands and thousands of dollars of lost revenue paying back the GSE’s to make the loan whole. If the underwriter would have completed the 1088 form we could have avoided many of these issues.
So what does the 1088 do?
1) Evaluates Gross Revenue of the Business, comparing year to year growth or loss.
2) Evaluates Expenses as a percentage of gross revenue, and compares year to year growth or decline in gross expenses
3) Taxable income as a percentage of gross revenue and compares year to year growth or decline in taxable income
Once we have compare a single year the user is required to then compare year over year trends. The great thing about this form is it is fairly easy to complete, just time consuming, it requires up to 21 math calculations to complete. For example, it can show you the business’s taxable income went down from 2012 to 2013 BUT it was because the expenses went up due to a new expansion (for example) so things are ok. Remember a business’s bottom line does not tell its full story, remember year after year Amazon lost money…. Now, look at them!
So don’t forget your 1088, but if you want a much faster way to complete the 1088 come on over to our site www.blueprintio.wpengine.com and go over to the tools section where you will find an online version of the 1088 which is quick, easy, and allows you to print a PDF to fully document your review!
Here’s to reviewing loans like a pro…