Fannie Mae is currently preparing to update its Desktop Underwriter to its newest version, 10.2, after seeing an increase in high debt-to-income mortgages in the fourth quarter of 2017.
The GSE will implement updates over the weekend of March 17, and it will include decreased risk layering for loans with higher DTIs, according to an announcement the company released back in January.
“Last year’s update, DU Version 10.1, enabled loans with debt-to-income ratios above 45%, up to 50%, to rely on DU’s comprehensive risk assessment, and removed specific rules that had previously set maximum loan-to-value ratio and minimum reserves requirements for those loans,” Fannie Mae said previously in its release. “After assessing the profile of loans delivered to us since the DU 10.1 changes went into effect, we are fine-tuning DU’s risk assessment to limit risk layering.”
Last year, before the change took place to allow for mortgages with higher DTIs under Desktop Underwriter, Fannie Mae explained it expected mortgages with DTIs higher than 40% to increase. However, it also pointed out that while the update would allow Desktop Underwriter to look at the loans, 45% to 50% DTI mortgages were already accepted by the GSE before that under limited circumstances.
“We expect the DU update will result in more loans with DTI ratios between 45% and 50% receiving an Approve/Eligible recommendation from DU: approximately 3% to 4% of recent applications did not receive an Approve/Eligible recommendation but would receive one in DU 10.1 with these changes,” Fannie Mae Vice President of Single-Family Credit Policy said back in July.
However, after reviewing the loans that flooded in during the fourth quarter, Fannie Mae announced it would put forth another update to its risk assessment system.
In its 10K annual report, Fannie Mae disclosed that its mortgages with DTIs higher than 45% surged to 20% in the fourth quarter. From the filing:
Due in part to our implementation of this change, the percentage of our non-Refi Plus single-family acquisitions associated with borrower debt-to-income ratios above 45% increased to 20% in the fourth quarter of 2017, compared with 10% for all of 2017 and 5% for all of 2016. After assessing the loan profile of loans delivered to us since the DU Version 10.1 changes went into effect, we are revising DU’s risk assessment to limit risk layering.
And some MI companies also noticed the riskier trend, and began to fight back. At first, HousingWire outlined plans from MGIC and Genworth to increase their standards on high DTI loans, but as it turns out, that was just the tip of the iceberg. Many other MI companies, including Essent, Radian and National MI, announced they will also raise their standards this month.
“DU Version 10.2 includes an adjustment to the Desktop Underwriter credit risk assessment to limits risk layering and builds on the simplification we introduced last summer with DU Version 10.1,” Fannie Mae told HousingWire. “There is no change to the risk factors evaluated by DU.”
“This update is prudent and active risk management at work, and will help lenders to better manage default risk while continuing to provide sustainable homeownership options to borrowers,” Fannie Mae concluded.