Freddie Mac · OTC:FMCC
Freddie Mac — Earnings Presentation (February 2021)
48 slides from Freddie Mac's earnings presentation, Feb 23, 2021
Slide 1: Let's QC Quarterly Call Series – Community Lending
Let’s QC Quarterly Call Series – Community Lending QC Roadmap – Defects, Pitfalls and Guidance Host: Steven Glancey Speakers: Rick Holcombe, Matt Puglise and Mary Simon February 23, 2021
Slide 2: Welcome!
Welcome! 2021 Q1 Let’s QC Quarterly Call – Community Lending Series Freddie Mac | Do Not Distribute 2
Slide 3: Goal of Call Series
Let’s QC Quarterly Call Series – Community Lending Goal of Call Series 01 Provide training and guidance 02 Allow transparency and insight into our Quality Control loan review process 03 Provide useful information to incorporate into your Underwriting and QC process Freddie Mac | Do Not Distribute 3
Slide 4: QC Roadmap – Defects, Pitfalls and Guidance
Agenda QC Roadmap – Defects, Pitfalls and Guidance Topic 1: Topic 2: Topic 3: Topic 4: Defect Trending Self-Employed Self-Employed Underwriting Borrowers in a working for a Self-Employed C-Corporation Family Member Borrowers During Owned Business COVID-19 Freddie Mac | Do Not Distribute 4
Slide 5: Topic 1 – Defect Trending
Topic 1 – Defect Trending • Defects from 2020 Q4 completed reviews • Performing Loan Samples only • Focus on defects appearing in > 5 loans • Mostly Q1-Q2 2020 funding
Slide 6: Top 10 Defects Overall
Topic 1 – Defect Trending Top 10 Defects Overall Out of 2,072 loans decisioned in Q4 2020 we found 479 defects across 366 unique loans. Category Defect # of Loans 1. Legal / Insurance Tax/Ins missing or insufficient 95 2. Liabilities Liability doc missing or insufficient 54 3. Collateral Appraisal f
Slide 7: Top 10 Defects Overall (continued)
Topic 1 – Defect Trending Top 10 Defects Overall (continued) Out of 2,072 loans decisioned in Q4 2020 we found 479 defects across 366 unique loans. Category Defect # of Loans 6. Assets Insufficient funds to close 25 7. Income COVID-19 temporary income violation 13 8. Liabilities Docs to exclude debt
Slide 8: Top 10 Defects Overall (continued) – Key Takeaways
Topic 1 – Defect Trending Top 10 Defects Overall (continued) Key Takeaways Our top Fraud related defects are 01 Income and Liabilities as a whole still lead the industry in defects 03 low and Fraud has been declining; however, Freddie Mac remains vigilant in this space 02 BK and Credit Event defects
Slide 9: Top Defects Related to Transaction
Topic 1 – Defect Trending Top Defects Related to Transaction Defect Primary Area(s) Tax/Insurance missing or insufficient Purchases, Owner Insufficient funds to close Occupied & Loan Product Advisor Liability payment calculated incorrectly (NCO & Cash-Out evenly split with purchases) BK docs missing
Slide 10: Top Defects Related to Transaction (continued)
Topic 1 – Defect Trending Top Defects Related to Transaction (continued) Key Takeaways 01 The Freddie Edge is evident in the use of tools from the Freddie Mac Loan Advisor toolbox 02 Currently, we are seeing a high level of Owner-Occupied transactions, both in your segment and the industry 03 COVID-
Slide 11: Defects for Second Homes and Investment Properties
Topic 1 – Defect Trending Defects for Second Homes and Investment Properties Income Taxes and Insurance Liability documents miscalculated documents missing missing or insufficient or insufficient Freddie Mac | Do Not Distribute 11
Slide 12: Questions?
| ‘SI Questions?
Slide 13: Topic 2 – Self-Employed Borrowers in a C-Corporation
Topic 2 – Self-Employed Borrowers in a C-Corporation
Slide 14: Definition of a Self-Employed Borrower
Topic 2 – Self-Employed Borrowers in a C-Corporation Definition of a Self-Employed Borrower 5304.1 Stable monthly income and documentation requirements for self-employed Borrowers (a) Self-employed Borrower definition and verification of ownership interest percentage A Borrower who has an ownership
Slide 15: Excerpts of Borrower's Application
Topic 2 – Self-Employed Borrowers in a C-Corporation Excerpts of Borrower’s Application Freddie Mac | Do Not Distribute 15
Slide 16: Loan Product Advisor Feedback & Guide Reference
Topic 2 – Self-Employed Borrowers in a C-Corporation Loan Product Advisor Feedback & Guide Reference Loan Product Advisor Feedback Message 5401.2: Monthly debt payment-to-income ratio (b) Liabilities that may be excluded from the monthly debt payment-to-income ratio (i) Contingent liabilities A cont
Slide 17: Lender Documentation from Borrower
Topic 2 – Self-Employed Borrowers in a C-Corporation Lender Documentation from Borrower VOE indicated the Borrower’s salary is $15,000 monthly, and that his salary in the prior two years was $132,000 which worked out to $11,000 monthly. • tax return matched the $132,000 income since the salary was i
Slide 18: Red Flag #1
Topic 2 – Self-Employed Borrowers in a C-Corporation • Lender’s documentation included 12 cancelled checks Red Flag #1 for each of the car loans to prove the business paid the loans. • The first car loan paid by the business was in the Borrower’s name. • Second car loan paid by the business was in t
Slide 19: Red Flag #2
Topic 2 – Self-Employed Borrowers in a C-Corporation Red Flag #2 The company’s website indicated the names of the company’s seven officers, two of whom had the same last name as the Borrower. Freddie Mac | Do Not Distribute 19
Slide 20: Repurchase
Topic 2 – Self-Employed Borrowers in a C-Corporation CAPACITY The Borrowers capacity to repay the mortgage was not established. According to public records, the Borrower founded the Great Widget Corporation in 2016, and he and the co-borrower are officers of the company. Freddie Mac concluded the Bo
Slide 21: Appeal
Topic 2 – Self-Employed Borrowers in a C-Corporation Appeal To Whom It May Concern: I represent the Anytown Accounting Firm. Our company has prepared the personal tax returns for Joe and Jane Doe for many years, and we have prepared the corporate tax returns for the Great Widget Corporation since it
Slide 22: Guide 5304.1 (d)
Topic 2 – Self-Employed Borrowers in a C-Corporation Guide 5304.1 (d) 5304.1 Stable monthly income and documentation requirements for self-employed Borrowers (d) Business and income analysis The following chart contains requirements and guidance pertaining to business and income analysis: Analysis T
Slide 23: Scenario One – Takeaways
Topic 2 – Self-Employed Borrowers in a C-Corporation Scenario One – Takeaways If the Borrower needs corporate income in addition to the W-2 income, there are additional steps necessary as outlined in the Guide, Section 5304.1 01 Investigate Red Flags 03 • • analysis of the impact to the business if
Slide 24: Questions?
| ‘SI Questions?
Slide 25: Topic 3 – Self-Employed working for a Family Member Owned Business
Topic 3 – Self-Employed working for a Family Member Owned Business
Slide 26: Loan Product Advisor Feedback & Loan Application
Topic 3 – Self-Employed working for a Family Member Owned Business Loan Product Advisor Feedback & Loan Application Loan Product Advisor messaging required lender to obtain W2 and paystub. Loan application Freddie Mac | Do Not Distribute 26
Slide 27: Qualifying Income Documents
Topic 3 – Self-Employed working for a Family Member Owned Business Qualifying Income Documents • Qualifying income as $11,000 per month into Loan Product Advisor, which would amount to $132,000 annually in base salary. • W-2 from the previous year reflects total earnings of $88,000. • The current pa
Slide 28: Guide 5301.1 (c)
Topic 3 – Self-Employed working for a Family Member Owned Business Guide 5301.1 (c) 5301.1 General requirements for all stable monthly income (c) Income stability and history requirements The Seller must consider the length of history of the income and whether the earnings have been level and consis
Slide 29: Red Flags
Topic 3 – Self-Employed working for a Family Member Owned Business Red Flags • The Borrower (John Homebuyer) works for a company called Homebuyer Manufacturing Corp with the person who completed the Verification having the same last name as the Borrower (Ron Homebuyer). • The person who completed th
Slide 30: Guide 5302.4 (c)
Topic 3 – Self-Employed working for a Family Member Owned Business Guide 5302.4 (c) Income types and/or employment 5302.4 Tax returns and tax return Location characteristics information: Documentation and verification requirements Tip income – Cash and charge tips reported on IRS Section 5303.3 Form
Slide 31: Appeal
Topic 3 – Self-Employed working for a Family Member Owned Business Appeal They were able to provide the previous two years of tax returns which contained the schedule K-1 reflecting the Borrower having a 22% ownership interest in the business for both tax filing years. The K-1 did reflect business i
Slide 32: Guide 5303.2(d)
Topic 3 – Self-Employed working for a Family Member Owned Business Guide 5303.2(d) 5303.2 Primary and secondary employment and income (d) Employment characteristics For all employment characteristics below, the Seller must determine whether the employment represents primary or secondary employment a
Slide 33: Scenario Two – Takeaways
Topic 3 – Self-Employed working for a Family Member Owned Business Scenario Two – Takeaways 01 Use caution whenever a Borrower receives a significant pay increase in the current year 02 Look for red flags on loan documentation such as inconsistencies on the Verbal Verification of Employment 03 Obtai
Slide 34: Summary
Topic 2 & 3 Summary Key Takeaways 01 Know your Borrower’s employment status 03 Document the income according to the Guide If tax returns are required to calculate 02 Look out for Red Flags 04 income, raises that occurred after the last tax return filed should not be used to qualify Freddie Mac | Do
Slide 35: Questions?
| ‘SI Questions?
Slide 36: Topic 4 – Underwriting Self-Employed Borrowers During COVID-19
Topic 4 – Underwriting Self- Employed Borrowers During COVID-19
Slide 37: Content Overview
Topic 4 – Underwriting Self-Employed Borrowers During COVID-19 Content 01 Supporting Market Liquidity & Development Background Overview 02 Identifying Factors to Consider 03 SE Income – Pandemic Data Snapshot (U.S. Census Bureau) 04 Guidance for the Application of Pandemic Requirements 05 Key Remind
Slide 38: Supporting Market Liquidity | Development Background
Topic 4 – Underwriting Self-Employed Borrowers During COVID-19 Supporting Market Liquidity| Development Background Supporting Market Liquidity while Promoting Sustainable Homeownership “Income from a business that has been negatively impacted by changing conditions is not necessarily ineligible for
Slide 39: Identifying Factors | 3 Primary Business Scenario Segments
Topic 4 – Underwriting Self-Employed Borrowers During COVID-19 Identifying Factors | 3 Primary Business Scenario Segments IDENTIFYING FACTORS TO CONSIDER – BUSINESS SCENARIO SEGMENTS Determining the extent to which a business has been impacted by COVID-19 Pandemic Impacts to Businesses 3 Primary Bus
Slide 40: Identifying Factors | Pandemic Related Factors to Consider
Topic 4 – Underwriting Self-Employed Borrowers During COVID-19 Identifying Factors | Pandemic Related Factors to Consider Determining the extent to which a business has been impacted by COVID-19 Examples – Refer to Bulletin 2020-44 Seller must consider pandemic-related factors which may include, but
Slide 41: U.S Census Bureau | Small Business Pulse Survey (SBPS)
Topic 4 – Underwriting Self-Employed Borrowers During COVID-19 U.S Census Bureau | Small Business Pulse Survey (SBPS) PANDEMIC DATA SNAPSHOT Census Survey Question: In the last week, did this business have a Census Survey Question: change in operating revenues/ sales/receipts, not including any fina
Slide 42: Baseline Requirement Excerpts
Topic 4 – Underwriting Self-Employed Borrowers During COVID-19 Baseline Requirement Excerpts Baseline Requirement Excerpts Review the YTD profit and loss statement (unaudited or audited), business account statements, and Impact 1. all other relevant factors and documentation to determine the extent
Slide 43: Documentation: Minimum – Supplemental | Review Guidance
Topic 4 – Underwriting Self-Employed Borrowers During COVID-19 Documentation: Minimum – Supplemental | Review Guidance Minimum Documentation – Is it enough? ▪ Unaudited signed YTD P&L and ▪ 3 months business bank statements dated no more than 60 days prior to note date Additional documentation may b
Slide 44: YTD P&L – Business Bank Statements | Review Guidance
Topic 4 – Underwriting Self-Employed Borrowers During COVID-19 YTD P&L – Business Bank Statements | Review Guidance YTD P&L Statements – Review Guidance Quarterly P&L Statements are recommended to enable a comprehensive analysis – • Provides clearer view of revenue throughout the various pandemic st
Slide 45: Summary
Topic 4 – Underwriting Self-Employed Borrowers During COVID-19 Summary Key Takeaways 03 Dates and the most recent information are important Focus on pandemic revenue impact 01 Written Income Analysis 04 Ensure the 2020 tax returns are obtained as soon as they become available Determine business segm
Slide 46: Questions?
| ‘SI Questions?
Slide 47: Additional Resources
Additional Resources Freddie Mac Learning Customer Contact Support Freddie Mac Single-Family Center sf.FreddieMac.com Webinar – COVID-19 Temporary Appraisal Guidelines 1-800-FREDDIE Freddie Mac Single-Family Interactive Tool – Temporary Credit Seller/Servicer Guide Requirements and Appraisal Flexibi
Slide 48: Thank You
Let’s QC Quarterly Call Series – Community Lending Thank You