The life of a mortgage loan

In this series, we will examine the path of a mortgage loan from application, processing and closing, and discover how each area within GMAC Mortgage makes an impact on it. First, up, the application, from a loan officer’s point of view.

Step One: the Application

Every sales professional gets nervous once in a while. Even after practicing what we are going to say, and having met with the clients before to discuss their financial goals and challenges, the butterflies may still be in the pit of our stomach.

As I walk up to the clients’ home to complete the application, I think back to the first meeting we had over the telephone when we determined what type of loan program would best meet their needs. In this case, it was a 30-year fixed rate mortgage, because the house they are moving to is one they plan on keeping for the long run, and because they like payment stability because it fits better into their tight budget.

I knock and when the wife opens the door, I smile warmly and introduce my self. All of the nervousness suddenly disappears as the “game” begins.

I walk in and take a moment to view their home, making a comment of their choice of wall coverings and noting the newly refinished wood flooring. I also see that they have the same type of countertops that my wife and I have chosen for our kitchen. We exchange niceties and take our places at the dining room table.

The husband has been unusually quiet and has only offered to shake my hand. To break the ice I ask a few questions on hobbies or points of interest. He tells me that he enjoys golf and asks what my handicap is. I confess that I have only tried the game a handful of times and have modest success in controlling that little white ball. I go on to say, “it always looks fun, until I take that first discouraging swing.” He smiles and tells me that a little practice goes a long way.

In respect for their time, I bring the conversation to the project at hand. I review the goals that were discussed in our initial conversations and begin to show examples of how GMAC Mortgage can meet those goals. We cover the details of their possible monthly payments, estimated closing costs, and the challenges we may have bringing it all together. They seem to be completely with me the whole time. As we talk, I ask questions about their income and debts, along with information about the property they are moving to and the amount they wish to borrow. When all of that information is gathered in the application, I ask for their endorsement.

“Wait a minute. We want to think about it,” the husband says. As a professional, I’ve heard this before and know that these words often times are covering a deeper reason or area of concern. Being a true professional I know I must not panic. I dig deeper, asking about their concerns and then show how we can dispel those concerns.

His wife adds, “We were not going to make any decisions tonight. We want to sleep on it.”

I realize that they have made a pact with each other before I even arrived at their home. I ask more questions and finally, uncover that their concern is the desire to shop for a possible lower interest rate. While I explain again that rate alone is not the most important factor, but rather the “annual percentage rate” or APR, which includes the rate, plus the fees, they pull out paperwork from another lender. Glancing at the paperwork, it’s easy to see that the rate they were offered was actually lower, but the higher fees charged raised the APR higher than the one we offer. We chat for a while and go over the specifics.

The feeling in the air is now relaxed and I ask if there are any other reasons for not moving forward with the proposal I have offered today. The husband hesitates only for a moment and nods to his wife. Without another word, I again turn the documents back toward the clients and set my pen within easy reach. They sign. Confidently, I continue as if the conversation never lost momentum.

The rest of the appointment goes without issue and they seem very happy with their decision. As I begin to leave their home with a signed application in hand they walk me to the door. I step off the porch the husband thanks me for taking the extra time to answer their questions and concerns. With a smile and a wink he tells me he looks forward to seeing me on the golf course.

Step Two: Processing

Once the loan officer completes the application as reported in Step 1, the next step may begin.

The Customer Loan Specialist (CLS) or processor must acknowledge the new loan in the loan originations system. Once the loan is placed in the status of “received by processor” the processing function begins.

The processor will ensure that the file is stacked properly by checking the placement of documentation against a stacking order sheet. The processor will print a product matrix and check it against the information listed on the loan officer information sheet, the file itself, and on the loan originations system.

The next step is to ensure that all disclosures are in the file, that they are the correct version of the disclosure forms, and that they have been completed properly.

If all disclosures check out, the processor begins to calculate the income/assets based on the product selected. All information must be validated, which includes income, assets, contracts, etc. While going through the file, it is important that the processor checks that all conditions required through Desktop Underwriting (DU), Fannie Mae’s automated underwriting system, are met. If not, a list must be made for the missing conditions. There may be instances where information, once validated, needs to be updated or changed and, therefore, DU will need to run a second time.

Once all of these steps are complete, it is time to set the conditions in the originations system. The status of the loan also needs to change. For example, it must indicate it is “submitted for final approval” or “submitted for conditional approval.”

If the processor is DU certified they can underwrite the file themselves and change the status to final approval or pre-closing complete, depending upon the file, and send all documents to closing. Notes are entered onto the 1008 (transmittal sheet) and the submission package is printed. The package includes the 1003, 1008, and approval submission form.

The next step is called the “welcome call.” The purpose of this call is to inform the customer of the status of their loan and to obtain any outstanding conditions, if necessary. At the completion of the call, all notes are logged into the originations, and the processor will contact the loan officer to discuss the updates.

Once the file is ready for submission, a copy of the file is made and an underwriting cover sheet is completed. The file is packaged and shipped to underwriting (if necessary) or directly to closing (if DU approved) where the life of the loan continues.

Step Three: Underwriting

After the information on the loan application has been validated by the processor, the loan is ready to be underwritten. Usually, a trained delegated underwriter reviews the file, analyzes the creditworthiness of the borrower, and renders a decision based on underwriting guidelines. Increasingly, though, these tasks are performed by automated underwriting as mentioned in the last segment. In either case, here are the basic items considered in the process:

Debt
One of the first items a delegated underwriter determines is the borrower’s proposed monthly mortgage payment and their other monthly debt obligations. The mortgage payment would include monthly principal and interest payments, and in some cases, 1/12th of the annual property taxes and insurance, and/or other fees such as condominium or homeowners’ fees. The monthly debt obligations include any outstanding credit such as credit cards, car loans, student loans or other borrower obligations.

Monthly Income
Another important component is determining the borrower’s income. The income of all borrowers and co-borrowers is included in the calculation. The income can be derived from several sources, but it must be supported by historical documentation and have a high likelihood of continuing.

Income-to-Debt Ratios
After determining the monthly income of the borrowers, the monthly housing expenses, and the total monthly debt obligations, the delegated underwriting authority calculates both expenses to determine if the borrowers can meet their obligations.

The Down Payment and Funds to Close
When the proposed loan is used to finance the purchase of a home, underwriters will evaluate the source of the funds for the down payment and closing costs. The funds may be in the form of bank account funds, stocks, bond and mutual funds, the sale of an existing property, or gifts from family members.

Credit Analysis
Determining the creditworthiness of the borrower is a crucial part of the underwriting process. The delegated underwriting authority will review the borrower’s credit report to find evidence of their past willingness to repay the debt as agreed. At times it may be necessary to supplement the credit report with additional documentation to assist in developing the borrower’s credit profile.

The Appraisal
A delegated underwriting authority reviews the property appraisal or the acceptable valuation source to assure that it meets the necessary guidelines, and sometimes request additional information to substantiate the home’s value. This ensures that the loan amount is in line with the property’s value.

Compensating Factors
A delegated underwriter may consider variables in their analysis. No two borrowers have the same credit and income profiles and all of the information in the loan file is evaluated to render a decision. For example, borrowers may fall outside the traditional guidelines, but have strong compensating factors that reflect low credit risk. All factors are weighed in the loan’s final decision.

The Final Decision
After the delegated underwriting authority reviews the entire loan file, there can be four possible outcomes: approval, approved with conditions, suspended or denied. If approved with conditions, additional documentation is required before making a final decision. If suspended, the underwriting authority cannot make a decision because the file is either incomplete or there are many unanswered questions. Once a loan is approved, it moves onto the next step, closing.

Step Four: Closing

After the loan has completed the underwriting process and is approved (as outlined in part three), the file is sent to closing. The closing process consists of four major components: verification, document preparation, signing and funding. There are also four major players in this process: the borrowers, the broker (if applicable), the title company, and the lender. While no two closings are ever the same, the general process is the same for all.

The verification process is typically performed by the lender. This is the part of the process where the closer verifies all of the information in the file, which typically includes insurance information, title work, disclosures, and any other documents that have been signed, or need to be signed, by the borrower.

Document preparation is a step exclusively completed by the closer. In today’s mortgage industry, all or most of these steps are completed by computer. The closer confirms that the documents produced match the loan application, lock and all program guidelines set by the lender. Once these documents are produced, they are sent (generally electronically) to the title or escrow company.

On the scheduled day of closing, the borrower signs the paperwork (note, deed, disclosures, etc.) as a final step in the loan process. The title company is present to notarize the documents and ensure that the documents are signed correctly. The broker (if applicable) is generally present for any last minute questions regarding the paperwork.

The funding of a loan, where the payment of loan money from the lender to the borrower is disbursed, can take place at two different times in the closing process. If the loan transaction is a purchase, or a refinance on a property that isn’t a primary residence, the funds will usually arrive the morning of the closing so that they are available as soon as the borrower signs. However, if a transaction is a refinance on a primary residence, there is a three day waiting period to receive funding. Most lenders will use this time to review the loan package to make sure the borrower has signed correctly. The funds are always sent to the title company, who will disburse the funds accordingly to the borrower, broker, seller, etc.

Different lenders have slightly different ways to perform these functions. Closers that prepare documents sometimes do not fund their own loans. However, every lender does everything they can to ensure the processes are completed properly. If the closing of a loan is not completed properly, it can negate all of the work done by the players in the life of a loan.

Step Five: Document Custody

Once a first mortgage loan closes and funds, as described in Step 4, the document custody process begins. This step typically occurs about five days after funding.

Since GMAC Mortgage originates loans from three different channels (Retail, Ditech, and Direct), the path to Document Custody varies. If a loan originates in Retail, for example, the file travels directly to Document Custody after funding, where the “collateral” is imaged. The collateral consists of the file’s documents, such as the Note and Mortgage Deed, which must be in order to sell the loan to an investor.

The scanning of collateral is completed and stored on an application referred to as ImageWeb. The images of the documents are stored should they need to be viewed in the future by anyone in the corporation.

After imaging, the collateral documents are audited (also known as pre-certification) to make sure the information on the collateral is accurate and meets the requirements of investors, preparing it for sale (also known as delivery) to the Secondary Market. The file is stored in the vault within the Document Custody area in Horsham until the investor delivery is completed. Once the collateral is received the entire Document Custody/Audit process is typically completed within 48 hours.

If a loan originates in Direct, the file is sent to Enterprise Records Management (ERM) after funding. ERM processes the documents and a 3rd party vendor images the collateral before forwarding to the Document Custody area where it is audited. From there it is placed in a vault in Fort Washington until sale. Ditech files are also sent to a 3rd party vendor to be imaged and then sent to Document Custody, where the process is the same as it is with Retail and Direct.

Both vaults in Fort Washington and Waterloo meet all agency requirements and are two-hour fire rated to keep the documents safe.

Step Six: Allocation or Sale of the Loan

After a loan is audited and placed in the vault as outlined in Step 5, it is marked in “good Note” status. Its next stop is Capital Markets Securitization and Allocation, where the loan prepares for sale. Capital Markets receives shelf reports listing the marked loans so the process can begin.

The process differs slightly depending if the loan is conforming (a loan that meets the requirements to be eligible for purchase by Fannie Mae, Freddie Mac or Ginnie Mae) or non-conforming (a loan that doesn’t meet the standards set by Fannie, Freddie or Ginnie; the most common reason is that it exceeds the allowable loan limit, which is also known as a jumbo loan).

For conforming loans, the process is automated. Loans are marked in a category of allocation depending on rate, loan type and term, and pooled together in similar groups for sale to the Secondary Market. The Secondary Market is made up of investors—some agency and some private. These institutions act as a middleman purchasing loans from lenders securitizing them for investments.

Once the loans are grouped in pools they are sent for “Delivery.” We’ll cover this step in detail in the next installment of this series. After delivery, the loan circles back to Capital Markets to prepare the paperwork and to settle the pool.

“For instance, GMAC Mortgage originates fixed rate conforming loans with similar interest rates,” says Patty Taylor, vice president and manager of securitization and allocation. “We may group these loans together and securitize them in a $20 million pool with an agency, such as Fannie Mae. Fannie Mae will issue mortgage-backed securities backed up by those loans, and GMAC Mortgage will then sell the security on Wall Street to an investor.” The securities are settled at specific times of the month depending upon loan type, such as 30-year and 15-year fixed, ARMs, etc.

With non-conforming loans, the process is similar but less automated. Capital Markets examines the shelf reports, pools the loans manually and negotiates contracts with investors or securitizes them in our own private label issuances.

If a loan is not in “good Note” status, (which may mean the original note is not in the file or a document is not properly signed) it is sent back to Document Custody to fix before the allocation process begins.

In Step 7 of the loan process, we’ll cover the loan’s delivery, as noted above.

Step Seven: Loan Delivery

The Delivery and Collateral Curative Department handles the delivery of first and second mortgages to all GSEs (Government Sponsored Enterprises such as Fannie Mae, Freddie Mac and Ginnie Mae) or to private investors (Wall Street firms). Once a loan is allocated, or made ready for sale, it is placed in a pool and delivered to one of the GSEs or to a private investor.

The group is essentially the last stop in the origination process. The delivery process has changed over the last few years. The GSEs and Wall Street firms now require more data, which means all of the origination data in the file must be revalidated.

For example, since the majority of loans originated by GMAC Mortgage are purchased by Fannie Mae, they will rerun the last DU (Desktop Underwriter) to recheck the LTV (loan-to-value ratio – the ratio of the amount of the loan to the appraised value or sales price of the property), the CLTV (combined loan-to-value ratio – the principal balance of all mortgages on the property, divided by the value of the property), the FICO score (a customer’s credit score) and the debt-to-income ratio (the borrower’s monthly payment on long-term debts divided by their gross monthly income).

If the file passes the revalidation, the process is complete. If not, the loan is removed from the pool and is sent to the Collateral Curative group for “fixing.” Data errors are the most common, which typically means the investor or product guidelines have not been met. If the problem is at the product level, for example, the file must meet all of the guidelines and requirements of that particular loan type. Whatever the problem, the group strives to cure it so it can be delivered.

Delivery turnaround time is typically 24 to 48 hours. The group delivered approximately $4 to $5 billion in loans each month in 2006, for example. Their highest month ever during the refinance boom topped $10 billion.

When delivering loans to a private investor, the process differs slightly. The Allocation Department sends much of the information along with the files, and the Delivery group performs a smaller verification and validation of the information before it is delivered.

The goal of Loan Delivery is to sell all loans and not have too much on the balance sheets. They usually turn around 97% percent of all loans that come through the department the first time.

Step 8: What is Mortgage Servicing?

The term mortgage servicing refers to the loan administration that follows once the loan goes to settlement and funds.

There are basically two forms of mortgage servicing: “Primary Servicing” and “Master Servicing”. Primary servicing includes functions that interact with homeowners and loan investors while Master Servicing doesn’t include a homeowner segment and relates to the management of underlying loan servicers, the reporting of cash and data exclusively for loan investors.

The Residential Finance Group (RFG) has both servicing operations under the Enterprise Servicing Group. Primary mortgage loan servicing includes the management of loans originated by our lending channels and/or secured through our sub-servicing business. Primary loan servicing begins after the first mortgage or home equity loan funds and is sold to an investor. GMAC Mortgage retains the “servicing rights” as an asset and primary and master servicing care enhance the value of that asset. The primary servicing group interacts with homeowners through customer service operations and retention/cross-sell programs. Primary servicing administers the fundamental functional aspects of the mortgage loan which include the administration and processing of mortgage loan payments, escrow management including taxes and insurance, investor reporting and loan accounting.

Primary servicing also manages the performance of the mortgage loans for investors by ensuring homeowners remit their payments and that the value of the mortgage asset is enhanced through low delinquency and loss severity rates. Master Servicing manages the underlying mortgage loan cash flows and data by interacting with end investors and mortgage loan trusts to where the loans are sold.

Larger servicers, like RFG, build their servicing portfolios by originating, acquiring and subservicing loans. We originate loans through our retail and direct lending platforms, we acquire loans through our business lending channels and we acquire loans through our subservicing channel. These loans are serviced under our brand or a private label brand (when we assume the identity of another) in accordance with the policies and procedures provided by the loan investor.


Step 9: More Mortgage Servicing

It’s understandable that once a loan closes, a customer may believe that the loan process is complete. In truth, the process is just beginning, especially when you take into consideration that they’ll be making payments for up to 30 years.

Mortgage servicing is simply the loan administration after the loan goes to settlement and funds. Investors like Freddie Mac and Fannie Mae rely on mortgage servicers to collect payments, disburse taxes and insurance payments and provide a multitude of services on their behalf. In exchange, the mortgage servicer collects a fee for their efforts.

When a loan arrives in servicing, it is either one that originated from our Retail, Direct, Wholesale/Correspondent channels or is a sub-serviced loan from one of our fee-based servicing clients. For this series, we will highlight servicing for all types of loans.

The first step in loan servicing is to board the loan onto the MortgageServ servicing platform. Basic customer care information is then sent to a customer. This information is a way of explaining the servicing process and welcoming the customer to the GMAC Mortgage family.

The customer care information also outlines the various ways a customer can pay their mortgage, such as automatic payments, which can be deducted from a checking/savings account, a bi-weekly payment option (also deducted from a checking/savings account) that may reduce the term of a mortgage and save the customer thousands of dollars in interest payments, online payments through gmacmortgage.com, pay by phone, or standard payments by mail. The customer is able to decide which method is best for them.

The Escrow Account
Another function of the servicing process is maintaining the customer’s escrow account. An escrow account is an account set up by a lender for such obligations as real estate taxes and homeowners insurance. A customer’s monthly mortgage payment often includes principal and interest, along with 1/12 of an installment for their yearly taxes and homeowners insurance. When these bills become due, the lender disburses the funds on behalf of the borrower, and the payment is taken from the escrow account.

Escrow accounts are maintained for the majority of customers, about 75%, and they are analyzed once a year. The results of the analysis are sent to customers, and monthly payments, if necessary, are adjusted accordingly.

Investor Reporting
While certain areas of servicing ensure functions are performed properly on behalf of the customer, Investor Reporting makes certain that the requirements of investors are met. The group ensures that from a customer’s mortgage payment each month, the appropriate funds are sent to the appropriate investor.

The Investor Reporting group is responsible for reporting, remitting and reconciling principal and interest payments associated with loan pools sold to our investors (Fannie Mae, Freddie Mac, Ginnie Mae and Private Investors) along with our GMAC Mortgage owned investment portfolios. The Investor team has consistently been in the top Tier and top Peak Performer rankings for Freddie Mac and Fannie Mae over the past several years.

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