One of Fannie Mae's new loan-quality guidelines goes against the grain of traditional mathematics teaching.
As part of an initiative to make sure lenders deliver loans that meet its requirements, the GSE is changing how it calculates LTVs. They will be shortened to two decimal places, then rounded up — and only up — to the next whole percent. So while 80.001% would become 80%, a loan-to-value ratio of 96.01% would become 97%.
The latter example is at odds with a widely held rule of rounding: that whole numbers are rounded up only when the first decimal is the number 5 or higher (so 96.01% is rounded to 96% and 96.51% to 97%).
Observers said that while Fannie's formula bucks tradition, it is prudent to err on the side of caution when determining a borrower's leverage.
"The agency is trying to protect itself," said Marco Avellaneda, a professor of mathematical finance at New York University and a partner at Finance Concepts, a risk management consulting firm.
Either way, "I don't think it will have a material impact," Avellaneda said. "If the round-up was to the nearest 10%, then you could complain. … If it's a round up to the 1%, it's not material."
He compared loan-to-value ratios to driving speeds. "If you're going at 55.1 miles an hour, are you going above the speed limit?"
The new rounding policy will take effect for all loans or mortgage-backed securities submitted to Fannie beginning on Jan. 3 of next year, the GSE said.
"Lenders must ensure that the LTV ratio provided at delivery uses this methodology or one that will result in a higher LTV ratio," Marianne E. Sullivan, a senior vice president and Fannie's single-family chief risk officer, wrote in a memo to lenders last week.
Fannie launched the loan-quality initiative, which covers a range of topics, to help lenders avoid ending up having to buy back ineligible loans, she wrote. Such buybacks are a growing source of tension in lender-GSE relations.
Meanwhile, Fannie Mae is also encouraging lenders to pull a second credit report before a mortgage closes to check if the borrower has taken on any additional debts since the outset of the application process.
As part of the loan-quality initiative, the GSE said, it now requires lenders to include "all debts of the borrower incurred or closed up to and concurrent with the closing of the subject mortgage" on the final application. Refreshing a credit report just prior to closing may uncover additional debt, Fannie said in a one-page tip sheet sent to lenders this week.
Chris Thomas, the owner of Mortgage Support Services, a Westminster, Colo., correspondent lender, said the new rule is likely to delay closings at the very least, since any newly discovered liabilities will force a lender to send a loan back to underwriting.
But he predicted that many lenders would miss the forest for the trees.
"You know what originators are going to complain about the most? The cost of the new report," he quipped.
