Understand Top Defects to Help Strengthen Loan Quality

Below are Fannie Mae's top 10 *initial significant defects identified in a random sampling of loans acquired by Fannie Mae in Q4 of 2024 (October 2024 - December 2024).

• Rental income not documented was cited as the top defect for this period.
  • The Selling Guide requires the lease to support the rental income and either Form 1007 (Comparable Rent Schedule) or proof of rent payments. Files cited with missing documents included 1) a lease but no 1007 or proof of rent payments, or 2) a 1007 but no lease or proof of rent payments.
• Instances of loans closing without a borrower employed have increased. Whether this change is indicative of a shifting labor market or seasonal job changes, Fannie Mae encourages lenders to ask borrowers questions about their employment status at various intervals during the loan process, such as: (1) when taking a loan application, (2) at loan approval, (3) when closing disclosures are provided, and (4) at closing. Borrowers often consider their loan application at a point in time and may not realize the importance of providing updates. Pointed questions can reveal changes. Examples to consider: “In the next 60 days, are you anticipating any changes to your employment? Do you expect any changes to your wages or compensation structure?”
• Miscalculated rental income was a top defect and has consistently ranked at or near the top of the list in the prior two-year period. The miscalculated rental income pushed the debt-to-income (DTI) out of tolerance, making the loan ineligible.
  • Most issues result from a lower-than-actual rental loss. For example, the lender submitted the loan with a rental loss of $200, and the review calculation reflected the rental loss at $600, pushing the DTI out of tolerance and making the loan ineligible. See Best Practices for Rental Income Verification for actions you can take to prevent or reduce the instances of misrepresentation
• Loans with monthly debt payments not properly calculated pushed the debt-to-income (DTI) out of tolerance. Student loan payments and principal / interest / taxes / insurance / assessments (PITIA) payments on non-subject properties were common.
  • Fannie Mae encourages lenders to remain diligent when reviewing student loans. Confirm the monthly payment used in the DTI by obtaining either documented proof of the monthly payment or a payment based on 1.00% of the balance, per our Selling Guide requirements.
  • Instances in which the property tax payment, insurance payment, or HOA payment amount was incorrect or the PITI from the credit report was used for qualifying despite the file containing a mortgage statement or credit supplement with updated information.

Below are Fannie Mae's top 10 findings identified in a random sampling of loans acquired by Fannie Mae in Q4 of 2024 (October 2024 - December 2024).

• Four of the top ten findings in Q4 of 2024 were related to information in appraisals. As findings, they did not create eligibility issues but were cited as discrepancies between appraisal data and Fannie Mae’s data. The errors were primarily related to discrepancies in comparable data on the subject property including distance, square footage, and acreage.
• Asset-related findings were primarily the result of loan files (1) containing only 30 days of banking activity when 60 days were required, and (2) missing the Closing Disclosure showing the proceeds from the sale of another property.
• Liability-related findings were cited when an obligation was miscalculated or improperly excluded but the DTI stayed within tolerance. The issues most often cited were related to real estate obligations such as tax bills or insurance payments, or HOA dues were often excluded or miscalculated. Various other issues included missed garnishments appearing on paystubs, child support or alimony excluded without documentation showing it could be excluded, and missed solar panel payments.

Targeted and discretionary samples 

Fannie Mae performs reviews on discretionary samples of loans to supplement our random samples. The discretionary samples intentionally look for loans with a greater likelihood of having a manufacturing quality error. Since these reviews are purposely targeted, there are a few differences in the defects identified compared to our random sample. 

Below are Fannie Mae’s top 10 *initial significant defects identified in a discretionary sampling of loan reviews completed by Fannie Mae in Q4 of 2024 (October 2024 – December 2024).

Undisclosed Liabilities were the top defect in Q4 of 2024 and have remained among the top defects in the discretionary sample over the last two years. 

• Undisclosed liabilities result in a DTI that makes a loan ineligible. Often, these include installment debts incurred for the purchase or lease of an automobile.
• Fannie Mae encourages lenders to speak with borrowers at time of loan application and throughout the loan process about any upcoming financial obligations that will go into effect prior to the loan’s note date. As a best practice, lenders should also consider developing talking points to explain that such obligations may affect loan eligibility related to DTI. Some lenders have added “call-outs” on the signature lines of loan officers, processors, or closers reminders as a constant reminder to borrowers about the impact of taking on new liabilities prior to loan closing.
• Leverage inquiries on the credit report as a basis for follow-up questions to the borrower to prevent future problems. Lenders can use the questions in Section 5: Declarations of the URLA to guide their inquiries or even a standalone disclosure to ask about any new debts. An example:
  • “I see you have inquiries from four auto loan lenders on your credit report. Can you provide me with the monthly payment and creditor’s name automobile you just purchased?”
  • “Will you be applying for any new credit (installment loan, credit card, car loan) on or before closing that isn’t disclosed on your application?”
  • “Are you in the process of purchasing or refinancing any other property?”
• For lenders who have debt monitoring capabilities, keep in mind that debt monitoring tools may only pull data from one credit bureau, while the best practice is to monitor data from all three bureaus. Lenders should ensure debt monitoring runs on weekends and is reviewed as close to closing as possible. Lastly, keep in mind that it may take 30 to 60 days for a new installment loan to be reported to the credit bureaus (often called the “quiet period”).
• Consider if your process can incorporate the Section 6 of the URLA for discussions with the borrowers, including “If the information I submitted changes or I have new information before closing of the Loan, I must change and supplement this application…” 

Borrower Not Employed came in as the next most cited defect during this period and consistently ranks in the top five defects. 

• Borrowers applying for a loan using income from an employer are expected to be working for that employer as of the note date A change in the borrower’s employment status could have a significant impact on that borrower’s capacity to repay the mortgage loan.
• Fannie Mae encourages lenders to speak with borrowers at the beginning of the loan application process about potential changes in employment that may occur in the next two months and at any time before or immediately after closing. Example questions could include:
  • “I understand that you’re not able to answer with complete certainty, but do you see any changes to your employment status happening before we get this loan to closing?”
  • Are you currently undergoing any sort of employment status change at this time?
  • Are you planning on looking for a new job in the next 60 days? 

Understanding the employment status of all borrowers can help lenders move through the origination process with confidence and prevent complications down the road.

Loan Quality Resources 

Fannie Mae is committed to providing enhanced tools to bring greater upfront certainty. For instance, over 80% of the loans Fannie Mae acquired in 2024 leveraged at least one form of Day 1 Certainty® (DU validation service, value acceptance, and/or certainty on appraised value). The greatest benefit comes when lenders leverage as many of Fannie Mae Day 1 Certainty services as possible. When lenders validate all four components of Day 1 Certainty – income, employment, assets, and collateral – the risk of repurchase is reduced by 64%.

With the use or implementation of any Fannie Mae loan validation tools, it is imperative that QC personnel are familiar with the requirements outlined in section D1-3-02 of the Selling Guide and are sufficiently testing for compliance. QC must (1) ensure the accuracy and integrity of the input data and (2) check that the “DU close by date” is met, when applicable. 

Here are a few Fannie Mae offerings and tools that are available to deliver certainty, improve loan manufacturing quality, and reduce repurchase risk. 

DU Validation Service 

Validates borrower income, employment, and assets. 

Benefits include: 

• Increased process efficiencies in both production and QC, including reduced reverification requirements.
• Provides representation and warranty relief for income, employment, and/or assets.
• Helps prevent defects tied to employment eligibility, income calculation, and assets 

Income Calculator 

Assists with calculating self-employed income and rental income more accurately and efficiently. 

Benefits include: 

• Maximizes qualifying income that can help offset other defects that negatively impact DTI and affect eligibility (such as undisclosed liabilities).
• Provides Representation and Warranty relief for the accuracy of the income amount calculated.
• Helps prevent defects tied to the calculation and analysis of self-employed income and rental income. 

Collateral Underwriter® (CU®) 

Helps manage collateral repurchase risk by allowing lenders to preemptively address known appraisal deficiencies such as risk flags for overvaluation/undervaluation, safety/soundness, and eligibility. 

Benefits include: 

• Appraisals with CU Risk Scores of 2.5 or less are eligible for relief from reps & warrants on property value as a part of Day 1 Certainty®.
• CU allows for effective workflow management and resource allocation by segmenting appraisals by risk profile. •
• CU’s dynamic functionality – comparable sales data, mapping, aerial imagery, public records, local market trends and more – helps lenders manage appraisal and valuation risk.