The Path To Fannie Mae And Freddie Mac Approval

So, you have been a mortgage broker for a while now, and you think you are ready for the next step: approval by Fannie Mae and Freddie Mac as a Seller and Servicer, so you can service your own loans.

In general, to be an approved Seller and Servicer for either FNMA or FHLMC, you are going to need to meet the following requirements: a corporate net worth of $500,000 to $1 million; adequate warehousing lines; three letters of reference; errors and omissions insurance and fidelity insurance; an excellent quality control program; and personnel experienced in all aspects of mortgage origination, processing, underwriting, funding and shipping, administration, service accounting and, of course, servicing itself.

These are only general, minimal requirements, so let us take a more detailed look at the requirements and the process. I preface the following information with the understanding that the reader realizes that approval of a firm by FNMA or FHLMC is at their complete discretion and is, to a great extent, a judgment call based upon your total package and all the factors included in it. All requirements are subject to change.

As far as FHLMC approval goes, net worth requirements are either $1 million or $500,000, depending upon whether you use the generally accepted accounting principles (GAAP) net worth of $1 million, or the FHLMC definition of acceptable net worth ($500,000). Unfortunately, a lot of potential applicants are not aware of the $500,000 net worth possibility. Even a call to Freddie Mac still found the operator not aware of that option, and claiming $1 million was a hard, fast requirement to be approved.

Acceptable net worth is defined by FHLMC as GAAP net worth minus any of the following: goodwill, purchased servicing, capitalized excess servicing, investments in joint ventures, investments in limited partnerships, REO, property, plant and equipment, receivables from affiliates, investment in affiliates, other intangibles and other assets, and deferred taxes on capitalized excess servicing. Audited financial statements are to be provided as part of the approval package.

One requirement that many still think is in force, but is not, is the requirement that a mortgage company be approved by HUD-FHA in order to be a FHLMC Seller and Servicer.

Additional requirements include having an acceptable quality control program; E&O insurance and Fidelity insurance of $300,000 minimum coverage; a business plan (specific and reasonable for short and long term strategies); three reference letters from investors; credit reports on managing executives; adequate experience in origination and sales; and experience in underwriting, administration, default management, REO servicing and investor accounting, and servicing. Servicing is usually the weak spot for mortgage companies. You must show that whether or not you use a sub-servicer, and you have staff with more than adequate ability and knowledge to handle servicing. FHLMC no longer says you need a specific amount of servicing on the books to be approved and, in fact, you can be approved with no servicing, but the stronger the package, the more likely you will be approved.

If you are accepting Third Party Originated (TPO) loans, you also have to provide information on your standards and procedures for accepting and servicing them, since there have been so many problems with the history of these loans.

In order to apply to FHLMC, you request an application package (call 800-Freddie) and follow the instructions completely. You will need to submit resumes, financial statements, credit reports, a business plan, various certifications, the approval you want, a list of parent or subsidiary companies, corporate liaisons in various corporate capacities, any legal problems with company or managing officers, a list of investors (including their reference letters), a list of your warehouse lenders, quality control program and questionnaire, number and quantity of loans originated and sold in the last two years, number and quantity of loans serviced plus your delinquency ratios, copy of insurance coverage and all other pertinent information you feel would help your package. There is a $1000 application fee.

As far as FNMA is concerned, their requirements are very similar to those of FHLMC. There are differences, though, and as I list the general requirements (FNMA also can request any additional information it needs; the application package is a guideline and basis from which to work), any item that is different will be identified with an asterisk.

You need a corporate net worth of at least $500,000, a quality control program, experienced personnel in all areas pertinent to the business, proof that the personnel have not had any problems when employed at other FNMA-approved entities*, a servicing system in place (your own or sub-services), E&O and Fidelity insurance (same dollar amounts), references, credit reports, history and scope of the business*, list of any owner of five percent or more of the company*, audited financial statements, estimated volume to be sold to FNMA during the first 12 months*, and availability of all key personnel for an on-site interview with FNMA staff*.

In order to apply to FNMA, call the nearest regional office and request an application package. You will return the following information (some of it on their forms): areas you operate within; the approval you are applying for; any legal disclosures of problems with the company or personnel; narrative on history and scope of the company; resumes in same areas as FHLMC; investors you are currently servicing for; proof of E&O and Fidelity coverage; financial statement; quality control program; FNMA Selling ad Servicing Contracts; estimated first 12 months sales volume; quantity and dollar amount of loans originated in the last three years; credit authorizations; number of employees in servicing and origination; liaison personnel in selling, underwriting, servicing and investor accounting; number and dollar amount of loans serviced; list of delinquencies; list of warehouse lines; and various certifications, along with a $1000 application fee.

To summarize, if you have, or are willing to acquire, the net worth, the insurance and plenty of experienced personnel, and can show you have the corporate capacity to meet all of the approval requirements of FNMA or FHLMC, maybe you should consider becoming a Seller and Servicer. The mortgage business is in an improving cycle, with the housing market (new and resale) beginning to show signs of coming alive again. This may be your time. But remember, it is not right for everyone, so be sure the approvals and servicing will fit into your corporate goals.