Catalina

Underwriting Guidelines

As of 01/07/03

Link to Underwriting Options

Borrower Eligibility

title requirements

• Mortgages must be made to natural persons only

• If the borrowers are another type of legal entity (such as a corporation, S corporation, non-revocable Inter Vivos trust, life estate, general partnership, or real estate syndication), the mortgage is ineligible

• Title to the property must be in the name of individual borrowers only.

Inter Vivos Trusts

• Some programs allow ownership by Inter Vivos trusts

• The Inter Vivos revocable trust, also called a family trust, living trust, or revocable living trust, can be used as an alternative form of property ownership.

• The trust must be revocable and must contain specific language within the document giving the right to revoke.

• Legal title to the property must be held in the name of the trustee(s), on behalf of the inter vivos trust.

• The title insurance policy must ensure full title protection, and must indicate that title to the subject property is vested in the name of the trustee(s). The policy may not list any exceptions with regard to the trust or the trustee(s).

• Whenever possible, the underwriter must obtain copies of the entire recorded trust document. The copies must be certified by an attorney or the grantor/trustor/settlor.

• The title company must also be supplied with copies of the trust.

• Some borrowers may be reluctant to provide full copies of a trust document if the trust includes significantly more assets than the subject property. In such cases, the borrower must supply all portions of the trust, as required by the title company, clearly designating:

• The identities of the grantor/trustor/settlor, beneficiaries, and trustee

• The powers of the trustee

• That the property is held as part of the trust

• Revocability of the trust

• That the trust was created and became effective during the lifetime of the original grantor/trustor/settlor

residency

Permanent Resident Aliens

Non-U.S. citizens who are lawful, permanent residents of the United States are eligible under the same terms available to U.S. citizens. Permanent resident aliens must have any of the following:

• An Alien Registration Card (also called a green card) with a 10-year expiration date on the front, but no expiration date on the back

• An Alien Registration Receipt Card (I-551) with an expiration date and must be accompanied by a copy of an unexpired INS Form 1-751

• Unexpired foreign passport that contains an unexpired stamp reading "Processed for I-551." Temporary Evidence of Lawful Admission for Permanent Residence. Valid until (mm-dd-yy). Employment authorized."

• Any other evidence of permanent residency issued by the INS

Non-Permanent Resident Aliens

• Non-permanent resident aliens are non-United States citizens who have no valid evidence of permanent residency, but have valid visas

• If all the borrowers on a loan are non-permanent resident aliens and they do not have the required two-year credit, employment or residency history, the loan must be originated and closed under the Foreign Nationals programs

• Acceptable visas are H-1, H-2A, H-2B, H-3, L-1, E-1, and G series

• The following additional requirements apply on non-conforming and nonconforming expanded criteria loan programs when ALL the borrowers are non-permanent resident aliens:

(1) Loans for non-permanent resident aliens who do not have the required 2-year credit, employment or residency history must be originated and closed under the Foreign National programs.

Foreign Nationals

Non-United States citizens, who are not permanent or non-permanent resident aliens, and do not have full or partial diplomatic immunity must meet the standard requirements of an eligible borrower.  Foreign Nationals must provide:

• Residency visa to visit or live in US for limited amount of time

• Eligible Visas are: B-1, B-2, E-1, E-2, G1 through G5, I, J-1, J-2 and K-1.

• Copy of unexpired passport.

• Social Security Number or Certificate of Foreign Status form W-8.

ineligible borrowers

• Living Trust Corporation

• S Corporation

• Non-revocable

multiple loans to one borrower

The number of loans the investor will extend to one borrower is limited to no more than four (4).  For example:

• One owner-occupied primary residence

• One second home

• Two investment properties

Exception

The number of loans Investor will extend to one borrower may be increased up to eight (8) provided the transaction meets the following criteria:

number of properties owned

• The occupancy of the property being financed will determine the limitations on how many other financed one-to-four family properties the borrower may own.

• For all loans, the borrower's primary residence, subject property and any properties owned separately by a Co-borrower must be included in the total.  Joint ownership in residential property is considered the same as total ownership for limitation purposes.

• Ownership in multi-family (5+units), commercial real estate or unimproved land is excluded from these limitations.

• The following lists the maximum number of financed properties a borrower may have including the subject property.

Note: Some loan programs may be more restrictive. Refer to the individual loan program guidelines.

1) Borrower may not be affiliated with the builder, developer, or seller of the subject property.

non-occupant co-borrowers

• Allowed on all conforming conventional loan programs with an LTV of 90% or less

• Non-occupant co-borrowers are also allowed under some non-conforming loan programs

• When allowed, the non-occupant co-borrower does not need to be a family member

• There should be, however, an established relationship and motivation not including an equity participation for profit

• If there is a non-occupant co-borrower, the owner-occupant must have 5% of the purchase price in their own funds, unless 20% of the down payment is provided from a gift or grant

• If there is a non-occupant co-borrower, the owner-occupants must qualify at 35%/43% ratio, regardless of the LTV

• If the LTV is greater than 80%, the owner-occupant must have 5% of the purchase price in own funds

non-arm's length transaction

Non-arm’s length transactions with non-family members will only be considered if it is a bona fide sales transaction and the borrowers will occupy the property as their primary residence.

• A non-arm's length transaction occurs when a personal or business relationship exists between the borrowers and the builder or seller.

• These transactions include:

• Family sales or transfers

• Corporate sales or transfers

• Mortgagors employed in the real estate or construction trades who are involved in the construction, financing, or sale of the subject property

• Some transactions involving principals or a seller or other vendor (such as an appraiser, settlement agent, title company, etc.) who is involved in the lending process of the subject property

• Non-arm's length transactions may require additional documentation depending on underwriter's assessment of risk.

• Non-arm's length transactions with a family member are generally acceptable if:

• The family member or relative is the borrower's spouse, child, parent, or any other individual related to the borrowers by blood, adoption, or legal guardianship.

• An executed purchase or sales agreement between the purchaser and the family member is in the loan file.

• The source and ownership of funds for the down payment, closing costs, and reserves is well documented in the loan file.

• The appraised value of the property is well supported, particularly for gifts of equity or gifts of more than 20% of the LTV.

• Gifts are not allowed for second home and investment properties.

• Gifts are allowed for owner-occupied transactions if they meet the normal gifting guidelines as follows:

• The borrowers must have 5% of their own funds as a down payment.

• However if the LTV is less than or equal to 80% then the entire down payment may be a gift.

• Gifts of equity are acceptable if verified by an appraisal and gift letter.

• A signed gift letter and verification of the receipt of the funds are provided.

• Non-arm's length transactions are not allowed on loans using the No Income/No Asset or Investor Fast & Easy documentation type.

occupancy

Primary Residence

• A one- to four-family property that is the borrower's primary residence

• At least one of the borrowers must occupy and hold title to the property, and also execute the Note and mortgage

• The borrower must occupy the subject property within 30 days of close of escrow.

Second Home

• Property that the borrower occupies in addition to the primary residence

• The property must be located in an area that can reasonably function as a second home and must be suitable for year-round occupancy.

• Cannot be a 2-unit property

Investment Property

• The full amount of the mortgage payment for the rental property (PITI) is factored into the amount of the net rental income (or loss); therefore, it should not be counted as a monthly obligation.

• Reasonable adjustments to gross rental income must be made to compensate for vacancies, operating and maintenance expenses, and rental income received for furniture.

• A one- to four-family property that the borrower does not occupy. This definition is used whether or not the property produces income

• Investment properties are subject to the following requirements:

• Conforming loans only: The borrower must have a two-year history of managing rental properties. Verification must be provided through the most current two years of tax returns.

• The property must have a minimum coverage of six-months' rent loss insurance to cover rental losses that may be incurred during any period that a property is being rehabilitated following a casualty.

Exception (Conforming loans only): The two-year history managing rental properties and six- months' rent loss insurance coverage requirements may be waived if the borrower qualifies for the mortgage based on the full payment (PITI) for the subject property without having to rely on the rental income.

• On Refinances of 2-4 unit properties, an occupancy inspection to verify owner occupancy must be completed on loans for 2-4 unit properties prior to closing the loan.

• The inspections may be performed by the appraiser or a property inspection company.

• An executed Occupancy Declaration must be included in the loan file at the time the loan is delivered.

non-purchasing spouse

• Spouse must sign the security instrument and any other applicable documentation to confirm they are relinquishing all rights to the property.

• Purchasing spouse's lien position must be superior to that of the non-purchasing spouse

purchasing from builder

If borrowers are purchasing a property from a builder who is purchasing the borrower's existing residence, it is considered a non-arm's length transaction and is not permitted

Credit Requirements

credit history

When evaluating the borrower's credit history, the following factors should be considered to determine if the borrower's Credit is acceptable:

• The type and amount of outstanding credit

• Age of the borrower's credit history

• Balance-to-account-limit ratios

• Recent changes in the number of open accounts or overall amount of credit outstanding.  Payment history of all accounts

• Any recent inquiries shown on the credit report

• Any public record or collection item

A borrower whose income or assets are used for qualification must have at least the following for:

• Conforming Loans

• The minimum necessary number of trade lines to obtain a credit score

• Non-Conforming Loans

• 3 trade lines or as specified in the individual loan program

• At least one trade line must be currently open and not be a collection or charge-off.

• At least one trade line must have had activity in the last 6 months

• 4 non-credit payment references, OR

• A total of 4 trade lines and non-credit payment references.

• A documented savings history of at least 12 months may be included as one of the non-credit payment references if the history shows periodic deposits, at least quarterly, resulting in a growing balance.

• Multiple borrowers

• Acceptable credit for one borrower cannot be used to offset the unacceptable credit of another.

• The credit worthiness of all borrowers who will appear on the Note will be considered, including each borrower's income, assets and debt.

• Non-Permanent Resident Aliens

• Borrowers who are non-permanent resident aliens must have established a credit history in the US for at least the most recent 2 years.

minimum credit score

See Product Matrices

age of report

• All standard credit documentation used to determine the borrower's eligibility must be no more than 120 days old on the date the Note is signed.

• If the property is a new construction, the documents may be up to 180 days old.

Representative credit score

A single, representative credit score can be selected for each borrower. A representative score is then designated for the borrower and the loan, as follows:

Borrower Representative Score:

• If a total of 3 scores are obtained for a borrower, the designated score for that borrower shall be the middle score.

• If a total of 2 scores are obtained, the lower score will be the designated score for that borrower.

Loan Representative Score:

• If there are co-borrowers on the loan, the credit score applicable to the loan itself will be the lowest of the respective borrowers scores. Note: If the borrower's incomes are equal, the lowest score, or lowest middle score of all the borrowers should be used.

• If only one score is available from all three repositories, the one score will be designated as the loan score

Equity Loans

• Full/Alt Documentation - Use the primary borrower's middle score (highest wage earner). If two scores are used, the primary borrower's lowest score should be used.

Note: If the borrowers' incomes are equal, the lowest score, or lowest middle score of all the borrowers should be used.

• Reduced Documentation - Use the lowest middle credit score among all borrowers.

Note: Some non-conforming loan programs may have more restrictive guidelines for determination of the credit score. Refer to the appropriate loan program for information.

Usable Credit Scores

For a credit score to be considered valid and usable, it must be based on a minimum amount of information. Generally, a usable credit score is based partially upon a minimum number of trade lines that have been open for a minimum length of time. The following standard guidelines should be used when reviewing the borrowers credit history. Refer to the appropriate loan program guidelines for specific credit score requirements.

Credit Score Not Available

If a credit score is not available or if the credit score is not usable, the borrower may not be eligible, depending on the loan program.

Non-traditional MCR

• A Non-traditional Mortgage Credit Report (MCR) must be used as a substitute for, or as a supplement to, a traditional credit report that has an insufficient number of credit references

• The Non-traditional Mortgage Credit Report must be developed by a credit reporting agency after ensuring that all 3 of the major credit repositories were checked in the initial attempt to verify the borrowers credit history.

• A Non-traditional MCR should include a 12-month credit history with at least 4 different credit sources

• Three credit sources are acceptable provided that the borrower's utilities are included in the verified rent payment

• The report should be evaluated following the same standards as a traditional credit history, and should not be used to offset derogatory traditional credit references.

• Non-traditional mortgage credit reports are only allowed for conforming loan programs, and are not acceptable for non-conforming, expanded criteria, equity, or sub-prime programs

Exception: The Foreign National Program allows the use of a non-traditional mortgage credit report.

• A non-traditional mortgage credit report should not be used if a credit score can be obtained for the borrower despite his or her limited use of credit.

Credit Score Review

Credit scores should be used to assist in determining the borrower's willingness to repay a mortgage. During the underwriting process, the following chart should be used to determine the level of review required for the loan:

Basic

The loan should be underwritten to confirm the borrower's willingness to repay the mortgage as agreed.

Comprehensive

All aspects of the borrower's credit history should be underwritten to establish the borrower's willingness to repay the mortgage as agreed

Cautious

• A particularly detailed review of all aspects of the borrowers credit history should be performed to ensure that the borrower's willingness to repay the mortgage as agreed has been satisfactorily established

• Unless there are extenuating circumstances or major factors related to Credit that offset the risk indicated, a credit score in this range should be viewed as a strong indication that the borrower does not show sufficient willingness to repay the debt.

business credit reports

• Under some Reduced Documentation loan programs, self-employed borrowers who own their business as a corporation, an S corporation, or a partnership must obtain a business credit report to supplement the individual credit report

• The same requirements that apply to individual credit reports apply to business credit reports

bankruptcy

• If the credit history reflects a bankruptcy or a foreclosure or deed in lieu of foreclosure within the last 7 years, the derogatory information is significant and must be attributed to extenuating circumstances

• A signed, written letter of explanation, consistent with all other information in the loan file, should be requested from the borrowers.

• If a bankruptcy was disclosed on the borrower's credit report was determined to be acceptable due to extenuating circumstances, the following documentation must be included in the loan file, in addition to all the documentation required for extenuating circumstances:

• Copies of the bankruptcy petition, schedule of debts, and discharge showing the discharge

• Evidence to indicate that all debts not satisfied by the bankruptcy have been paid or are being paid

• Any other evidence necessary to support the Seller's determination that factors outside the borrower's control caused the bankruptcy, and that the borrower has re-established an acceptable credit reputation.

foreclosure

• A previous foreclosure or conveyance of a deed-in-lieu of foreclosure, disclosed on the borrower's credit report must always be considered significant derogatory information

• The foreclosure or deed-in-lieu must be attributable to outside events beyond the borrower's control.

• Additionally in all cases, including mortgages underwritten with credit scores, the borrower must have experienced extenuating circumstances, and the Seller must meet the documentation requirements for determining that the Borrower now has an acceptable credit reputation.

judgments/collection/tax liens/adverse credit

• The credit history for the last 7 years should be reviewed to determine whether there are any major indications of derogatory credit, such as undischarged debts, judgments, bankruptcy, etc.

• Any litigation involving the borrower including bankruptcy, foreclosure, deed-in-lieu, short sale, judgments, tax liens, collection accounts and charge-offs must be evaluated separately and meet the specific loan program guidelines.

• When evaluating borrowers with adverse credit information, more weight should be given to derogatory credit information or late payments occurring within the past 2 years

• However, the following factors should still be considered:

• The number, timing and extent of the delinquency

• Eventual repayment of delinquent obligations

• Any previous bankruptcy, mortgage foreclosures or deed-in-lieu of foreclosure within the past 7 years

• Whether other characteristics of the borrower's credit profile, such as age of credit, use of outstanding credit, and inquiries, make any significant difference in the derogatory credit information

When reviewing derogatory credit, the following general guidelines apply.

Conforming and Non-Conforming Loans:

Any outstanding judgments and/or tax liens, as well as any other derogatory items appearing in the title policy (e.g., delinquent taxes, tax liens, mechanics’ liens, and collections) must be paid/released to the satisfaction of the title company.

Conforming Loans Only:

• In certain cases, collection and charge-off accounts will be reflected in amounts that have no material effect on the priority of the lien.

• Therefore, collection or charge-off accounts do not have to be paid off at or before loan closing if they are less than $250 per individual account or $1,000 in total.

• An explanation in writing should be obtained from the borrower and included in the loan file delivered for purchase by Investor.

Refer to the individual loan program for more restrictive requirements.

Financial Mismanagement

• It is not easy to substantiate that borrower whose derogatory or adverse credit information is due to financial mismanagement presents an acceptable credit risk

• This generally takes a longer, and more convincing, credit re-establishment period

• When financial mismanagement is determined, use the following guidelines:

• Determine that the borrower's credit reputation is acceptable.

• Develop criteria supporting the determination that the financial mismanagement is unlikely to recur; and

• Include in the loan a file an analysis detailing the reasons for considering the borrower to be credit-worthy.

payoff debt to qualify

Revolving Debt

If any portions of the loan proceeds are being used to pay off debts for qualification purposes, the underwriter must count a minimum $10 per month payment for revolving debts and include these debts in the total debt ratio.

Installment Debt

• Installment debts being paid off do not need to be included in the total debt ratio.

• Verification that the debt has been paid must be provided by one of the following:

• A copy of the HUD-1

• A supplemental credit report

• Verification from the creditor

Note: Student loans with more than three (3) years' deferment do not have to be included in the calculation of the borrower’s liabilities.

divorce

See "Financial Mismanagement" section above

credit counseling

Active Participant

Only sub-prime loans with an LTV less than or equal to 90% are eligible for purchase by Investor when borrowers are currently participating in a credit counseling program. All other loan programs are not eligible.

Previous Participant

When a borrower's credit report reflects they have been in credit counseling, there must be a minimum of 12 months' seasoning on credit re-established since the credit counseling was terminated. The re-established credit may not include accounts paid through credit counseling.

Note: Credit bureaus generally do not actively track credit counseling history in the borrower's credit file. If a completion date is not shown on the credit report, the borrower must submit verification from the counseling agency establishing the date of completion.

upgrading credit

Not available

Alternative credit

When verifying non-credit payment references, sufficient information must be obtained to establish:

• To whom payments were made

• Nature of the obligation, such as utilities, payment for purchases, insurance, etc

• When account was opened

• Amount of the payment required or made

• When payments are due

• A payment history

• Any outstanding balances

• The historical status of the account in a format indicating the number of times and duration of times past due

• General reference letters without the above information are not sufficient documentation

• If a savings history is used, the loan file must contain documentation, preferably bank statements meeting the above requirements, showing a minimum of 12 months' history of periodic deposits and a growing account balance.

Income Requirements

acceptable income

• Salaried (W-2)

• Self-employment

• Military income

• Public Assistance

• Worker's Comp

• Disability

• Alimony/Child Support

• Retirement/Pension

• Passive, or Unearned Income

unacceptable income

Any income or compensation for qualifying borrowers whose source of income cannot be verified by the Seller is not allowed.

Employed by relatives

• If borrowers are employed by a relative, domestic partner, fiance/fiancee or family business, signed copies of the borrower’s most recent 2 years federal tax returns must be obtained, in addition to the Form 1005.

• The underwriter must verify the income was paid in the form of wages, and that it was accurately reflected on the Form 1005.

employment history

• Borrower's employment history for the most recent 2 years must be verified

• If there are multiple borrowers, only the income used for qualification must be verified

documentation type

Full Doc

• The use of verification forms, mailed directly to and received directly from the borrower's employer, bank, mortgage company or landlord, to document the borrower's income, employment, available funds, and mortgage payment history

• When full documentation is used, no additional documentation (such as bank statements or pay stubs) is required

• Electronic, Faxed, or Computer-Generated Documentation:

• Verification documentation that is faxed, computer-generated, or downloaded from the Internet, including on-line bank and investment statements is allowed.

• Documentation must meet all of the following requirements:

• The source of the information must be clearly identified (i.e., information from the Internet or fax banner at the top of the document).

• The documents must clearly identify the name of the depository investment institution, or borrower's employer

• The documents must include all the essential information as the hard-copy original documents including account owners name, full account number, borrower's employment, income, assets, and funds for closing (as applicable).

Note: Documents must be legible and free of any alterations, erasures, white-outs, or similar indications that changes have been made.

Alt Doc

Alternative Documentation is available for owner-occupied primary residences, second homes and investment properties. Refer to the individual loan program guidelines for eligibility.  General requirements are:

• Single family properties only, including eligible condos and PUDs.

• Salaried and hourly paid borrowers only. Commissioned or self-employed borrowers are not eligible for Alternative documentation.

• Documentation requirements are identical for conforming and nonconforming loan programs.

• When Alternative documentation requirements are stricter than the individual loan program guidelines, the more restrictive guidelines must be used.

• A 3-Repository Merged In-File Credit Report or Residential Mortgage Credit Report is required.

• The verification of income and payment history must be completed no more than 120 days before the date of the Note. The most recent bank statement to verify the source of funds must be dated no more than 45 days earlier than the date of the loan application, and not more than 120 days earlier than the date of the Note.

Reduced Doc

• Self-employed borrowers

• Documentation must show borrower has been in same business and same location for minimum of 2 years

• Two months' certified copies of bank statements or VOD reflecting balances commensurate with stated income is required

Non Conforming Loan Programs

• Salaried borrowers (with the following restrictions)

• Must have 2 years' of employment verified by same employer or in same line of work. Any employment change must be deemed a career advancement.

• Must have an acceptable verbal VOE, verifying employment that contains all the information covered in a VOE with the exception that no income may be disclosed. The verbal VOE must cover a full two-year period.

Non Conforming Expanded Criteria and Expanded Criteria Conforming Balance Loan Programs

• Salaried or commissioned co-borrowers are allowed on Non-Conforming Loan programs with the following restrictions:

• Must apply with a self-employed primary borrower

• If their income is used for qualifying, both employment and income must be verified using Full or Alternative documentation

• Primary source of income must be verified on all employment types

• Amount of income, although disclosed, is not verified

• Employment must be disclosed on 1003

• Ratios are calculated and borrower must still qualify for the loan

Passive or Unearned Income

If the primary source of income is unearned or passive income, then the source must be verified. An income amount must be stated and the file must contain reasonable documentation that the income exists. Verification may be obtained verbally and should be obtained from a third party source, such as a CPA, attorney, or trust administrator. Examples of passive or unearned income include:

• Retirement Income (Pension/Social Security/Disability)

• The income must be stated on the application and verified by a third party source, such as a social security or retirement award letter

• The income should be expected to continue for at least 3 years

• Verification of the receipt of the income is not required

• Interest Dividend or Annuity Income

• Assets generating the income must be verified by obtaining 2 months most recent account statements or by a verification of deposit (VOD) and must be deemed a reasonable rate of return on the asset.

• Child Support, Alimony, or Separate Maintenance

• The divorce decree indicating the borrower is eligible to receive the child support and/or alimony must be obtained and should indicate that the income is expected to continue for at least 3 years

• Verification of the receipt of income is not required.

• Notes Receivable and Installment Sales

• A copy of the Note must be provided indicating the borrower is eligible to receive Note income.

• The income should be expected to continue for at least 3 years.

• Verification of receipt of the income is not required.

• Trust Income

• A letter from the executor of the trust must be obtained and indicate that the income should be expected to continue for at least 3 years

• Verification of the receipt of the income is not required

• If the borrower is the executor, a copy of the trust must be obtained.

• Rental Income

• A schedule of real estate must be completed listing all properties owned by the borrower

• Lease/rental agreements are not required; however, the rent must be deemed reasonable.

Verification of Assets

Assets must be disclosed and verified through Full or Alternative documentation subject to the following requirements:

• The assets must be the borrower's own funds.

• Acceptable sources include checking and/or savings accounts, certificates of deposits, brokerage or mutual funds, and publicly traded stocks.

• Assets that would not be acceptable are accounts in the name of the corporation or partnership, or other party, and stock in a closely held corporation.

• A minimum 2 months' most recent bank statements of VOD

• These must show an average balance that is deemed reasonable and consistent with borrower's stated income

• These must not show any reference to income, such as Direct Deposit of income

Stated Income

Income is disclosed on 1003