2014 Rescission Examples
Examples of Rescission Scenarios Under The Arch MI First Lien Master Policy1
CATEGORY 1: LOAN QUALITY (Misrepresentations and Origination Errors)
1. Misrepresentation
- Materiality
- Arch MI would have insured Loan on same terms: : Initial scenario: Arch MI investigates an insured Loan before the Borrower has made sufficient payments to achieve Rescission relief. Arch MI determines that there is a discrepancy between the income listed on the 1003 ($5,000 per month) and the Borrower’s true income ($4,000 per month). Using the true income the Borrower’s DTI moves from 22% to 30%. Arch MI interviews the Borrower who admits that she inflated her income on the 1003 because she believed she needed the additional income to qualify for the Loan. Arch MI determines that had it known the Borrower’s true income, it would have insured the Loan on the same terms. The misrepresentation is not a Material Misrepresentation.
Conclusion: No Rescission - Arch MI would not have insured Loan on any terms: Same as initial scenario, but the Borrower’s income is lower and the DTI moves from 40% to 51%. Arch MI determines that at a 51% DTI, it would not have insured the Loan on any terms. The misrepresentation is a Material Misrepresentation.
Conclusion: Possible Rescission
- Arch MI would have insured Loan on same terms: : Initial scenario: Arch MI investigates an insured Loan before the Borrower has made sufficient payments to achieve Rescission relief. Arch MI determines that there is a discrepancy between the income listed on the 1003 ($5,000 per month) and the Borrower’s true income ($4,000 per month). Using the true income the Borrower’s DTI moves from 22% to 30%. Arch MI interviews the Borrower who admits that she inflated her income on the 1003 because she believed she needed the additional income to qualify for the Loan. Arch MI determines that had it known the Borrower’s true income, it would have insured the Loan on the same terms. The misrepresentation is not a Material Misrepresentation.
- Credible Evidence
- Lack of Credible Evidence: Arch MI investigates an insured Loan. Through the investigation Arch MI finds conflicting evidence as to whether the verification of deposit (“VOD”) in the file is false. The VOD itself is handwritten and indicates that the Borrower had $15,100 on deposit. $15,000 was needed to close. The verifying bank is a small, single- branch bank. A representative of the bank advises Arch MI orally that the deposit amount on the date of the verification was “a lot less than the amount indicated on the VOD,” but will not give Arch MI the accurate amount and will not send a written verification. Arch MI would not consider the oral statement of the representative of the verifying bank to be “Credible Evidence” and will not rescind.
Conclusion: No Rescission - Credible Evidence: Same scenario as above, but the bank provides Arch MI with a written re-verification showing that the account balance on the date of the VOD was $5,100, not $15,100. There is no evidence in the file that the VOD was ever out of the chain of custody of the broker or the bank. Arch MI would consider the re-verification to be Credible Evidence that the broker altered the VOD and may Rescind.
Conclusion: Possible Rescission
- Lack of Credible Evidence: Arch MI investigates an insured Loan. Through the investigation Arch MI finds conflicting evidence as to whether the verification of deposit (“VOD”) in the file is false. The VOD itself is handwritten and indicates that the Borrower had $15,100 on deposit. $15,000 was needed to close. The verifying bank is a small, single- branch bank. A representative of the bank advises Arch MI orally that the deposit amount on the date of the verification was “a lot less than the amount indicated on the VOD,” but will not give Arch MI the accurate amount and will not send a written verification. Arch MI would not consider the oral statement of the representative of the verifying bank to be “Credible Evidence” and will not rescind.
- Borrower Statements
- Uncorroborated/unsworn Borrower statement: Initial scenario: Loan delivered through delegated channel. Borrower has made sufficient payments to achieve Rescission relief. In connection with its investigation of the Loan, Arch MI interviews the Borrower. The Borrower tells Arch MI that although he indicated on the 1003 that the Property was intended to be a primary residence, in fact he did not intend to occupy the Property or pay the mortgage payments and was purchasing it as an investment property, and that the Loan broker was fully aware that the Borrower did not intend to occupy the Property. However, the Borrower will not agree to give Arch MI a written statement to that effect under oath. Arch MI would not have insured the Loan had it known that the Property was being purchased as an investment. The coverage cannot be Rescinded for a Material Misrepresentation by a Borrower as a result of the Rescission relief and Arch MI finds no Credible Evidence corroborating the Borrower’s statements implicating the broker.
Conclusion: No Rescission - Sworn Borrower statement: Same as initial scenario, but the Borrower does provide Arch MI with a sworn statement stating that he did not intend to occupy the Property and credibly describing circumstances that demonstrate that the Loan officer or broker was aware of and participated in the misrepresented intent to occupy.
Conclusion: Possible Rescission - Sworn Borrower statement: Same scenario as above (sworn Borrower statement) but Arch MI determines that it would have insured the Loan as an investment Property at a higher Premium rate. Arch MI will request the additional Premium from the Insured under the process set forth in its then current Delinquency and Claims Reference Manual. If the Company receives the additional Premium within sixty days, it will not Rescind.
Conclusion: Reprice rather than Rescind - Corroborated, unsworn Borrower statement: Same as initial scenario (no sworn Borrower statement), but Arch MI finds in the file an initial 1003 indicating that the Property was intended to be an investment Property and a note from the Loan broker to the Borrower advising him that because of the number of investment properties the Borrower already held, he would not qualify for the Loan unless the Property was going to be his primary residence. Arch would not have insured the Loan as an investment property, so there is no opportunity to reprice. The Borrower’s statement was corroborated by documents in the file.
Conclusion: Possible Rescission - Rescission limitation not yet effective: Same as initial scenario (no sworn Borrower statement), but the Loan defaults at six months – before Rescission relief is achieved. Accordingly, Arch MI retains the right to Rescind for a Material Misrepresentation by the Borrower. However, Arch MI does not have a sworn Borrower statement that the Borrower did not intend to occupy the Property or other credible facts corroborating the Borrower’s unsworn statement.
Conclusion: No Rescission - Rescission limitation not yet effective: Loan defaults at six months before Rescission relief is achieved. But, Arch MI does obtain a credible, sworn Borrower statement or corroborating evidence.
Conclusion: Possible Rescission
- Uncorroborated/unsworn Borrower statement: Initial scenario: Loan delivered through delegated channel. Borrower has made sufficient payments to achieve Rescission relief. In connection with its investigation of the Loan, Arch MI interviews the Borrower. The Borrower tells Arch MI that although he indicated on the 1003 that the Property was intended to be a primary residence, in fact he did not intend to occupy the Property or pay the mortgage payments and was purchasing it as an investment property, and that the Loan broker was fully aware that the Borrower did not intend to occupy the Property. However, the Borrower will not agree to give Arch MI a written statement to that effect under oath. Arch MI would not have insured the Loan had it known that the Property was being purchased as an investment. The coverage cannot be Rescinded for a Material Misrepresentation by a Borrower as a result of the Rescission relief and Arch MI finds no Credible Evidence corroborating the Borrower’s statements implicating the broker.
2. Origination Errors
- Delegated Channel
- Harmless error: Loan delivered through delegated channel. Arch MI investigates a Loan and discovers that the originator incorrectly calculated the LTV. The incorrect LTV disclosed to Arch MI was 86% and the true LTV was 88%. Arch MI determines that it would have insured the Loan at 88% at the same Premium rate. Arch MI considers this to be a Harmless Error.
Conclusion: No Rescission - Loan eligible at higher Premium rate: Same scenario (delegated delivery), but the LTV as disclosed to Arch MI was 85% and the true LTV was 88%. Arch MI would have insured the Loan at a higher Premium rate. Arch MI will re-price rather than Rescind.
Conclusion: Reprice rather than Rescind - Material Origination Error: Same scenario (delegated delivery), but the LTV disclosed to Arch MI was 92% and the true LTV indicated in the Loan file was 98%. Arch MI would not have insured the Loan at a 98% LTV at any Premium rate. Arch MI considers this to be a material Origination Error (i.e., not Harmless Error) and may Rescind coverage on the Loan.
Conclusion: Possible Rescission
- Harmless error: Loan delivered through delegated channel. Arch MI investigates a Loan and discovers that the originator incorrectly calculated the LTV. The incorrect LTV disclosed to Arch MI was 86% and the true LTV was 88%. Arch MI determines that it would have insured the Loan at 88% at the same Premium rate. Arch MI considers this to be a Harmless Error.
- Non-Delegated Channel
- Arch MI Underwriting Error: Same scenario, but Arch MI underwrote the mortgage insurance on the Loan. The Arch MI underwriter incorrectly calculated the LTV as 92% rather than 98%. Arch MI made the error and will neither rescind nor reprice the coverage on the loan.
Conclusion: Arch MI’s error – No Rescission
- Arch MI Underwriting Error: Same scenario, but Arch MI underwrote the mortgage insurance on the Loan. The Arch MI underwriter incorrectly calculated the LTV as 92% rather than 98%. Arch MI made the error and will neither rescind nor reprice the coverage on the loan.
CATEGORY 2: PROPERTY VALUE
1. Variance between Origination Appraisal and Review Appraisal — with no appraiser misconduct
- Variance of less than 15%: (Initial scenario) In connection with an investigation of an insured Loan, Arch MI obtains a properly performed Review Appraisal. The opinion of value in the Review Appraisal exceeds the opinion of value indicated in the Origination Appraisal by 14%. Arch MI will not rescind for a Material Value Variance, because the variance between the Origination Appraisal and the Review Appraisal is not 15% or more.
Conclusion: No Rescission - Variance of 15% or more : Same as initial scenario, but the Review Appraisal indicates a 16% variance between the Origination Appraisal and the Review Appraisal. Arch MI reviews the origination appraiser’s comps and finds that although they are not the same as the comps used in the Review Appraisal, there is no indication that there was any misrepresentation, omission, or manipulation of information in selecting the comps. Although the variation is greater than 15%, Arch MI will not rescind coverage because there was no finding of misconduct by the origination appraiser.
Conclusion: No Rescission
2. Variance between Origination Appraisal and Review Appraisal – with appraiser misconduct
- Variance of Less than 15%: Same as initial scenario (14% variance), but the review appraiser determines that although there were recent sales of nearly identical properties at lower prices in the same subdivision as the subject Property, the comps selected were in a neighboring subdivision with higher prices and higher quality homes with no reasonable professional justification. Arch MI considers the origination appraiser’s use of the more distant comps in the higher priced subdivision to be an inappropriate manipulation of information. However, because the variance is less than 15%, Arch MI would not consider this to be a Material Value Variance.
Conclusion: No Rescission - Variance of 15% or more : Same as above scenario (Arch MI finds appraiser misconduct), but the Review Appraisal indicates a 16% variance between the Origination Appraisal and the Review Appraisal. Arch considers this to be a Material Value Variance and may Rescind.
Conclusion: Possible Rescission
CATEGORY 3: MISSING DOCUMENTS
- Immaterial Missing Document: Arch MI requests the Loan Origination File. The file is missing a copy of the verification of employment (“VOE”). Arch MI interviews the employer and confirms that the Borrower was employed as disclosed on the 1003. Arch MI will not rescind coverage on the ground that the document is missing from the file.
Conclusion: No Rescission - Material Missing Document: Same scenario, but the employer will not provide any information to Arch MI’s investigator. Arch MI has some evidence that the Borrower was not employed as disclosed on the 1003. A copy of the original VOE is essential to Arch MI’s investigation. Arch MI may rescind coverage.
Conclusion: Possible Rescission
1The scenarios are presented as examples only. Each loan Arch MI investigates presents different facts and situations. Accordingly, the examples in this document should not be considered as dispositive with respect to actual loans. Capitalized terms used in this document have the meaning given to them in the Master Policy and related endorsements.