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; Errors and Omissions 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.

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