1205.03

Including the Cap Cost Factor in the Variable Underwriting Rate

Requirements

When determining the Variable Underwriting RateVariable Underwriting RateRate for Structured ARM Mortgage Loans per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1202: Underwriting. used to calculate the minimum required Underwritten DSCRUnderwritten DSCRRatio of Underwritten Net Cash Flow to the annual debt service for a Mortgage Loan amount based on a level debt service payment with the applicable amortization, and calculated per Part II, Chapter 2: Valuation and Income, Section 202: Income Analysis, as adjusted for the applicable products and…, you must include a cap cost factor based on the term of the SARM Loan and the term of the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate.  The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. .

You do not need to include a cap cost factor if the term of the initial Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate.  The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. equals the term of the SARM Loan.

You must ensure that the cap cost factor equals

  • the estimated cost of the replacement cap (when the term of the initial cap expires), divided by
  • the term of the initial cap.

Operating Procedures

For example, to calculate the cap cost factor assuming a 5-year Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate.  The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. and 7-year SARM Loan term:

  • You must include an annual cap cost factor in the Variable Underwriting RateVariable Underwriting RateRate for Structured ARM Mortgage Loans per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1202: Underwriting. .
  • If the SARM Loan term is 7 years and an initial cap is purchased for a 5-year term, the cap cost factor equals the estimated cost of a replacement cap divided by 5 (the number of years of the initial interest rate term).
  • The replacement cap has a 2-year term and a Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. equal to that of the initial cap. 
  • If a 2-year Interest Rate CapInterest Rate CapInterest rate agreement between the Borrower and a provider for which the Borrower receives payments at the end of each period when the interest rate exceeds the Cap Strike Rate.  The Interest Rate Cap provides a ceiling (or cap) on the Borrower's Mortgage Loan interest payments. at the initial Cap Strike RateCap Strike RateMaximum specified Index interest rate that will trigger a payment obligation by the Interest Rate Cap provider. costs 20 basis points, you must divide 20 by 5, then add the result (4 basis points) to the Variable Underwriting RateVariable Underwriting RateRate for Structured ARM Mortgage Loans per Part III, Chapter 12: Structured Adjustable Rate Mortgage (SARM) Loans, Section 1202: Underwriting. .