Chase Correspondent Division Credit Policy Guide Overview by linxiaoqin

VIEWS: 4 PAGES: 361

									Credit Policy                                                          Chase Correspondent Division



            Chase Correspondent Division Credit Policy Guide
Overview


Introduction      The following chapters comprise the Chase Correspondent Division Credit
                  Policy Guide (CPG). The CPG has been designed to provide basic
                  underwriting and documentation guidelines. It should be used in conjunction
                  with the Correspondent Lending Guide and the applicable Product and
                  Program Guidelines,

                  Adherence to the guidance provided within the combined resources will help
                  to ensure a sound underwriting decision. As a reminder, when the specific
                  Product and Program Guidelines differ from a feature detailed within the
                  Correspondent Lending Guide or the Credit Policy Guide, the Product and
                  Program Guideline will dictate.


In this Chapter   Included in this chapter are the following topics:

                                              Topic                                  See Page
                  Corporate Credit Quality Principles                                    3
                  Fair Housing Opportunity Policy                                        4
                  “Know Your Customer” Policy                                            5


Background        The underwriting and documentation guidelines provided are based upon the
                  JPMorgan Chase and Company’s credit quality policies and principles..

                  Through the use of both centralized and decentralized decision making
                  environments in which these underwriting guidelines are used, Chase builds
                  an investment quality portfolio for the firm and its investors comprised of
                  agency, non-agency, government, and low-to-moderate income mortgages.

                  NOTE: A separate policy is effective and maintained by the B/C (sub-
                  prime division).

                                                                             Continued on next page




July 2004                                                                          Credit Policy – 1
Credit Policy                                                           Chase Correspondent Division



Overview, Continued


Risk            A key factor in Chase’s success in building a portfolio of investment quality
Management      mortgages is the necessity of all employees involved in the production of
                mortgages at Chase to exercise common sense and responsible judgment in
                their underwriting and/or recommendations. While Chase uses automation
                and technological tools to augment risk, we continue to rely on the sound and
                mature judgment of underwriters to interpret system messages and
                requirements and apply their skills and knowledge to mortgage loan requests
                outside automation. By coordinating marketing activities with prudent risk
                management oversight, Chase maintains high standard and credit quality
                principles.


Product         This credit policy’s minimum and maximum product standards must be
Standards       applied specifically to each applicant, and to that individual’s distinctive
                financial profile. Situations that carry higher elements of risk, beyond stated
                product standards, or situations that fall below our financial profile objective,
                may be considered on an “exception basis.” As exceptions, however, such
                situations would warrant a greater degree of review and approval, and should
                include compensating factors for the exceptions, which are clearly
                documented in the file. The granting of extension requests should be
                managed carefully to ensure the integrity from, not only, a fair lending
                perspective, but also, a salability and securitization perspective.




July 2004                                                                           Credit Policy – 2
Credit Policy                                                          Chase Correspondent Division



Corporate Credit Quality Principles


Credit Quality   Chase will only do business with individuals and companies that evidence a
Principles       track record of incurring debt prudently and servicing it diligently, and a
                 responsibility for debt obligations. For mass-market retail segments,
                 analytical tools will be applied to best measure such segments relative to
                 these criteria.

                 · Chase will not compromise credit quality for the sake of volume or short-
                   term profits.
                 · Chase’s portfolio must reflect a prudent diversification of risk.
                 · Credit quality is the joint responsibility of all business managers in
                   conjunction with their credit officers.
                 · Chase will only commit the corporation’s capital following thorough
                   professional research and analysis, utilizing all expertise resident anywhere
                   in the organization, which may contribute to our risk management.
                 · The integrity of Chase’s portfolio management process is dependent upon
                   timely and accurate risk ratings. Deterioration in credit risk, real, or
                   potential, must be quickly and completely communicated.
                 · Credit and management audits are an important line of defense against
                   possible weakness. Deficiencies cited in such audits must receive prompt
                   remedial action.
                 · Individuals are expected to manage assets and products as if they were their
                   own property.




July 2004                                                                          Credit Policy – 3
Credit Policy                                                           Chase Correspondent Division



Fair Housing Opportunity Policy


Fair Lending    To underscore its commitment to fair lending laws and regulations, Chase has
                adopted the following fair lending policy statement:

                    The equal treatment of all credit applicants, without regard to race,
                    sex, sexual orientation, color, national origin, religion, age, marital
                    status, disability, or any other prohibited basis, is an integral part of
                    the Corporation’s fundamental mission of providing quality financial
                    services to existing and prospective customers. Denying any
                    segment of society equal access to basic opportunities, such as home
                    ownership or credit, is morally repugnant and has no place in our
                    society. Only through the efforts of all of us at Chase can we ensure
                    that every applicant for credit receives fair and equal treatment and
                    that we have helped each member of the communities Chase serves
                    reach his or her fullest potential.

                    Chase is committed to the principle that every applicant for credit
                    receive fair and equal treatment throughout the credit application and
                    approval process. This principle is embodied in the Equal Credit
                    Opportunity Act and Fair Housing Act, and applies to every lending
                    subsidiary of the Firm.




July 2004                                                                           Credit Policy – 4
Credit Policy                                                          Chase Correspondent Division



“Know Your Customer” Policy


Introduction     It is the policy of Chase that each business unit world-wide should know its
                 customers, be aware of the services used by its customers, and follow account
                 documentation, credit review, and other established policies and procedures
                 to properly identify customers and help deter customers from using Chase
                 products and services in violation of the law or to cause damage to the Chase
                 reputation. Our responsibility with regard to this policy is threefold.


Identify Your    Chase policies and procedures incorporate the appropriate amount of inquiry
Customer         and verification to identify the customer. Some independent form of personal
                 identification (such as driver’s license, passport, photo ID, etc.) must be
                 requested at closing to confirm the applicant’s identity.


Understand       It is not possible to be alert to a potential borrower’s misuse of Chase’s
Your             products and services. Of course, a borrower who requests a mortgage will
Customer’s Use   make either a very simple statement of purpose such as “purchase” or
of Our           “refinance.” However, as a customer begins to use a more complicated mix
Products         of products, more sophisticated products or products posing a greater risk to
                 Chase (i.e., use of cash-out proceeds), it becomes more important to
                 understand the customer’s explanation of how these products and services are
                 intended to fit into the business. This is not so that Chase’s judgment may be
                 substituted for the customer’s judgment regarding the appropriate conduct of
                 the customer’s personal business, which does and should remain the
                 responsibility of the customer. Rather, this understanding is important so that
                 any subsequent use of these products and services by the customer which
                 significantly and inexplicably deviates from the explained purpose should
                 raise questions, particularly where suspicions are aroused surrounding the
                 source of the customer’s funds.

                                                                             Continued on next page




July 2004                                                                          Credit Policy – 5
Credit Policy                                                          Chase Correspondent Division



“Know Your Customer” Policy, Continued


Question        All Chase customers, and people seeking to become Chase customers, are
Unusual or      presumed to be law-abiding people. To say that behavior is unusual or
Suspicious      suspicious is to say nothing more than behavior warrants closer scrutiny to
Behavior        enable Chase staff to determine whether this presumption of legality
                continues to be justified. Suspicious behavior is cumulative; where a single
                unusual occurrence might not cause any special notice, the repeated
                occurrence of events which are inconsistent with the customer’s stated
                personal business, or the occurrence of several types of suspicious behavior,
                becomes increasingly suspect.

                If any unusual or suspicious behavior is suspected, it is Chase’s policy to refer
                such matters to the Quality Investigations (QI) Unit of the Quality Assurance
                Department. The QI staff conducts a thorough investigation of any suspicious
                activity and when warranted, the findings are referred to the JPMC Bank
                Fraud Prevention and Investigations Unit, and the appropriate law
                enforcement agency. QI consults with Credit Risk Management and the
                Legal Department to determine the appropriate action to be taken.


Managed Third   Chase must ensure that our extensive network of Correspondents understand
Party           our commitment to these responsibilities and act in partnership with us to
Relationships   comply with them. Chases’ approved Correspondents go through a formal
                approval process with periodic monitoring and must meet criteria that Chase
                has established to ensure that Chase is dealing with financially fit and
                reputable lenders. If you suspect that a third party is not acting in the best
                interests of Chase, the value of the relationship should be questioned and
                acted upon accordingly.




July 2004                                                                          Credit Policy – 6
Credit Policy                                                           Chase Correspondent Division



                                   Credit Philosophy
The 5 “Cs” of Credit


Overview          Chase bases its underwriting philosophy on the “5 Cs of Credit”:

                  ·   Capacity
                  ·   Capital
                  ·   Character/Credit History
                  ·   Collateral
                  ·   Conditions

                  Each “C” of credit is evaluated individually in the assessment of the borrower
                  and property’s worthiness. In concert, the “Cs” of credit, frame a mortgage
                  loan request from a borrower’s credit profile and property’s analysis. This
                  Chapter will define the “Cs” of credit, describe analytic tools used to assess
                  the “Cs” of credit and provide basic Chase philosophy of the “Cs” of credit.


In this Chapter   Included in this chapter are broad overviews of the following topics:

                                                 Topic                                See Page
                  Capacity                                                                2
                  Capital                                                                 3
                  Credit History                                                          5
                  Collateral                                                              6
                  Conditions                                                              7
                  Profile                                                                 8




July 2004                                                                      Credit Philosophy – 1
Credit Policy                                                          Chase Correspondent Division



Capacity


Definition      Capacity is a borrower’s ability to meet fixed debt obligations (or make
                monthly payments) from income sources that are predictable, recurring, and
                consistent. This approach indicates that Chase expects to be repaid from a
                borrower’s recurring cash inflows, not from the sale of collateral pledged for
                the mortgage.


Measurement     The principal tools used to measure capacity are the D/I ratio, and P/I ratio.

                · The D/I ratio divides the borrower’s fixed monthly debt obligations (cash
                  outflows) by the borrower’s predictable, recurring, and consistent monthly
                  income sources (cash inflows).
                · The P/I ratio divides the borrower’s fixed housing expense by the
                  borrower’s predictable, recurring, and consistent monthly income sources.


Determining     To determine continuity of predictable, recurring and consistent income
Continuity      sources, employment, and records of historical income must be carefully
                analyzed. Additional sources of income (i.e., bonus, overtime, commissions,
                interest and dividends, rental real estate, royalties, alimony, child support,
                pension, social security, etc.) must be scrutinized for continuity and trends.
                Borrower-owned businesses (proprietorships, partnerships, and corporations)
                must be analyzed to ensure that:

                · the business is profitably viable,
                · the business is generating sufficient cash-flow to fund internal business
                  needs, and
                · the business can provide the owner (the borrower) with sufficient salary
                  and/or distributions so that he/she can repay all debt obligations.




July 2004                                                                      Credit Philosophy – 2
Credit Policy                                                          Chase Correspondent Division



Capital


Overview        The term capital in the broadest sense relates how well a borrower has
                managed his/her financial affairs. There are three dimensions of capital to
                consider:

                · net worth,
                · cash reserves, and
                · capital at risk.


Net Worth       · Net worth represents the borrower’s excess in assets over liabilities.
                · The principal tool used to measure net worth is the tangible net worth
                  calculation: tangible assets minus liabilities equals net worth. Tangible
                  assets usually exclude personal property such as furniture.
                · A strong net worth position indicates that the borrower:
                  · has a significant investment in his/her assets,
                  · has managed their financial dealings to build equity, and
                  · may have greater incentive to protect equity in investments.


Cash Reserves   · Cash reserves, relates the borrower’s cash position and the ability to quickly
                  convert assets to cash.
                · The principal tool to measure cash position is the number of months of
                  PITI the Borrower has available after closing.
                  · The number of months PITI divides the borrower’s cash assets by the total
                    monthly costs of owning the home (principal, interest, taxes, insurance(s)
                    - PITI, and homeowner’s association fees, and special assessment fees).
                · The borrower’s cash reserve position, provides a cushion against
                  disruptions of the borrower’s income stream or unforeseen financial needs.
                  The borrower’s cash position also indicates whether the borrower exhibits
                  an ability to save.
                · In a purchase transaction, the borrower must have sufficient cash to pay
                  for any required closing funds (down payment or equity investment,
                  prepaid items, closing costs, and loan fees.)

                                                                             Continued on next page




July 2004                                                                     Credit Philosophy – 3
Credit Policy                                                          Chase Correspondent Division



Capital, Continued


Capital at Risk   · Capital at Risk is defined as the cash injected (cash at risk) into an
                    investment such as a home purchase.
                  · The principal tool used to assess the cash at risk is the borrower’s cash
                    down payment into a purchase transaction.
                  · A borrower’s investment of risk capital into a purchase transaction means
                    that the borrower has a stake in the property. The likelihood of default is
                    lower when a borrower has an investment in the property. For this reason,
                    encouraging the equity investment (down payment) as part of the borrower
                    negotiation process is, in all cases, preferred.




July 2004                                                                      Credit Philosophy – 4
Credit Policy                                                          Chase Correspondent Division



Credit History


Definition      A credit history provides valuable information to Chase on a borrowers “use”
                of credit. The definition of “use” of credit covers several aspects:

                · The borrowers payment history, which evidences his/her willingness to:
                  · Pay obligations,
                  · Adhere to contractual financial agreements, and
                  · Fulfill financial commitments.
                · How much credit a borrower requests.
                · The sources and type of credit.
                · How much credit a borrower has.
                · How much a borrower owes.

                To assess the credit history, the Correspondent must obtain a credit report
                from a credit reporting bureau. The value in a credit report is not limited to
                simply providing evidence of a payment history - it provides historical
                information of a borrower’s “use” of credit.

                REFERENCE: For additional detailed information on credit history and
                the use of credit reports, refer to the Credit History chapter.




July 2004                                                                      Credit Philosophy – 5
Credit Policy                                                           Chase Correspondent Division



Collateral


Definition      Collateral, or security, is defined as the asset pledged by the borrower to the
                lender. Collateral is a secondary source of repayment; cash flow is the
                primary source of repayment.

                The principal tool used by mortgage lender to evaluate collateral is the real
                estate appraisal. The analytic tool used is the loan-to-value (LTV).
                Generally, the loan-to-value ratio is calculated by dividing the collateral value
                of the proposed collateral by the amount of the mortgage.

                Chase requires experienced state-certified or state-licensed appraisers to help
                define the value of our collateral. It is our responsibility as lenders to
                carefully review the appraisal report to determine whether the collateral is
                sufficient to secure the mortgage.

                Even though credit analysis employs standardized quantitative techniques, it
                is the result of assumptions, judgments, and inferences about the future that
                are based upon past and present circumstances. The appraisal report is the
                final factor in our credit analysis. The function of collateral is to protect us
                from the imperfection of our judgment and the adverse impact of anticipated
                changes in conditions.




July 2004                                                                      Credit Philosophy – 6
Credit Policy                                                         Chase Correspondent Division



Conditions


Definition      Conditions are factors essentially beyond the borrower’s control that could
                impair or enhance his/her ability to meet commitments. Chiefly, Chase is
                concerned with national, regional, or local factors that can impact the
                borrower’s employment or property value.

                Conditions can be classified into two major categories: macro-conditions and
                micro-conditions. Macro-conditions are broad-brush factors that influence a
                large segment of an industry, the country, or population, such as economic
                downturns. Micro-conditions are usually focused upon conditions unique to
                the borrower: such as a required closing date, a trend in the borrower’s
                business, or an unusual aspect of the borrower’s credit profile.

                In short, attention to conditions is not simply identification of macro- and
                micro- external and internal risks, but an assessment of the likelihood of
                occurrence. Events or occurrences already underway or deemed highly likely
                to occur should carry the greatest weight in the credit decision.




July 2004                                                                    Credit Philosophy – 7
Credit Policy                                                        Chase Correspondent Division



Profile


Overview        Chase determines what products and programs are available to a borrower
                through an assessment of a borrower’s profile. The analytic tools of the five
                Cs of credit compose a “snap-shot” of the borrower’s financial position. This
                “snap-shot” captures the:

                · borrower’s ability and willingness to repay the requested mortgage,
                · borrower’s investment in the property, and
                · macro- and micro-conditions that may impact the borrower.




July 2004                                                                   Credit Philosophy – 8
Credit Policy                                                           Chase Correspondent Division



                                      Underwriting
The 5 “Cs” of Credit


Overview          CHASE uses the five “Cs” of credit as the analytic framework to assess the
                  borrower’s stability, ability, and willingness to repay a mortgage.

                  This section of the Credit Policy Guide provides underwriters with guidance
                  in determining:

                  · the measurement of the “Cs” of credit,
                  · required documentation and verification, and
                  · appropriate credit analysis and underwriting procedures.

                  The analysis of these credit factors allows the underwriter to determine the
                  credit “profile” of the customer.


In this Chapter   The following topics are covered in this chapter:

                                                Topic                                 See Page
                  The 5 “Cs” of Credit                                                    1
                  Capacity                                                                2
                  Income Analysis                                                         4
                  Salaried Borrowers - General Information                               14
                  Salaried Borrowers - Income Analysis                                   17
                  Investment Income - General Information                                23
                  Investment Income - Types of Income                                    25
                  Additional Income Sources                                              36
                  Self-Employed Borrowers - Income Source                                42
                  Self-Employed Borrowers - Income Analysis Methods                      44
                  Additional Income Considerations                                       49
                  Debt Analysis - General Information                                    50
                  Debt Analysis - Other Types of Debt                                    52
                  Debt Analysis - Real Estate                                            54
                  Debt Analysis - Installment                                            59
                  Debt Analysis - Revolving                                              60
                  Debt Analysis - Business                                               61




July 2004                                                                          Underwriting – 1
Credit Policy                                                             Chase Correspondent Division



Capacity


Analytic Tools   The principal analytic tools used to measure Capacity are the debt-to-income
                 (D/I) ratios. These ratios accomplish this by indicating the percentage of a
                 borrower's income required to meet recurring debt and housing debt
                 obligations. This analysis necessitates projecting a borrower's recurring
                 income sources (cash inflows), housing payments, and other required debt
                 payments (cash outflows). Then, the recurring payments (cash outflows) are
                 divided by the recurring income sources (cash inflows) to calculate the debt-
                 to-income ratio. We use two primary debt-to-income measurements:

                 · housing debt-to-income ratio, and
                 · total debt-to-income ratio.


P/I Ratio        The housing debt-to-income ratio, or payment-to-income ratio, measures the
                 ability of the borrower to meet the total proposed housing debt (or total PITI).
                 The Total PITI (Principal, Interest, Taxes, and Insurance) is defined as the
                 total of the monthly amounts for:

                 ·   principal and interest (for all mortgages on the property);
                 ·   real estate taxes,
                 ·   any insurance premiums (hazard, flood, and mortgage);
                 ·    homeowner’s association fees; and
                 ·   a special assessment fees.

                 This ratio is calculated by dividing recurring monthly housing payments (total
                 PITI) by recurring income and is expressed as a percent. This ratio is also
                 known as the front-end ratio.

                                                                                   Continued on next page




July 2004                                                                              Underwriting – 2
Credit Policy                                                              Chase Correspondent Division



Capacity, Continued


Calculating     The P/I ratio, and the D/I ratio, include the payment on the requested
Mortgage        mortgage. The underwriter calculates the payment amount as follows:
Payment

                          Product                                 Method of Calculation
                Fixed Rate                       Full amortizing payment calculated with the interest
                                                 rate for the specific product and lock-in period.
                Short Term ARMs                  Initial start rate + 2%.
                (initial adjustment < 3 years)
                Long Term ARMs                   Initial start rate.
                (initial adjustment > 3 years)

                NOTE: Specific products and programs may dictate the use of a
                particular method for calculating the payment for the requested
                mortgage. See specific product or program for details.


D/I Ratio       The total debt-to-income ratio measures the ability of the borrower to meet all
                his/her current and projected debt payment obligations. It is calculated by
                dividing recurring monthly housing payments and all other debt payments by
                recurring monthly income and is expressed as a percent. This ratio is also
                known as the back-end ratio.

                The two debt-to-income ratios are often expressed together, such as 28/36%.
                The first percentage relates to the housing debt-to-income ratio, and the
                second percentage indicates the total debt-to-income ratio.




July 2004                                                                             Underwriting – 3
Credit Policy                                                          Chase Correspondent Division



Income Analysis


Introduction    Greatest weight is given to historic income data that can be verified to the
                satisfaction of the underwriter. The income must be recurring to be available
                next month, and next year, to meet housing and debt payments.


Verification    The following topics provide Chase’s standard conventional loan income
Requirements    statement/verification requirements.

                NOTE: Specific product or program income verification requirements
                may differ. Please review the product and program guidelines for
                specific products.



Borrower’s      · Chase requires an initial application on all borrowers.
Application     · This application serves as the borrower’s financial statement and provides
                  statistical information as well as certifications from the borrower as to the
                  validity of the information disclosed.
                · Once all the information stated by the borrower on the initial application is
                  received and/or verified, a final application is prepared which must be
                  signed by the borrower prior to or at closing.
                · On stated income products or automated underwriting system “findings”
                  reports, the application serves as the income and employment verification.



Income          · On products that require verification of income streams, the income used
Verification      for qualifying must be adequately verified to evidence stability and
                  continuity.
                · There are varying document requirements according to the product
                  parameters. Be sure to refer to the product, program, or automated
                  underwriting system findings' report for specific requirements; however,
                  standard sources for verifications of salaried borrowers or for self-
                  employed borrowers who are paid salary but have less than 25% ownership
                  in the business from which they derive the salary, are listed below

                                                                             Continued on next page




July 2004                                                                         Underwriting – 4
Credit Policy                                                          Chase Correspondent Division



Income Analysis, Continued


Hand-held       The following are documents that the borrower provides directly to the
Verifications   Lender in original form:

                       Document                                Requirements
                 Pay Stubs/Pay           Chase requires copies of the most recent computer-
                 Statements              generated pay stub(s) or statement(s) to verify income
                                         and earnings trends. The stub(s) must report the
                                         cumulative year to date earnings and must represent at
                                         least 30 days’ earnings in the cumulative total(s).
                                         Generally, this requirement is met by obtaining at least
                                         the most recent single pay stub, but may require more
                                         than one pay stub to establish consistency in income or
                                         to identify earning trends. There may be alternative
                                         sources, such as the employer’s ledger sheets, which
                                         may be used in those circumstances in which
                                         computer-generated stubs are not available; and,
                 W-2 Forms               · Generally, the two most recent W-2 forms are needed
                                           to verify consistency in past earnings.
                                         · In cases in which employment and income are
                                           clearly stable and the employer has not changed, one
                                           W-2 form may be sufficient.
                 Internet/Computer-      · Eligible for owner-occupied and 2nd homes only.
                 generated/Facsimile     · Must clearly identify the borrower and his/her gross
                 Income Statements         earnings for past two years, year-to-date, and most
                                           recent 30-day period.
                                         · Statement must clearly identify employer and
                                           individual providing the information.
                                         · Facsimile and e-mail documents must show the
                                           “banner” of origin and/or author of the information.
                                         · Verbal verification to employer, per Verbal
                                           Verification of Employment procedures on the next
                                           page.

                                                                             Continued on next page




July 2004                                                                         Underwriting – 5
Credit Policy                                                           Chase Correspondent Division



Income Analysis, Continued


Verification of   The Fannie Mae/Freddie Mac uniform verification of employment form is an
Employment -      alternative to the preferred simplified method of using hand-held
Standard VOE      documentation and may be used to verify present and past employment, under
                  certain circumstances. Following are the criteria under which the VOE form
                  is or is not eligible:

                  · Eligible on Agency products
                    · Eligible by exception on Non-Agency and Home Equity loan/line
                      products if accompanied by paystub or bank statements to validate
                      information
                  · The VOE must be mailed directly to the employer’s personnel, human
                    resources, or payroll department:
                    · Must be returned fully completed to the originator directly from the
                      employer, without passing through the hands of the borrower.
                    · The employer must complete all applicable sections of the form and
                      certify to its contents by signature and date.
                  · Must obtain verbal verification of employment


Verification      Chase has contracted with The Work Number for Everyone/TALX, a vendor
Service           who performs employment and salary verification for borrowers who are
Vendors           employed by corporations that have contracted to provide information to the
                  service. Verifications from this vendor are acceptable on Agency, Non-
                  Agency, and HE products, as well as, verbal verification/confirmation, as
                  required by Chase policy.

                  The following are the requirements when using this service:

                  · TALX report should be the "Full Verification" form and must provide
                    sufficient information to determine stable monthly income. If not fully
                    complete, must have a minimum of all the following:
                    · Information current as of (date) [must be last day of payroll cycle
                      immediately preceding date "full verification" form was requested.
                    · Employer name
                    · Employee's Social Security number
                    · Employee's status
                    · Employee's most recent start date and termination date (if applicable)

                                                                              Continued on next page




July 2004                                                                          Underwriting – 6
Credit Policy                                                          Chase Correspondent Division



Income Analysis, Continued


Verification     ·   Employee's job title
Service          ·   Base pay and frequency
Vendors          ·   YTD base pay
(continued)
                 ·   Past year(s) base pay
                 ·   TALX reference number

                NOTE: If verification not available through TALX on other employers,
                must provide standard verification of employment or previous
                employment via hand-held verifications or a standard VOE Form.


Stated Income   Chase has several products and/or automated underwriting system methods
Options         that allow the borrower’s stated income as verification of employment and
                income. They include:

                · Stated Income (Program) from the Application,
                · Freddie Mac’s “Accept Plus,” and
                · Fannie Mae’s DU “Approve/Eligible-Streamline”

                Although these products or automated underwriting system “findings” do not
                require written verification of income, they do require that the income that is
                stated be reasonable, based on the borrower’s occupation, title, and length of
                time with the company. If it cannot be determined that the stated income is
                reasonable under these conditions, the next level of verification should be
                obtained. These products and underwriting systems do require verbal
                verification of employment.

                                                                             Continued on next page




July 2004                                                                         Underwriting – 7
Credit Policy                                                        Chase Correspondent Division



Income Analysis, Continued


Verbal          As a fraud prevention and quality control measure and to re-verify previously
Verification/   verified employment, verbal verification/confirmation of current employment
Confirmation    is required on all loans, including “no income verification” and “stated
of Employment   income” loans, prior to closing, and regardless of the type of documentation
                that was used to verify income, except as follows:

                · FHA Streamline Refinance
                · VA Streamline Refinance
                · Specific conventional Signature Series programs. Check the product guide
                  to determine if a verbal VOE is not required.

                The verification process should take place within the two week period prior to
                closing. In states that close under escrow arrangements, the verification must
                be done within the two weeks preceding documents being sent out.
                If the employment or borrower’s business cannot be confirmed, as originally
                stated on the application, the loan cannot close. See “Procedures for
                Borrower No Longer Employed with Same Employer..”
                The verifying person must obtain the phone number, independent of any
                information provided by the borrower. This is, typically, best obtained from
                the phone directory, telephone information service, or internet. See the
                sections below for procedures for salaried or self-employed borrowers
                Many large companies contract with outside vendors to provide verifications.
                Chase has entered into an agreement with the company The Work Number for
                Everyone/Talx to simplify the verification process for companies that have
                subscribed to this service. Verifications of employment and/or income may
                be requested through this vendor, where eligible. See “Procedures for
                Salaried Borrowers.”

                                                                           Continued on next page




July 2004                                                                       Underwriting – 8
Credit Policy                                                         Chase Correspondent Division



Income Analysis, Continued


Verbal VOE      · The verification process should take place within the two week period prior
Criteria          to closing.
                · In states that close under escrow arrangements, the verification must be
                  done within the two weeks preceding documents being sent out.
                · If the employment or borrower’s business cannot be confirmed, as
                  originally stated on the application, the loan cannot close. See “Procedures
                  for Borrower No Longer Employed with Same Employer.”
                · The verifying person must obtain the phone number, independent of any
                  information provided by the borrower. This is, typically, best obtained
                  from the phone directory, telephone information service, or Internet.
                · Many large companies contract with outside vendors to provide
                  verifications. Chase has entered into an agreement with the company The
                  Work Number for Everyone/Talx to simplify the verification process for
                  companies that have subscribed to this service. Verifications of
                  employment and/or income may be requested through this vendor, where
                  eligible.

                                                                            Continued on next page




July 2004                                                                        Underwriting – 9
Credit Policy                                                            Chase Correspondent Division



Income Analysis, Continued


Verbal VOE -    The following procedures are followed for Salaried Borrowers:
Salaried
Borrowers

                    IF verification is
                      completed …                                  THEN…
                 directly with Employer,   · Obtain the telephone number independent of the
                                             borrower’s information.
                                           · Contact the HR, Payroll, or Personnel department (as
                                             applicable to the business) and confirm the borrower’s
                                             employment.
                                             · If the company has no such department, you may
                                               contact the borrower’s supervisor directly, provided
                                               the number used for verification is obtained
                                               independently from any information provided by the
                                               borrower.
                                           · Complete, sign, and date the Verbal Verification of
                                             Employment Form.
                                             · Document all attempts made in verifying
                                               employment on this form.
                                             · If the employer refuses to verify, note that on the
                                               form and obtain the next level of documentation,
                                               such as paystub, VOE, tax returns.
                                           · Retain the completed form in the file behind the loan
                                             approval document, along with the next level of
                                             documentation, if applicable.
                 via Telephone or          · Complete, sign and date the Verbal Verification of
                 Internet with a Vendor,     Employment Form
                                           · Retain the completed form in the file behind the loan
                                             approval document.

                                           NOTE: The fees for verification may not be charged
                                           to the borrower.

                                                                               Continued on next page




July 2004                                                                          Underwriting – 10
Credit Policy                                                              Chase Correspondent Division



Income Analysis, Continued


Verbal VOE -     The following steps are completed for Self-employed Borrowers:
Self-Employed
Borrowers

                   Step                                     Action
                    1     Contact directory assistance to ensure the number/business is still active
                          and in existence

                                If Borrower filing a 1099
                              contracts through a company      If Borrower is an individual service
                                         verify…                provider who files a 1099 verify…
                            employment through the company.    the telephone number through
                                                               directory assistance or other source.

                    2     Verifier must complete, sign, and date the Verbal Verification of
                          Employment Form, as applicable for all borrowers.

                          · Document all attempts made in verifying on this form.
                          · If unable to verify, you must obtain the next level of documentation,
                            such as tax returns.
                    3     Retain the completed form in the file behind the loan approval document
                          and supporting documentation, if applicable


If Borrower is   If while completing the Verbal VOE, it is determined the Borrower is no
No Longer        longer employed by the same employer, or no longer owns the same
Employed by      company, or wasn’t an employee or owner at application the following steps
Same Employer    are completed:

                                                                             If Borrower wasn’t
                 If Borrower secured new     If Borrower is not            employed or an owner
                       employment…              employed…                       at application
                 · document the Verbal   · document the Verbal            · document the Verbal
                   VOE Form,               VOE Form,                        VOE Form,
                 · update the file,      · Update the file,               · update the file,
                 · resubmit the file to  · resubmit the file to           · refer as Fraud file.
                   Underwriting.           Underwriting.

                                                                                 Continued on next page




July 2004                                                                            Underwriting – 11
Credit Policy                                                          Chase Correspondent Division



Income Analysis, Continued


Tax Return      Unless the automated underwriting system message does not require tax
Requirements    returns, Chase requires a minimum of two years signed personal tax returns
                from the borrower, including all schedules, under the following general
                guidelines:

                · Any loan request that exceeds $750M.
                · When the tax returns are needed to verify historic qualifying income
                  amounts for certain salaried borrowers, "investment" income, and
                  "additional" income sources.
                · The determination for what calendar year returns are required, is based on
                  the application date. For example, applications taken on April 1, 2004
                  would require year 2001 and 2002 tax returns, as the filing date for calendar
                  year 2003 has not yet passed. While the Borrower may opt to provide 2003
                  and 2002 returns, the 2003 returns are not required until the application date
                  passes the year 2003 tax-filing deadline of April 15, 2004.
                · For self-employed borrowers (any borrower who owns 25% or more in a
                  business).
                · For borrowers employed by a family business but are not self-employed.
                · If tax returns are required and the tax-filing deadline has passed without the
                  borrower's filing, we must obtain a properly executed notice of extension
                  for our review and loan file.
                · If the borrower’s original signature does not appear on the copy of the
                  return, the borrower must sign the return prior to closing.


IRS Form        The IRS form 4506-T is generally utilized to validate tax returns provided by
4506-T          the borrower who is self-employed or whose income fluctuates from
Requirements    commission or gratuities earnings. However, the 4506-T may also be
                required when misrepresentation is suspected to validate income
                documentation such as W-2 forms or earnings history stated on the
                Verification of Employment form.

                NOTE: When misrepresentation is suspected, the borrower must sign a
                Form 4506-T. The borrower's income must be validated prior to closing.

                                                                             Continued on next page




July 2004                                                                       Underwriting – 12
Credit Policy                                                           Chase Correspondent Division



Income Analysis, Continued


IRS Form        The following information provides the requirements for when a 4506-T is
4506-T          needed:
Requirements
(continued)     Agency, FHA and VA loan products: The underwriter must condition for
                Form 4506-T to be signed for a self employed borrower or if tax returns are
                utilized to verify any portion of qualifying income.

                · The borrower may sign at application with no additional 4506-T required
                  provided the 4506-T is sent to the IRS during the loan processing period.
                  The form does not have to be returned by the IRS prior to closing. We
                  encourage the practice of obtaining the signature and requesting the
                  verification at the time of application. OR
                · The borrower may sign at application and again at closing so that the form
                  may be utilized for quality control requirements. The form does not have to
                  be sent to IRS prior to closing.

                Chase Preferred/Non Agency products: Self employed borrowers and
                borrowers who are not self employed but federal income tax returns are used
                to verify sources of income or other information must sign Form 4506-T at
                application. Validation of the returns must be made prior to closing.

                Private Investor products: The underwriter must condition for Form 4506-T
                to be signed at closing for a self employed borrower or if tax returns are
                utilized to verify any qualifying income. Refer to product charts for special
                requirements, as some private investors may be more restrictive.

                No Income Documentation programs or products: The requirement for
                Form 4506-T is eliminated for these programs/products unless a private
                investor sets this criterion. Refer to product charts for special requirements.

                The 4506-T cannot be waived by persons other than the Underwriting Center
                Manger or higher level of lending authority, nor can the borrower modify it or
                be instructed to modify it. If the borrower refuses to sign the 4506-T, the loan
                cannot close until the signature issue is resolved through the Underwriting
                Center.




July 2004                                                                        Underwriting – 13
Credit Policy                                                           Chase Correspondent Division



Salaried Borrowers - General Information


Salaried        Salaried borrowers are defined as individuals who have less than 25%
Borrowers       ownership in the business from which they derive the salary.
Defined


Tax Return      Copies of personal tax returns are required for salaried borrowers in the
Requirements    following situations:

                       Scenario                                 Requirement
                Loan requests exceeding   A minimum of the last two years of personal tax returns,
                $750M.                    signed (the signatures do not need to be originals, but
                                          should represent a reasonable facsimile when compared
                                          to other signed documentation) by the borrower and
                                          including schedules, K-1s, and statements.
                Loan requests with        A minimum of the last two years of personal tax returns,
                additional income other   signed by the borrower and including schedules and
                than salary income.       statements. These additional income sources may be:

                                          · Investment income related (interest/dividend, capital
                                            gain, rental property, trust income, lease income,
                                            royalty income, etc), or
                                          · Other income related (alimony, automobile allowance,
                                            retirement/pension, social security, etc.).
                Loan requests from        Salaried borrowers who earn more than 25% of their
                salaried borrowers who    income via bonus and commissions, and salaried
                may have significant      borrowers with car allowances often have significant
                employee business         employee business expenses related to the production of
                expenses related to the   the income. The personal tax returns must be reviewed
                production of the         the expenses subtracted from qualifying income.
                income.                   Generally, these expenses are found on Schedule A and
                                          Form 2106 of the personal tax returns. The expenses are
                                          generally averaged unless increasing.

                NOTE: If tax returns are required and the tax-filing deadline has passed
                without the borrower’s filing, we must obtain a properly executed notice
                of extension for our review and loan file.

                                                                              Continued on next page




July 2004                                                                        Underwriting – 14
Credit Policy                                                         Chase Correspondent Division



Salaried Borrowers - General Information, Continued


Employment      Chase requires salaried borrowers to exhibit the following employment
Stability       standards:
Standards
                · A minimum of two years employment,
                · Prior to closing, the Correspondent must independently verify and note in
                  the loan file that the borrower is employed.
                · Any employment gap of more than 2-4 weeks must be explained in writing
                  by the borrower,
                · In cases where a borrower exhibits short employment because he/she has
                  just entered or re-entered the job market the following factors should be
                  considered:
                  · The borrower may have potential for increased earning and
                    advancement because he/she has just entered or re-reentered the job
                    market and has received job training, a degree, or a diploma in his/her
                    current field of employment.
                  · In the above incident, the borrower must provide supporting
                    documentation in the forms of a diploma, job training certificate, or
                    transcripts.

                NOTE: Specific product or program employment stability standards
                may differ. Please review the product and program guidelines for
                specific products.


Employment      Consistent and predictable income streams are crucial to timely mortgage
Analysis        repayment. Analyzing a borrower’s present and past employment, and
                predicting the likelihood of future employment, provide the basis of this
                analysis.

                       Criteria                                 Requirement
                Employment Stability       All borrowers whose incomes are used to qualify for
                                           the debt should evidence continuity of income
                                           streams. Borrowers who are employed should
                                           evidence stability in employment with no significant
                                           unexplained gaps, although, it is not required that
                                           their employment be with the same employer, unless a
                                           product specifically requires a specific length of
                                           employment with one employer.

                                                                            Continued on next page




July 2004                                                                      Underwriting – 15
Credit Policy                                                          Chase Correspondent Division



Salaried Borrowers - General Information, Continued


Employment Analysis (continued)

                           Criteria                            Requirement
                 Continued Employment   Borrowers should exhibit the potential for
                 Potential              maintaining continuous employment and/or income.
                                        For those borrowers with fluctuating or diminishing
                                        income from employment the ability to meet current
                                        and future obligations must be evidenced.
                 Economic Issues        National, regional, and local economic issues should
                                        be addressed in the employment analysis by the
                                        underwriter, if it is a significant factor in the decision.
                 Transferable           A salaried borrower’s readily transferable skills and
                 Skills/Abilities       abilities (which are determined based on information
                                        in application package) that are in strong demand, can
                                        serve as a mitigant or compensating factor in the
                                        employment analysis.




July 2004                                                                        Underwriting – 16
Credit Policy                                                        Chase Correspondent Division



Salaried Borrowers - Income Analysis


Income          Salaried borrowers can be paid in a wide variety of ways. This variety
Analysis -      extends to the timing of the salary payment (hourly, weekly, bi-weekly, bi-
General         monthly, monthly, annually), and to the means by which it is earned (straight
                salary, bonuses, and commissions). The following salaried borrower income
                analysis guidelines provide procedures and verification requirements for
                determining a salaried borrower’s typical (or expected) monthly salary level
                to be used for mortgage qualification. In all cases for salaried borrowers,

                · Sufficient pay stubs/statements must be obtained to validate the monthly
                  (and/or annual) income calculation. Usually, at minimum, two pay
                  stubs/statements are required.
                · Declining income sources should not be averaged, and an explanation for
                  the decline should be obtained. The most recent lower income would be
                  used for qualification purposes.
                · If included in qualifying income, variable components of salary income,
                  especially bonuses and commissions, must be separately reported, if
                  possible.
                · Any significant increase in income should be adequately explained.

                NOTE: Specific product or program income verification standards may
                differ. Please review the product and program guidelines for specific
                products.

                                                                           Continued on next page




July 2004                                                                     Underwriting – 17
Credit Policy                                                             Chase Correspondent Division



Salaried Borrowers - Income Analysis, Continued


Calculating     Use the following chart to determine the appropriate method for calculating
Income          monthly income for salaried borrowers.

                  Pay Basis                              Method of Calculation
                Hourly           ·   Generally, for a 40-hour workweek, an hourly-paid borrower’s
                                     monthly income is determined by multiplying the hourly-wage
                                     rate by 40, multiplying this amount by 52, and dividing by 12.
                                 ·    Note, if the borrower does not work a 40-hour workweek, the
                                     underwriter must average the hours worked from the
                                     paystubs/statements.
                                 ·    The calculated monthly amount should be compared to the last
                                     two years historic income data to ensure reasonableness of the
                                     calculation.
                Daily            ·   Daily-paid borrowers rarely work regular full-time hours.
                                 ·   The underwriter must determine the specific number of days
                                     per week or days per month the borrower will work.
                                 ·   Then, the monthly income level is calculated by multiplying
                                     the daily salary rate by the number of days worked for a month.
                                 ·   The calculated monthly amount should be compared to the last
                                     two years historic income data to ensure reasonableness of the
                                     calculation.
                Weekly           ·   To determine a weekly-paid salaried borrower’s income
                                     multiply the weekly income by 52 and divide by 12.
                                 ·   The calculated monthly amount should correlate with historic
                                     annual amounts.
                Bi-Weekly        ·   A bi-weekly-paid salaried borrower is paid every other week,
                                     or 26 times per year.
                                 ·   The underwriter will multiply the bi-weekly salary by 26 and
                                     divide by 12 to determine a monthly income amount.
                                 ·   A bi-weekly pay-date can be determined by looking at the day
                                     of the week for the payday. Most bi-weekly pay-dates are
                                     every other Thursday or Friday.
                                 ·   The calculated monthly amount should correlate with historic
                                     annual amounts.

                                                                                Continued on next page




July 2004                                                                          Underwriting – 18
Credit Policy                                                              Chase Correspondent Division



Salaried Borrowers - Income Analysis, Continued


Calculating Income (continued)

                     Pay Basis                            Method of Calculation
                  Bi-Monthly (or   ·   A bi-monthly-paid salaried employee is paid twice per month,
                  Semi-Monthly)        or 24 times per year.
                                   ·   The underwriter will multiply the bi-monthly salary by 24 and
                                       divide by 12 to determine a monthly income amount.
                                   ·   A bi-monthly pay-date can be determined by looking at the
                                       date for the payday. Most bi-monthly pay-dates are on the
                                       15th and the 30th (or last day of the month).
                                   ·   The calculated monthly amount should correlate with historic
                                       annual amounts.
                  Monthly          ·   The monthly-paid salaried employee’s regular monthly income
                                       will be used for qualification purposes.
                                   ·   This monthly amount should correlate with historic annual
                                       amounts.


Additional       The following topics detail additional considerations that the Underwriter should
Issues           address in calculating a salaried borrower’s income.


Bonus Income     To use bonus income for mortgage qualification, the underwriter must
                 carefully consider the source and method used in quantifying bonus income,
                 and the basis upon which the bonus is earned (i.e., personal sales or company
                 profit). To include bonus income as qualifying income:

                 · The borrower must have a consecutive, most recent, two-year history in the
                   same field, and
                 · The bonus income must be determined and separately stated for the two-
                   year period,
                 · If bonus income comprises 25% or more of the borrower's qualifying
                   income, the borrower must submit signed copies of the last two years
                   personal tax returns (1040s), including all schedules and statements.

                 NOTE: Any employee business expenses incurred by the borrower in the
                 production of the bonus income must be subtracted in determining the
                 qualifying income level. Generally, these expenses are averaged, unless
                 increasing (these expenses are usually reflected on Schedule A and Form
                 2106 of the Personal 1040 tax returns).

                                                                                 Continued on next page




July 2004                                                                           Underwriting – 19
Credit Policy                                                         Chase Correspondent Division



Salaried Borrowers - Income Analysis, Continued


Calculating      · Generally, the following guidelines are used to calculate bonus income:
Bonus Income       · Total the last two years bonus income,
                   · Subtract applicable business expenses (a 2-year average from tax returns,
                     or higher if increasing), and
                   · Average the net bonus income over the two-year period.
                 · The employer should confirm that the bonus is expected to continue.


Commission -     Commission income can be volatile. This income source can rapidly increase
Paid Borrowers   or decrease.

                 · Generally, a commission-paid borrower must submit signed copies of the
                   last two years personal tax returns (1040s), including all schedules and
                   statements.
                   · Any business expenses incurred by the commissioned borrower must be
                     addressed in determining the qualifying income level.
                   · These expenses are usually reflected on Schedule A and Form 2106 of
                     the tax returns.
                 · If the borrower receives 25% or more of his/her income from commission
                   earnings, the commission income should be calculated by:
                   · Totaling the last two years commission income from the tax returns,
                   · Adding to this total the year-to-date commission earnings,
                   · Subtracting applicable business expenses (a two-year average from tax
                     returns, and an appropriate percentage for year-to-date expenses), and
                 · Averaging the net income over the total time period.

                  NOTE: A VOE may be required to itemize commissions from base
                 income.

                                                                            Continued on next page




July 2004                                                                      Underwriting – 20
Credit Policy                                                            Chase Correspondent Division



Salaried Borrowers - Income Analysis, Continued


Miscellaneous    Use the following chart to determine Chase’s requirements for various
Income           income considerations.
Considerations

                       Category                                  Requirement
                 Contract Employees      · Chase considers contract borrowers (borrowers who are
                                           paid on a contractual basis as independent
                                           “contractors”) as self-employed borrowers.
                                         · Contract borrowers must provide the same
                                           documentation as self-employed borrowers.
                 Future Salary Increases Borrowers with expected salary increases can include the
                                         increase in their qualifying income provided:

                                         · Written verification from the employer is obtained that
                                           states the dollar amount or specific percentage of the
                                           increase, and
                                         · The salary increase will begin prior to or within 30 days
                                           of the first payment date of the mortgage.
                 Gratuities and Tips     · Gratuities and tips can only be included in qualifying
                                           income if they are included in taxable income. This
                                           income source is usually found on W-2s or 1040s.
                                         · The income should be reported to the IRS and
                                           averaged, unless declining.
                 Military Income         Military personnel often receive supplemental income in
                                         addition to regular base-salary income. The following
                                         supplemental income amounts can be used for military
                                         personnel provided the pay is verified in writing by the
                                         branch of the military the borrower is in and the income is
                                         not subject to near-term elimination:

                                         · Flight/hazard pay,
                                         · Pro-pay (professional pay).

                                         The following additional supplemental income amounts
                                         for military personnel may be grossed up by a factor of
                                         1.25, as they are non-taxable:

                                         · Rations allowance,
                                         · Clothing allowance,
                                         · Quarters allowance.

                                                                                Continued on next page




July 2004                                                                          Underwriting – 21
Credit Policy                                                             Chase Correspondent Division



Salaried Borrowers - Income Analysis, Continued


Miscellaneous Income Considerations (continued)

                        Category                               Requirement
                  Overtime Salary        The use of overtime hours to qualify a borrower must
                  Income                 meet the following requirements:

                                         · The employer must provide written verification that the
                                           overtime earnings are likely to continue (usually, this
                                           verification is on the VOE), and
                                         · The overtime must be consistent and be reflected on
                                           historic income documentation (W-2s, and/or tax
                                           returns and/or VOE) for at least two years.
                  Part-time or Second-   To use part-time or second-job income as qualifying
                  job Income             income:

                                         · The income and employment should be verified as
                                           stable and likely to continue, and
                                         · The income should have a two-year historical record.
                                         · Use of income less than a two-year history requires a
                                           minimum one-year history and strong likelihood of
                                           continuance.
                  Partial Year Paid      · Certain borrowers (such as teachers or forest fire
                  Borrowers                fighters) may be paid for only part of the year.
                                         · The underwriter must ensure that the monthly
                                           qualifying income calculation incorporates this partial-
                                           year employment.
                                         · To determine a partial year paid teachers (or other
                                           partial year paid borrowers) qualifying income, the
                                           monthly salary is multiplied by the number of months
                                           the borrower is paid and divided by 12.
                  Union Member           Union Member borrowers income should be averaged
                  Borrowers              using:

                                         · The last two historic income from W-2s from all
                                           employers, and
                                         · Year-to-date earnings form current pay stubs/statements




July 2004                                                                          Underwriting – 22
Credit Policy                                                           Chase Correspondent Division



Investment Income - General Information


Investment       Investment income stems from a borrower’s assets or investments. Key to the
Income Sources   analysis of investment income streams is the stability and continuity of the
                 investment income sources.


Personal Tax     Other than annuitization of retirement/pension assets, and certain non-
Return           taxable income sources (such as public assistance), Chase requires the
Requirements     following for borrowers with Investment Income sources:

                 · A minimum of the last two years of personal tax returns, signed (the
                   signatures do not need to be originals, but should represent a reasonable
                   facsimile when compared to other signed documentation) by the borrower
                   and including schedules and statements.
                 · If tax returns are required and the tax filing deadline has passed without the
                   borrower’s filing, we must obtain a properly executed notice of extension
                   for our review and loan file.


IRS Form         The IRS Form 4506-T is utilized to validate the tax returns provided by the
4506-T           borrower and must be signed at closing if borrower receives a portion of
                 qualifying income from investment sources.


Additional       The following topics detail additional considerations the underwriter should
Considerations   address with borrowers who have Investment Income sources.

                 Annuitization of Retirement/Pension Assets - Chase allows the use of
                 income derived from “annuitizing” retirement/pension assets from individuals
                 who have free access to these assets. Free access means that there are no age
                 limitations, vesting issues, or tax surcharges to the individual that would
                 result from the distribution of the retirement/pension assets. Generally, the
                 individual must be 59½-years of age or older. In such cases we may
                 “annuitize” the applicant’s retirement/ pension funds. By annuitizing the
                 income we are, in essence, answering the question of: “Given a certain
                 interest rate, how long will the asset base sustain consistent regular
                 withdrawals?” We can use this asset generated income by using the
                 following guidelines:

                                                                              Continued on next page




July 2004                                                                        Underwriting – 23
Credit Policy                                                             Chase Correspondent Division



Investment Income - General Information, Continued


Additional       · Verifications of the assets used in the annuitization must reflect that they
Considerations     are liquid (cash and/or marketable securities),
(continued)      · The minimum term is 15 years,
                 · The discount rate is based on the prime rate at time of approval minus 2%.


How to           To annuitize the income, the underwriter follows these guidelines:
Annuitize
Income

                   Step                                       Action
                    1      Determine the asset base (present value).
                    2      Determine the discount rate (interest rate).
                    3      Calculate the annuitization amount using a 15-year term (amortization
                           period).
                     4     By inserting the three variables (interest rate, present value and
                           annuitization period) into a financial calculator the underwriter will
                           solve for the annuity amount.

                 As an example, a $500,000 asset base using a 6% discount rate would yield a
                 $51,481 annual and $4,290 monthly annuitized income amount.




July 2004                                                                           Underwriting – 24
Credit Policy                                                          Chase Correspondent Division



Investment Income - Types of Income


Capital Gains   In general, Chase does not include capital gains that arise from the sale of
Income          assets as qualifying income because they are usually non-recurring.
                However, certain types of capital gain distributions (such as mutual funds)
                may be of a regular and recurring nature. If capital gain income is to be
                included, the underwriter should:

                · Document that the capital gain income source has a minimum three-year
                  track record through three years personal tax returns,
                · Verify the underlying assets to support future income, and
                · Include any capital losses that correspond to the generation of the capital
                  gain in the analysis (i.e., a trader or stock broker who has both regular
                  capital gains and losses).
                · Be aware of any significant volatility or deterioration in the interim
                  period since the last year’s tax returns
                  · If known, discount the use of stock-generated income by 50% to
                    recognize the diminished potential in the current and forthcoming years.

                NOTE: Capital gain income is generally found on Schedule D of the
                personal tax return. Expenses of a trader or stockbroker may show up
                on schedules A, C, and/or E.


Interest/       To include interest or dividend income from cash or marketable securities in
Dividend        qualifying income, the following guidelines should be used:
Income
                · Verification that the underlying cash deposits and/or securities still exist
                  must be obtained,
                · Required funds necessary for closing on the subject transaction must be
                  subtracted prior to the calculation of interest/dividend income, and
                · Year-to-date interest and dividend income should be averaged with the last
                  two years as verified by the borrowers’ tax returns, unless declining.
                  · Year-to-date earnings can be imputed by applying a realistic market-rate
                    of interest to the account balances and averaging over the number of
                    months.
                  · Do not include interest from pass-through tax entities (partnerships and S
                    corporations) or from margined securities in the calculation of
                    interest/dividend income.

                NOTE: Interest/dividend income is found on Schedule B of the personal
                tax return.

                                                                             Continued on next page


July 2004                                                                       Underwriting – 25
Credit Policy                                                          Chase Correspondent Division



Investment Income - Types of Income, Continued


Investment      Apparent gains or trivial losses on Schedule E of the personal tax return may
Gains/Losses    mask sizeable required future liabilities or contributions. Consequently,
                analysis of Schedule E and K-1 statements (that reveal contingent liabilities,
                historic capital contributions and possible future liabilities) is important in
                assessing future customer liability or potential qualifying income.

                · A letter from the partnership or S corporation tax return preparer specifying
                  future contributions, obligations, debt responsibility and income projections
                  should be obtained whenever possible.
                · Any income derived from investment activity found on Schedule E of the
                  personal tax returns should be based upon a three-year tax return analysis
                  and averaged, unless declining.


Non-Taxable     To use non-taxable income (i.e., child support, foster care, public assistance,
Income          disability, municipal bond tax-exempt interest, etc.) as qualifying income, the
                underwriter must:

                · Obtain written verification of the income by bank statements or award
                  statements.
                · Ensure that the income has at least a two-year history.
                · Any non-taxable income may be “grossed-up” by multiplying by a factor of
                  1.25. The approval document should reflect that the non-taxable income
                  has been “grossed-up.”
                · A higher rate may be used, provided the borrowers’ personal tax returns are
                  obtained and verified against the appropriate tax table.
                · The tax table and personal tax returns must be retained in the file.
                · Non-taxable income does not include non-reported income (income not
                  reported to the IRS). Non-reported income is not a valid source of
                  qualifying income.

                NOTE: Non-taxable interest income is usually reflected on the front
                page of the personal tax return.

                                                                             Continued on next page




July 2004                                                                       Underwriting – 26
Credit Policy                                                          Chase Correspondent Division



Investment Income - Types of Income, Continued


Notes           To use interest income from a Note Receivable:
Receivable
Income          · the Note must be seasoned (minimum 12 months),
                · the Note must continue for at least three years,
                · a copy of the Note stating the payment terms must be obtained,
                · the receipt of the most recent 12 months payments, or a minimum of four
                  payments that represent one year’s payments must be verified, (verification
                  can be in the form of deposit slips, canceled checks, or the individual tax
                  returns), and
                · a two-year average of the reported interest income will be used, unless
                  declining.

                NOTES:
                · If the Note is seasoned, but not yet reported (due to overlap of tax
                  years), use the principal balance multiplied by the interest rate of the
                  Note to determine qualifying income.
                · Interest income is found on Schedule B of the personal tax return, and
                  sometimes on the Schedule D and Form 6252 - Installment Sales.


Rental/         Chase classifies rental/investment property into:
Investment      · residential - any 1-4 unit residential rental/investment property, and
Property        · non-residential - any rental/investment property that:
Income -
Non-Subject
                  · has more than four units,
Property          · is commercial property, or
                  · is industrial property.

                                                                             Continued on next page




July 2004                                                                        Underwriting – 27
Credit Policy                                                              Chase Correspondent Division



Investment Income - Types of Income, Continued


Rental/         Additionally, Chase designates the income from rental/investment property as
Investment      either seasoned or unseasoned. These requirements are for other real estate
Property        owned by the borrower (non-subject property).
Income -
Non-Subject     NOTE: Specific requirements when Chase is financing the property
Property
(continued)
                (subject property) follow this section.

                 Category            Definition               Income Verification Requirement
                Seasoned      Rental/investment            Rental income received for a minimum of
                              property that has at least   two consecutive years requires the two
                              a one-year history of        most recent federal tax returns with the
                              federal tax return           appropriate accompanying schedule/form:
                              derived rental income.
                              Non-reported income is       · Schedule E of the personal tax return,
                              not to be included in          or
                              qualifying income.           · Form 8825 for partnerships, S
                                                             corporations, or limited liability
                                                             companies with rental/investment
                                                             property income, or
                                                           · appropriate schedules/ addenda from
                                                             corporation (1120) tax returns.
                Unseasoned    Rental/investment            · Current leases,
                              property that:               · Rent rolls, or
                                                           · Operating statements
                              · does not have a one
                                year rental history
                                reflected on personal
                                tax returns, or
                              · is a new investment
                                purchase.

                Rental income received for at least one year but less than two requires:

                · one year federal tax return data from the accompanying schedule/form
                  Schedule E of the personal tax return, or Form 8825 for partnerships, S
                  corporations, or limited liability companies with rental/investment property
                  income, or appropriate schedules/ addenda from corporation (1120) tax
                  returns, and
                · a current lease that reflects consistent gross rental income. If the current
                  lease reflects lower gross rental income, use the lesser amount reflected on
                  the lease.
                                                                                 Continued on next page



July 2004                                                                           Underwriting – 28
Credit Policy                                                           Chase Correspondent Division



Investment Income - Types of Income, Continued


Calculating     The table below describes the methods to calculate rental cash flow from
Rental/         rental/investment property.
Investment
Property
Income

                       Category                           Cash Flow Calculation
                Seasoned Residential    · Net income (from the tax return before any passive
                Property                  loss or income restrictions),
                                        · PLUS 100% of any depreciation deduction,
                                        · PLUS 100% of any amortization,
                                        · PLUS any interest expense shown on the tax return,
                                        · LESS full payment (principal and interest) for the
                                          property,
                                        · EQUALS calculated cash flow.
                Seasoned Non-           · Net income (from the tax return before any passive
                Residential Property      loss or income restrictions),
                                        · PLUS 90% of any depreciation deduction (the lower
                                          figure accounts for any capital reserve requirement, or
                                          capital repairs on this property type)
                                        · PLUS 100% of any amortization deduction,
                                        · PLUS any interest expense shown on the tax return,
                                        · LESS full payment (P&I) for the property.
                                        · EQUALS calculated cash flow.
                Unseasoned Residential, · 75% of gross rents (as verified from Form 8825 - for
                and Unseasoned Non-       partnerships, S corporations, or limited liability
                Residential Property      companies with rental/investment property income).
                                        · LESS full payment (P&I) and taxes and insurance
                                          (T&I) for the property,
                                        · EQUALS calculated cash flow.

                                                                              Continued on next page




July 2004                                                                         Underwriting – 29
Credit Policy                                                           Chase Correspondent Division



Investment Income - Types of Income, Continued


Additional       Cash Flows - The cash flows from each property should be averaged over the
Issues Rental/   last two-year period for seasoned properties, unless declining.
Investment
Property         Include rental/investment income in the borrower’s debt to income
Income           calculation. If the calculated cash flows:

                 · are positive - add the net figure to the borrower’s income.
                 · are negative - include the figure in the borrower’s recurring debt.

                 Interest Expense - The interest expense should be compared to the current
                 P&I and to ensure the amounts correlate. If the current expense is
                 significantly higher than the historical P&I, the property may have additional
                 debt or a very volatile variable rate loan. Such situations should be
                 thoroughly assessed for potential impact on the borrower’s capacity.

                 Commercial and Industrial Real Estate - Commercial and industrial real
                 estate is generally more volatile than residential. Unless Chase is
                 knowledgeable about the commercial/industrial renter/lessee, and knows the
                 relatively long term (more than three year) nature of the lease contract, it may
                 be prudent to discount the gross rentals by a 10% “vacancy factor.”

                 Seasoned Properties - If current rent rolls/leases reflect higher income,
                 reasonable increases may be used at the underwriter’s discretion.

                 NOTE: Investment/Rental Property Income is found on:
                 · Schedule E for personal tax returns,
                 · Form 8825 for partnerships, S corporations, and limited liability
                   companies, and
                 · on an attached schedule or addendum to a corporation tax return

                                                                              Continued on next page




July 2004                                                                        Underwriting – 30
Credit Policy                                                        Chase Correspondent Division



Investment Income - Types of Income, Continued


Rental/         The following requirements apply when Chase is financing a
Investment      rental/investment property.
Property
Income -        Basic Requirements - All investment property loans require calculation of
Subject         either:
Property
                · income net cash flow (as detailed in “Calculating Rental/Investment
                  Property Income” below), or
                · recurring debt inclusion of the full PITI.

                Income Verification Requirements - The appraiser must provide space for
                the following rental/investment requests:

                · Single Family Properties (fee simple, condominium or PUD)
                  · A Single Family Comparable Rent Schedule (FNMA form 1007, is not
                    required if borrower is not using rental income to qualify), and
                  · An operating Income Statement (FNMA form 216, not required if
                    borrower is not using rental income to qualify).
                · Two to Four Family Properties - Operating Income Statement (FNMA form
                  216 is not required if borrower is not using rental income to qualify).

                Calculating Rental/Investment Property Income - Not required if borrower
                is not using rental income to qualify. Income (cash flow) shall be determined
                by using the amount calculated on the 216. If the amount is:

                · positive - it is added to the qualifying income.
                · negative - it is added to the recurring debts.

                NOTE: Specific or program rental/investment property standards may
                differ. Please review the product and program guidelines for specific
                products.

                                                                           Continued on next page




July 2004                                                                     Underwriting – 31
Credit Policy                                                          Chase Correspondent Division



Investment Income - Types of Income, Continued


Royalty/Lease   The underwriter should carefully consider the source and method in
Income (Other   quantifying this type of income, and develop a comfort as to its
than Real       reasonableness and continuity. Royalty/lease income is found on Schedule E
Estate)         of the personal tax return.

                To use royalty or lease income:

                ·   Copies of the contracts or leases should be obtained,
                ·   The income should have a two-year minimum track record,
                ·   the payers of the leases/contracts should be identified, and
                ·   a two-year average of the income should be used, unless declining.


Trust Income    Trusts arise when an individual places asset, or income streams into the hands
                of a third party who is to maintain the assets or income for the benefit of
                another individual. There are many forms of trusts. The trust agreement sets
                forth the type of trust, its purpose, execution, and expectations.

                All types of trusts have:
                · trustors - individual(s) that create the trust,
                · trustees - individual(s)/institutions(s) charged with execution of the trust
                  agreement, and
                · beneficiary(ies) - individuals who benefit from the performance, income, or
                  assets of the trust.

                Trusts can be:

                · revocable - capable of being changed by the trustors, or
                · irrevocable - cannot be changed.

                The two types of trusts underwriters frequently encounter are inter vivos
                trusts and testamentary trusts.

                Inter Vivos Trusts - Also known as living trusts. Individuals place assets in
                this type of trust as an estate planning tool. Often, the underwriter finds real
                property (and cash asset accounts) vested to inter vivos trusts. Generally, for
                an inter vivos trust, the trustors and the trustees are the individuals who own
                the trust assets. The primary beneficiary is usually a surviving trustor,
                secondary beneficiaries arise upon the death of the trustors.

                                                                             Continued on next page




July 2004                                                                        Underwriting – 32
Credit Policy                                                            Chase Correspondent Division



Investment Income - Types of Income, Continued


Trust Income    Usually this type of trust does not produce income and generally is not an
(continued)     eligible source of income. Guidelines are found in the collateral section of
                this guide to ensure appropriate security agreement perfection for this type of
                trust. Inter vivos trusts are usually revocable.

                Testamentary Trusts - Arise at the death of an individual who had
                composed a trust. The trust agreement sets forth the terms and conditions by
                which the trustee will distribute the assets and or income to the beneficiaries.
                This type of trust can produce significant income and provide qualifying
                income to a borrower. Usually the testamentary trust is irrevocable.

                Using Trust for Qualifying Income - To use trust generated income as
                qualifying income for a borrower who is a trust beneficiary, a copy of the
                trust agreement or letter from the trustee must be obtained that indicates:

                · the amount, frequency and duration of trust payments, and
                · that the trust income shall continue for at least three years.

                If Trust Constitutes 20% or More of Borrower’s Qualifying Income - If
                trust constitutes 20% or more of the borrower’s qualifying income, the trust
                agreement must be reviewed by Chase approved counsel for the following:

                · the terms and conditions of the trust (confirmation that the income will
                  continue for a minimum of three years),
                · the balance and assets of the trust corpus ( what the trust consists of),
                · the borrower’s ability to access trust funds,
                · ensure the validity of income assumptions (determine if the income sources
                  or the trust are legitimate and whether the income is reasonable based upon
                  the sources),
                · determine any revocability of the trust agreement,
                · uncover any restrictive clauses or beneficiary performance clauses that may
                  stop, hinder, or reduce trust payments to the beneficiary (borrower).

                A two-year average of this income is used, unless declining. The trust
                income is found on Schedule B, Schedule D, or Schedule E of the personal
                tax return depending on the composition of trusts assets.

                                                                               Continued on next page




July 2004                                                                          Underwriting – 33
Credit Policy                                                         Chase Correspondent Division



Investment Income - Types of Income, Continued


Stock Options   Corporate stock options are frequently used by an employee as an incentive to
                attract new hires or to compensate employees with a more direct interest in
                the success of the company.

                Generally, stock options are not utilized as an eligible source of income as
                values are subject to significant fluctuations, or may not be readily
                ascertainable. Additionally, there are often restrictions on when and how the
                options may be exercised. However, consideration as a source of income may
                be given, subject to the following requirements:

                · The borrower must have a minimum of three years of receiving the stock
                  option award.
                · In no case shall the same stock options be used as both an income source
                  and a source for reserves.

                · The stock options granted by the employer must be the
                  company’s/corporation’s stock and must be a publicly traded company.
                · The stock option must have verifiable vesting for the next 3 years (or a
                  letter from the employer stating that it is likely to continue as part of the
                  borrower’s compensation).
                · Income should be determined for a three-year period according to the
                  following Vesting Schedule Analysis. Obtain a company generated vesting
                  schedule with a minimum three-year history that details by year the:
                  · grant date,
                  · vesting date,
                  · grant price,
                  · number of options, and
                  · expiration date.

                                                                            Continued on next page




July 2004                                                                      Underwriting – 34
Credit Policy                                                          Chase Correspondent Division



Investment Income - Types of Income, Continued


Stock Options   Calculating the Allowable Income from the Vested Options – To calculate
(continued)     the allowable income from the vested options:

                · Multiply the number of vested options for each year by the current market
                  price of the stock, as determined in the Wall Street Journal for that day (A).
                · Multiply the number of vested options for each year by the grant price (B).
                · Subtract B from A.
                · Reduce the amount by 50% to recognize market fluctuations.
                · Verify two previous conversions of stock options as evidenced by Schedule
                  D of the borrower’s personal tax returns.

                NOTE: If the loan is under an Agency Product Type, it must be
                submitted to the Chase Underwriting Manager for review.




July 2004                                                                       Underwriting – 35
Credit Policy                                                           Chase Correspondent Division



Additional Income Sources


Personal Tax     Personal tax returns can be used as the verification source for several types of
Return           additional income sources. When the personal tax returns are used as the
Requirements     income verification source, the following requirements must be met:

                 · A minimum of the last two years of personal tax returns, signed (the
                   signatures do not need to be originals, but should represent a reasonable
                   facsimile when compared to other signed documentation) by the borrower
                   and including schedules and statements.
                 · If tax returns are required and the tax-filing deadline has passed without the
                   borrower’s filing, Chase must obtain a properly executed notice of
                   extension for our review and loan file.


Internal         The IRS Form 4506-T is utilized to validate the tax returns provided by the
Revenue          borrower and must be signed in accordance with the instructions detailed in
Service Form     the IRS Form 4506-T Requirements section of Income Analysis.
4506-T


Alimony, Child   If the borrower chooses to disclose the receipt of alimony, child support, or
Support and      separate maintenance payments, they may be included as qualifying income
Separate         under the following conditions:
Maintenance
Income
                 · The payments must continue for at least three years and we must have
                   evidence of receipt for the previous 12 months (via court documents, bank
                   statements, bank deposit slips, tax returns, or cancelled checks), and
                 · a copy of any of the following must be obtained:
                   · the divorce decree,
                   · a signed separation agreement,
                   · a notarized agreement signed by all parties and their respective attorneys,
                   · the court order,
                   · family court records,
                   · copies of cancelled checks, or
                   · other legally accepted evidence dictated by local custom.
                 · Child support, as a non-taxable source of income, may be grossed up by a
                   factor of 1.25. Alimony payments are found on the front page of the
                   personal tax return (alimony payments should not be grossed-up).

                                                                              Continued on next page




July 2004                                                                        Underwriting – 36
Credit Policy                                                          Chase Correspondent Division



Additional Income Sources, Continued


Automobile      An automobile allowance may be included in qualifying income provided:
Allowance
                · written verification is received from the employer, or
                · the amount is verified by pay statements, or
                · the calculation of the income amount must include any expenses tied to the
                  allowance (such as a loan for a car used for business and the operating
                  expenses of the car). If the expenses exceed the car allowance, this amount
                  should be subtracted from qualifying income. Business expenses for the car
                  are found on Schedule A and Form 2106 of the personal tax return.


Disability      Disability income may be included in qualifying income provided:
Income
                · the employer or insurance carrier verifies the amount and terms of the
                  coverage, and
                · the disability income continues for at least three years.

                Short-term disability income (less than 3 years) can be considered if the
                potential for long-term disability income or stable permanent income can be
                determined. Generally, non-taxable disability income can be grossed up by a
                factor of 1.25.


Foster Care     Income for providing foster parent services to foster children paid to the
Income          borrower by governmental agencies can be verified by:

                · copies of checks, or
                · copies of contracts/agreements with the governmental agency.

                The foster care income should have a two-year history and can be grossed up
                by a factor of 1.25.

                                                                             Continued on next page




July 2004                                                                       Underwriting – 37
Credit Policy                                                            Chase Correspondent Division



Additional Income Sources, Continued


Gift Income     Income given as a gift from the same family member, usually parent(s), on a
                regular and on-going basis, may be considered qualifying income if it meets
                all the following conditions:

                · minimum of two full years history of stable gift income, and
                · verification letter from the donor that gift income will continue with
                  certification that any applicable taxes have been paid, and
                · verification of the source of the gift (donor’s ability to continue giving gift
                  income), and
                · verification of receipt by the borrower, by either:
                  · copies of cancelled checks for a minimum of a two-year period, or
                  · bank statements verifying receipt of full gift for a minimum two-year
                    period.

                NOTE: Do not confuse with “one time” gift of funds to cover down
                payment, closing costs, etc.


Housing         In some cases, borrowers may be able to use certain housing allowances (such
Allowance       as military and clergy) as qualifying income under the following guidelines.
                The housing allowance:

                · should have a history of being a part of the historical salary, and
                · must continue for three years, and
                · the amount of the allowance must be verified in writing by the employer.


Mortgage        Mortgage interest rate differential payments may be used as qualifying
Interest        income if:
Differential
                · the employer verifies the amount, terms and payment method for the
                  differential payment, and
                · the differential will continue for at least three years.

                If the payment is not a level amount (if it changes from year to year) an
                average should be used. The mortgage differential amount cannot be
                subtracted from the PITI payment on the mortgage.

                                                                               Continued on next page




July 2004                                                                         Underwriting – 38
Credit Policy                                                         Chase Correspondent Division



Additional Income Sources, Continued


Relocations/    Borrowers involved in a corporate relocation sometimes pose a special
Trailing Co-    problem when there are joint applicants. In a corporate relocation, one of the
Applicant       co-applicants must usually terminate his/her job to facilitate the move of the
Income          other applicant. Trailing co-applicant income is defined as projected income
                of a presently employed co-applicant who is moving along with the employed
                borrower to another area without having secured employment at the
                destination point of the new residency. In those situations, a portion of the
                co-applicants income may be used in determining the qualifying income
                based on the following guidelines. The Product Guide for the selected
                product may supercede the percentage of income detailed below. Please
                always check the applicable Product Guide. In all cases, the following
                conditions must be met:

                · Neither borrower may be self employed or commissioned.
                · The co-applicant must be employed in a non-commissioned occupation that
                  is readily transferable to a new location.
                · The co-applicant must have a record of at least two years of consistent
                  employment prior to the relocation.
                · The trailing co-applicant income does not provide more than 40% of the
                  qualifying income.
                · The approval document must document the “trailing income” in the income
                  calculation and the D/I ratio with and without the “trailing income” should
                  be noted on the approval document.
                · The property must be the primary residence for both borrowers.
                · The transaction must be a no cash-out purchase transaction, not a refinance.
                · The co-applicant must provide a written statement of intention to seek
                  similar employment in the new location.

                Trailing Co-Applicant with Job Offer
                If such an applicant has a firm offer of a new job that can be verified, 100%
                of the income from the new job for the trailing co-applicant may be included.

                Trailing Co-Applicant without Job Offer
                · Non-Agency - 75% of the most recent, prior income is acceptable.
                · Agency - Refer to specific Agency guidelines for allowable percentage of
                  prior income in addition to the bulleted conditions listed above.

                                                                            Continued on next page




July 2004                                                                      Underwriting – 39
Credit Policy                                                           Chase Correspondent Division



Additional Income Sources, Continued


Retirement/       Pension and retirement income may be included as qualifying income upon
Pension Income    verification. Retirement/pension income is found on the front page of the
                  personal tax return. Verification can be supplied from:

                  · written verification from the organization/company supplying the income,
                  · copies of retirement/pension award letters,
                  · copies of the most recent two check stubs evidencing consistent receipt of
                    the income, or
                  · individual tax returns.


Social Security   To use Social Security income as qualifying income, the income should
Income            continue for at least three years.

                  To verify Social Security income, the underwriter should obtain one of the
                  following:

                  ·   a copy of the Social Security Administration Award Letter,
                  ·   bank statements that verify receipt of a minimum of two months benefits,
                  ·   1099 tax forms, or
                  ·   Personal tax returns.

                  Non-taxable Social Security benefit income can be grossed up by a factor of
                  1.25. Social Security income is found on the front page of the personal tax
                  return.


Unemployment      To use unemployment compensation as qualifying income, the
Compensation      unemployment income should be of a regular part of the borrower’s income
                  (e.g., a construction worker who has weather related periods of
                  unemployment) and can be verified with one of the following:

                  · copies of checks,
                  · copies of compensation statements, or
                  · personal tax returns (1040s).

                  Unemployment income is found on the front page of the personal tax return.

                                                                              Continued on next page




July 2004                                                                        Underwriting – 40
Credit Policy                                                            Chase Correspondent Division



Additional Income Sources, Continued


Veterans         Veterans benefits, other than educational assistance can be included as
Benefits         qualifying income provided:

                 · the income will continue for at least three years, and
                 · either a letter of distribution form or a statement of earnings from the
                   Veterans Administration (VA) must be obtained

                 Generally, non-taxable veteran’s benefit income can be grossed up by a factor
                 of 1.25.


Public           Public Assistance can be used as qualifying income, subject to two years’
Assistance       verification of receipt by one of the following:
(Welfare
Benefits,        · copies of checks,
Including Food
Stamps)
                 · copies of award letters, or
                 · copies of grant statements.

                 Public assistance benefit income can be grossed up by a factor of 1.25.




July 2004                                                                         Underwriting – 41
Credit Policy                                                         Chase Correspondent Division



Self-Employed Borrowers - Income Source


Self-Employed   “Self-employed” is defined as any borrower for whom substantial qualifying
Borrower -      income comes from an enterprise the borrower owns outright or substantially
Definition      controls. An ownership share of 25% or more shall constitute the benchmark
                for “substantial control.”


General Tax     · Personal Tax Returns. Generally, a minimum of the last two years of
Return            personal tax returns, signed by the borrower, including schedules, K-1s, and
Requirement       statements are required for all self-employed borrowers.
                · If the tax-filing deadline has passed without the borrower’s filing, we must
                  obtain a properly executed Notice of Extension for our review and loan file.


IRS Tax Form    The IRS Form 4506-T is utilized to validate the tax returns provided by the
4506-T          borrower and must be signed in accordance with the instructions detailed in
                the IRS Form 4506-T Requirements section of Income Analysis.


Business Tax    Please note the following business tax requirements for self-employed
Requirements    borrowers:

                Sole Proprietorships
                · Personal Tax Returns
                · If those returns are insufficient to understand the business, supplemental
                  financial information (i.e. interim financial statements) may be requested.

                Partnerships- If Borrower controls 25% or more of the business entity, the
                following documentation is required, at a minimum:

                · Personal Tax Returns
                · Two most recent years - 1065s
                · Two most recent years - K-1s

                NOTE: In some situations, where it is determined that the financial
                impact to the borrower is inconsequential; the corporate tax return/K-1
                requirement may be waived by the Underwriter.

                                                                            Continued on next page




July 2004                                                                      Underwriting – 42
Credit Policy                                                          Chase Correspondent Division



Self-Employed Borrowers - Income Source, Continued


Business Tax      Corporations - If Borrower controls 25% or more of the business entity, the
Requirements      following documentation is required, at a minimum:
(continued)
                  · Personal Tax Returns
                  · Two most recent years of Corporate Tax Returns (1020s or 1020Ss)
                  · Two most recent years - K-1s (if applicable)

                  NOTE: In some situations, where it is determined that the financial
                  impact to the borrower is inconsequential; the corporate tax return/K-1
                  requirement may be waived by the Underwriter. Also, corporate
                  financial statements are useful as a supplement and an update, but do not
                  substitute for the Corporate Tax Returns.

                  Limited Liability Companies - Limited Liability Companies file taxes using
                  partnership tax returns. The partnership tax return requirements listed above
                  apply to these companies.


Year-to-Date      Chase requires a year-to-date profit and loss statement for any self-employed
Profit and Loss   borrower whose application is dated more than 120 days after the end of the
                  business’ tax year regardless of the type of business.


Business Credit   Refer to the “Credit History” section for self-employed borrower business
Bureau Report-    credit-bureau report (D&B) requirements.
(D&B)




July 2004                                                                       Underwriting – 43
Credit Policy                                                          Chase Correspondent Division



Self-Employed Borrowers - Income Analysis Methods


Introduction    The self-employed borrower's business entity must be analyzed to assess the
                reasonableness and recurring nature of income streams from the borrower's
                business. Chase uses the AGI/SAM method and the Cash-Flow Analysis
                method to make these determinations. On loan amounts less than $ 750,000,
                Agency or Non-Agency products, Chase allows the use the AGI (Adjusted
                Gross Income) method or the SAM (Schedule Analysis Method), as
                applicable to the borrower and/or business. For loan amounts of $ 750,000 or
                greater, we require the Chase “Cash-flow Analysis Method” that is based on
                an analysis of two or more years of business tax statements and year-to-date
                financial statements. Both of these approaches are described later in this
                section. Regardless of the analysis method used, the underwriter must ensure
                that the sources and methods used in qualifying the cash flow are reasonable.


Chase Cash-     This method is the Chase preferred method to analyze the income for a self-
Flow Analysis   employed borrower for loan amounts greater than $750,000. We face two
Method          situations in analyzing the self-employed borrower.
                Principal
                Amortization of the principal on long-term debt (the net profit after-tax
                already included a deduction for interest expense) must be deducted.

                · If the terms of repayment are known for all business debt this amount can
                  be calculated.
                · Sometimes, this number can be obtained by taking the current portion of
                  long-term debt from the financials of tax returns (do not subtract the entire
                  amount of “mortgages, notes, bonds payable in less than one year” shown
                  on the tax return)
                · Finally, as a reasonable approximation one can:
                  · add the total of long-term debt (“mortgages, notes, bonds payable in one
                    year or more” - on the tax return),
                  · to short-term debt (“mortgages, notes, bonds payable in less than one
                    year”),
                  · take 10% of this total,
                  · and use this 10% as the principal reduction to Net Profit After Tax
                    (NPAT).

                                                                             Continued on next page




July 2004                                                                       Underwriting – 44
Credit Policy                                                             Chase Correspondent Division



Self-Employed Borrowers - Income Analysis Methods,
Continued



Chase Cash-      Cash-flow from Business used for Qualifying Income
Flow Analysis    As a general guideline, the Chase Cash-flow Analysis Method determines the
Method           borrower’s net business cash-flow by adding-back and subtracting certain
(continued)      components to NPAT from the business tax returns. These adjustments are
                 found on Schedule M of business tax returns.


Add-Backs to     Use this chart to determine guidelines for adding back to cash flow.
Business Cash-
Flow

                   Category                                   Guideline
                 Depreciation     Chase uses the “rule of thumb” that 80% of the depreciation in
                                  “business real estate” and other long-life capital assets can be
                                  added back.

                                  NOTE: The Underwriter may exceed the 80% rule in
                                  appropriate situations.
                 Amortization     The full amount can be added back.
                 Depletion        The full amount can be added back.
                 Pensions and     · For Schedule C borrowers, nothing is added back.
                 Profit Sharing   · For partnership, nothing is added back to the partnership cash-
                                    flow analysis. (However, contributions made by the
                                    partnership to a Keogh account on behalf of an individual
                                    partner may be added back to the individual partner's cash
                                    flow)
                                  · For corporations, as a rule of thumb, add back 100% if the
                                    borrower (or borrower and spouse) is the sole employee of the
                                    corporation, or 50% if there are any other employees employed
                                    by the corporation, and zero if the company is publicly held.

                                  NOTE: This add-back should not apply if the company is
                                  “funding” its pension plan by simply increasing its liability or
                                  accrued pension benefits rather than actually funding the
                                  pension plan by expending cash.
                 Tax Return       Any tax return adjustments for expenses reflected on the tax
                 Adjustment       return that were not paid for by the business in the year, or
                                  income the business earned in the period not reported on the tax
                                  return, are added back (e.g. charitable contributions made in prior
                                  years on non-taxable income).

                                                                                Continued on next page




July 2004                                                                           Underwriting – 45
Credit Policy                                                            Chase Correspondent Division



Self-Employed Borrowers - Income Analysis Methods,
Continued



Deductions      Use the following chart to determine deductions to cash flow guidelines:
from Business
Cash-Flow

                    Category                                  Guideline
                Principal          Amortization of the principal on long-term debt (the net profit
                                   after-tax already included a deduction for interest expense)
                                   must be deducted. Often, this number can be obtained by
                                   taking the current portion of long-term debt from the financials
                                   or tax returns.
                Tax Return         Any tax return adjustments for expenses paid for by the
                Adjustments        business not reflected on the tax return are subtracted. These
                                   expenses generally fall into three categories:

                                   · Expenses reduced/eliminated because of the generation of a
                                     tax credit (i.e., jobs credit, fuel credit, etc.),
                                   · Expenses reduced due to tax limitations (i.e., travel and
                                     entertainment reduction, etc.), and
                                   · Unallowed deductions (i.e., country club memberships, life
                                     insurance for officers, etc.).
                Cash Drains        Any other known cash drains on the company (i.e., projected
                                   recurring casualty losses, legal fees, etc.).


Spreading the   · Chase prefers to separate non-recurring income/loss business amounts from
Business          normalized cash flow to allow industry comparisons. Non-recurring losses
Financials        are added to cash flow prior to calculation of net operating income, and
Chase Cash-       non-recurring gains are subtracted. An example of a non- recurring item
Flow Method
                  may be a sale of business property or large casualty loss.
                · The underwriter will spread two years and year-to-date financials to analyze
                  trends and discern strengths and weaknesses of the business. Analyzing the
                  ratios on the Corporate Cash-Flow Analysis Worksheet gives the
                  Underwriter an excellent tool to accomplish this evaluation.
                · Generally, the business cash flow can be averaged over the two/three years
                  unless there is a declining trend that would require additional investigation
                  to ensure the viability and future solvency of the business.

                                                                               Continued on next page




July 2004                                                                         Underwriting – 46
Credit Policy                                                           Chase Correspondent Division



Self-Employed Borrowers - Income Analysis Methods,
Continued



Spreading the    · If the business cash flow calculation results in a negative number,
Business           · The negative amount must be subtracted from the borrower’s other
Financials           income from this business (i.e., wages from a corporation), or
Chase Cash-
                   · If the borrower has no other income from this business, the negative
Flow Method
(continued)          amount should be pro-rated and included in the borrower’s personal
                     recurring debt total.

                 NOTE: If the business is closely related (i.e., a management company
                 that oversees another separate business) to another borrower-owned
                 business that is profitable, the negative amount can be subtracted from
                 the income of the related business.


Analyzing K-1s   Partnerships and S Corporations are “pass through” tax paying entities and do
                 not, usually, pay tax. This pass-through designation means that many tax
                 return income and expense items pass directly to the borrower from the
                 partnership or S corporation. Chase recognizes actual distributions (that we
                 presume are cash) rather than ordinary taxable income in the analysis of a
                 borrower’s K-1.

                 Partnerships
                 A borrower can be a limited partner or a general partner. Underwriters should
                 recognize that general partners are jointly and severally liable for any and all
                 obligations of the partnership. Limited partners, usually, have limited
                 liability in the partnership. Chase’s basic cash-flow analysis for K-1s from
                 partnerships is to add guaranteed payments to distributions and subtract
                 contributions. An amount for a Keogh contribution that was made by the
                 partnership on behalf of the partner can also be added if it is clearly indicated
                 as such on the K-1. Additionally, large recourse debt amounts and negative
                 capital accounts should alert the underwriter to dig further to ensure that the
                 borrower does not have, or will not have, unexpected legal claims upon
                 his/her cash flow.

                 S Corporations
                 S Corporations also use K-1s and the basic cash-flow approach is to add to
                 the owner’s W-2 income any distributions found on the K-1 (the distributions
                 are found on page 2 of the K-1).

                                                                              Continued on next page




July 2004                                                                        Underwriting – 47
Credit Policy                                                           Chase Correspondent Division



Self-Employed Borrowers - Income Analysis Methods,
Continued



Schedule         The Schedule Analysis Method (SAM) is an income analysis method utilized
Analysis         for self-employed borrowers qualifying for loan amounts less than $750,000
Method (SAM)     only.

                 · The schedule analysis method evaluates only the tax return schedules
                   appropriate for the type of self-employed borrower. This method generally
                   requires review of: the personal - tax-return (1040); Schedules C, D, E, F;
                   Forms 2106, 4562; and the W-2 (the analysis format follows Fannie Mae
                   form 1084-A).
                 · Once the personal 1040 Schedules have been reviewed the business tax
                   returns should be reviewed for negative trends in revenues, profits, or debt.


Adjusted Gross   AGI is a Self-Employed Income Analysis method for loan amounts less than
Income Method    $750,000 only.
(AGI)
                 · The AGI method uses the adjusted gross income reported on the self-
                   employed borrower’s personal tax return as the basis of determining
                   qualifying income. The underwriter increases or decreases the AGI figure
                   by analyzing specific lines of the 1040 and/or of related schedules.
                 · These related schedules are generally, but not limited to: Schedules, A, B,
                   C, D, E, and F, and Forms 2106 and 4562. (The analysis format follows
                   Fannie Mae form 1084-B.)
                 · Once the personal 1040 Schedules have been reviewed the business tax
                   returns should be reviewed for negative trends in revenues, profits, or debt.


Comparative      When using the SAM or AGI method to determine business cash flow, the
Analysis         overall financial position of the business must be evaluated through
                 comparative income analysis. The analysis format follows Fannie Mae form
                 1088. The Chase Business Cash Flow Analysis method uses the Corporate
                 Cash-Flow Analysis Worksheet.




July 2004                                                                        Underwriting – 48
Credit Policy                                                             Chase Correspondent Division



Additional Income Considerations


Documenting      Chase recognizes that the judgment of the underwriter plays a critical role in
Assumptions      the determination of borrower income. Identifying the relevant information,
                 verifying it, and assessing future stability are crucial aspects of this analysis.
                 However, the underwriter is also strictly responsible for identifying (on the
                 approval document for purposes of approval and post-closing quality control)
                 the sources and method used to determine the qualifying income.


Non-Qualifying   · There are other sources of income (such as “boarder” income, or stable
Income             short-term income from a variety of sources) that cannot be included as a
                   qualifying income source.
                 · These additional sources of income, while they cannot be used as qualifying
                   income, because they are not expected to continue, sometimes can be used
                   as a compensating factor for a high payment or high debt-to-income ratio.


Non-Reported     · Non-reported income (a/k/a, “under-the-table” income) cannot be used as a
Income             qualifying income source for the following reasons:
                   · Such income stems from activities or employment that the Internal
                     Revenue Service (IRS) requires to be reported.
                   · As the borrower is not reporting the income, nor is the employer on the
                     borrower’s behalf for social security or other taxes making deductions, the
                     borrower is not in compliance with IRS regulations regarding federal
                     income taxation and may be subject to fine or imprisonment.


Non-Taxable      · Non-taxable income should be distinguished from non-reported income.
Income           · Non-taxable income sources are exempt from income taxation.
                 · Some examples of non-taxable income are child support, municipal bond
                   interest, foster care income and public assistance, and some civil service
                   annuities.
                 · As these income sources are not taxed the “value” to the borrower is
                   greater.
                 · Non-taxable income sources can be grossed-up by a factor of 1.25.




July 2004                                                                          Underwriting – 49
Credit Policy                                                           Chase Correspondent Division



Debt Analysis - General Information


Definition       Chase defines debt as claims upon a borrower’s assets and cash flow.
                 Usually, debts consist of recurring monthly contractual payments. Chase
                 measures debt level on Agency and Non-Agency loans using the debt-to-
                 income ratio. The borrower’s total debt-to-income ratio includes in it’s
                 numerator (top number) all recurring debt obligations (subject to the
                 guidelines discussed in the following topics. Generally, all contractual
                 obligations are included in this total, and not discretionary expense items.


Debt Analysis    To provide standards and ensure uniform treatment of similar debt
Guidelines       instruments, the following guidelines are provided to determine the
                 borrower’s recurring debt total.

                 NOTE: Specific product or program debt payment/verification
                 guidelines/requirements may differ. Please review the Product and
                 Program guidelines for specific products.


Payoff of Debt   A borrower may wish to pay in full a debt reported on the application or
                 credit report, and have the payment excluded from the qualifying parameters.
                 Refer to the table below when excluding debt from the qualifying parameters.

                    IF the debt is…      And the product is…               THEN…
                 an installment debt,   Agency or Non-Agency, · verify the asset/sufficient
                                                                equity to pay off the debt, and
                                                              · verify the debt has been paid
                                                                at or prior to closing.
                 a revolving/credit     Agency,               · verify the asset/sufficient
                 card debt,                                     equity to pay off the debt,
                                                              · verify the debt has been paid
                                                                at or prior to closing, and
                                                              · if utilizing an automated
                                                                system, exclude the debt from
                                                                the liability section.

                                                                              Continued on next page




July 2004                                                                        Underwriting – 50
Credit Policy                                                         Chase Correspondent Division



Debt Analysis - General Information, Continued


Payoff of Debt (continued)

                      IF the debt is…    And the product is…               THEN…
                   a revolving/credit   Non-Agency,            · reduce the maximum
                   card debt,                                    allowable debt/income ratio
                                                                 by 2%, according to the
                                                                 product’s maximum
                                                                 debt/income ratio,
                                                               · verify the asset/sufficient
                                                                 equity pay to pay off the debt,
                                                                 and
                                                               · verify the debt has been paid
                                                                 at or prior to closing (see
                                                                 example).


Reduction of      A borrower may wish to reduce the balance on a debt by paying a principal
Debt Balance      sum towards the balance, to exclude the monthly payment from the qualifying
                  ratios. When this instance occurs, the following guidelines apply:

                  · Reduction of the balance is eligible only on installment loans.
                    · On Non-Agency loans, the installment debt must be a non-mortgage debt.
                    · The remaining monthly payment cannot create an undue hardship on the
                      borrower for the remaining term of the debt.
                    · There cannot be more than 10 remaining payments on the installment
                      loan.
                  · Revolving/credit card accounts cannot be paid down to exclude the monthly
                    payment from the qualifying ratios. The minimum monthly payment on
                    revolving/credit card payments must be included in the debt/income ratio,
                    regardless of the “paid-down” amount.
                    · The DU or LP system findings may not require this on Agency loans.




July 2004                                                                       Underwriting – 51
Credit Policy                                                         Chase Correspondent Division



Debt Analysis - Other Types of Debt


Alimony/Child   · Any alimony/child support/maintenance payments with more than 10
Support           months remaining must be included in the recurring debt total.
Maintenance     · Verification clearly defining the borrowers responsibility must be obtained.
Payments
                · A copy of any of the following documents must be obtained:
                  · The divorce decree,
                  · A signed separation agreement,
                  · A notarized agreement signed by all parties and their respective attorneys,
                  · The court order, or
                  · Other legally accepted evidence dictated by local custom.
                · The treatment for alimony paid may differ for some products. See Product
                  and Program guidelines for details.


Asset Secured   Payments on loans that are secured by a borrower’s specific liquid assets,
Loans           such as life insurance policies, 401K/IRA accounts, CDs, stocks, bonds,
                marketable securities, etc. may be excluded from the DI calculation in those
                circumstances where the repayment of the loan rebuilds the asset. The
                following documentation is required:

                · A copy of the loan documents that:
                  · Show the asset as collateral for the loan,
                  · Detail the interest rate and payment, and
                  · Show the loan amount.
                · The loan secured by the financial asset was made by a financial institution.
                · The amount of the asset used as collateral is reduced, by the remaining loan
                  balance, prior to consideration, as reserves.


Investment      Any net investment loss or investment property loss should be amortized and
Gains/Losses    included as an expense. Any gain may be included as qualifying income. For
                more information refer to the “Investment Income - Rental” section of this
                guide.

                                                                            Continued on next page




July 2004                                                                      Underwriting – 52
Credit Policy                                                        Chase Correspondent Division



Debt Analysis - Other Types of Debt, Continued


Margin Debt     Often borrowers who have stock portfolios have loans secured by the
                marketable securities in their brokerage accounts.

                · As the margin account can be matched with a specific asset conversion, it is
                  not necessary to debt service the margin account.
                · Any margin loan must be separately reported on the approval document,
                · An amount equal to the margin loan balance must be:
                  · Subtracted from the borrower’s marketable security total, and
                  · Excluded from the borrower’s cash reserve and income calculations.
                · To properly reflect the borrower’s net worth, the excluded amount should
                  be separately reported on the approval document as a non-liquid asset.


Student Loans   · Student loans must be included if repayment will begin within 12 months of
                  the first loan payment.
                · In every case, any deferred liability and future payment should be noted on
                  the approval document.


Co-Signed       The outstanding balance of a co-signed loan is included as a contingent
Loan            liability but the monthly debt service (payment) can be excluded if:

                · The other party can provide six month’s canceled checks evidencing
                  payment (or equivalent verification), and
                · The co-signed loan has been paid as agreed.




July 2004                                                                     Underwriting – 53
Credit Policy                                                         Chase Correspondent Division



Debt Analysis - Real Estate


Bridge Loans    Bridge loans secured by other real estate owned by the borrower will be
(Non-Agency     acceptable in meeting required closing-fund requirements under the following
Only)           conditions:

                · A copy of the bridge loan note or a commitment letter from the bridge-loan
                  lender must be obtained that reflects:
                  · The amount of the bridge loan (the amount cannot exceed the equity in
                    the bridge-loan property);
                  · The term, maturity date, and renewal provisions;
                  · Required payments on the bridge loan; and
                  · Description of the bridge loan security (property address of the bridge-
                    loan security).
                · If payments are not scheduled on a monthly basis, at a minimum, monthly
                  interest payments for the bridge loan must be included in the borrower’s
                  debt-to-income ratio.

                NOTE: Generally, to calculate an interest only payment, multiply the
                bridge-loan principal by the prime rate plus 2%, and divide by 12.

                · The bridge loan must be recorded on the bridge-loan security.

                NOTE: If not recorded, at minimum, the bridge loan must be in
                recordable form.

                · When another creditor’s bridge financing is contemplated, and the bridge
                  loan will create a temporarily high transactional debt-to-income ratio, the
                  underwriter may utilize what is considered a normalized debt-to-income
                  ratio for qualifying ratio purposes. The transactional or temporary, debt-to-
                  income ratio includes payments on the bridge loan, and any other payments
                  (including PITI) on the “bridged” property.
                · To use the transactional debt-to-income ratio with a bridge loan , the
                  following additional guidelines must be followed:
                  · Evidence must be provided that the bridge loan will pay off within 60
                    days of the subject loan closing.

                NOTE: This evidence should be in the form of a mortgage-loan
                commitment letter for the purchaser of the bridged property.

                                                                            Continued on next page




July 2004                                                                      Underwriting – 54
Credit Policy                                                           Chase Correspondent Division



Debt Analysis - Real Estate, Continued


Bridge Loans       · The Borrower must have cash reserves equal to six months PITI (plus
(Non-Agency          “Bridge Payment”) on the other real estate owned in addition to Chase’s
Only)                cash reserves standard for the requested mortgage product.
(continued)
                   · If the loan will not payoff in 60 days and/or no commitment letter is
                     evidenced, the bridge loan payment and any other mortgage payments,
                     taxes, insurance, special assessment fees, and homeowner’s association
                     fees must be included in the borrower’s recurring debt total in the debt-to-
                     income calculation.
                   · If a bridge loan does not have scheduled monthly payments, a monthly
                     payment must be calculated as described above.
                   · The bridge loan cannot be cross-collateralized on the Chase financed
                     property.
                   · Bridge-loan proceeds cannot be used to calculate the number of months
                     PITI.


Contractual       Other ongoing legal or contractual payments, such as rent, tax and insurance
Payments          on properties (including payments on properties owned free and clear),
                  condominium or association fees, hangar-tie-down fees, slip fees, and
                  required capital contributions for partnerships (i.e., non-related businesses,
                  such as a contribution for a side- business unrelated to the borrower’s primary
                  occupation) must be included in borrowers recurring debt total.


Home Equity       · For Non-Agency HELOCs, calculate the required debt payment (principal
Lines of Credit     plus interest) as if the HELOC were a 20-year fully amortizing loan at
(HELOC)             prime+2 interest rate (do NOT use any special introductory rate).
                  · For seasoned HELOCs (one year or more old), either from Chase or another
                    lender, debt payment is based on 50% of the approved line or actual
                    balance, whichever is higher,
                  · For all unseasoned HELOCs (less than one year old), assume full line
                    amount utilization.
                  · If the HELOC is on the subject property, the HELOC payment must be
                    included as part of the housing debt-to-income ratio (P/I Ratio).

                                                                              Continued on next page




July 2004                                                                        Underwriting – 55
Credit Policy                                                            Chase Correspondent Division



Debt Analysis - Real Estate, Continued


Home Equity       · Payoff of cumulative draws exceeding $5,000 taken within the last year will
Lines of Credit     be considered as a “cash-out” and subject to “cash-out” LTV limitations.
(HELOC)             · Draws to be documented by a payment statement from 12 months prior.
(continued)
                  · For Agency HELOCs, calculate the payment on the actual balance of the
                    line at the line’s current interest rate at the time of application over a 15-
                    year term. Use that payment in your total housing expense calculation so
                    that it is included in the payment of income ratio, and consequently, in the
                    debt to income ratio.

                  NOTE: There are certain circumstances on LTV’s over 75%, which
                  require a different calculation for the payment. Refer to the appropriate
                  Product and Program guidelines in these circumstances.


Home Equity       · A second mortgage from another lender, financial or otherwise, that is
Loans (From         secured by the property on which CHASE is extending a first mortgage,
Another             should be debt serviced with:
Lender)
                    · The actual payments, or
                    · By calculating a payment over a 15-year fully amortized term using
                      Prime+2.
                  · Any variance from this procedure should be clearly explained and justified
                    in the approval document.
                  · If the home equity loan is on the subject property, the home equity loan
                    payment must be included as part of the housing debt-to-income ratio (P/I
                    Ratio).


Mortgage Debt     Prudent judgment should be exercised in evaluating the debt service of
                  first/second mortgage payments on all real estate holdings, including the
                  subject property, whether the debt is financed by Chase or by another lender.
                  If a payment appears to represent an interest-only payment or below-market
                  ARM payment, due diligence, in the form of a verification of mortgage,
                  comparable documentation, or adequate analysis should be exercised to
                  confirm whether adequate debt service has been calculated. The following
                  table provides guidance in the calculation of the debt service.

                                                                               Continued on next page




July 2004                                                                         Underwriting – 56
Credit Policy                                                                  Chase Correspondent Division



Debt Analysis - Real Estate, Continued


Mortgage Debt (continued)

                  If the first Mortgage is…                   Then calculate the…
                 long term ARM (no rate         monthly payment based on the current note rate.
                 adjustment in the next three
                 years of the date of the
                 application),
                 short term ARM (rate will      payment based on this formula:
                 adjust within next three
                 years of date of the short       IF the rate change       THEN calculate the monthly
                 term ARM),                         frequency is…             payment based on the…
                                                 six months or more,      Note rate plus 2%.
                                                 less than six months,    Note rate plus 1/2 of the lifetime
                                                                          of the cap.

                 interest Only (that does not   payment based on this formula:
                 include a rate adjustment
                 during the interest-only         If the interest-only      Then calculate the monthly
                 period),                         period expires in…          payment based on the…
                                                 three years or more,     interest only
                                                 less than three years,   fully amortized principle and
                                                                          interest.

                 interest Only (that includes a payment based on this formula:
                 rate adjustment during the
                 interest-only period),           If the interest-only  Then calculate the monthly
                                                  period expires in…          payment based on the…
                                                 six months or more,      Note rate plus 2%.
                                                 less than six months,    Note rate plus 1/2 of the lifetime
                                                                          of the cap.



                                                                                      Continued on next page




July 2004                                                                                 Underwriting – 57
Credit Policy                                                      Chase Correspondent Division



Debt Analysis - Real Estate, Continued


Taxes and       Use the actual amount, amortized monthly, of taxes, insurance, any
Insurance       homeowner’s association (HOA) fees, and special assessment fees in the
                recurring debt total.

                · In purchase money transactions where we lack definite indicators of taxes
                  and insurance we will use 1.5% of the purchase price as the total annual
                  burden and pro-rate this on a monthly basis.
                  NOTE: Certain states, or locales, may use a higher percentage estimate
                  due to local real estate tax rates.
                · Besides taxes and insurance, other items may have to be estimated at time
                  of approval. The underwriter is responsible, however, for indicating that
                  the expense item is estimated and for obtaining full re-approval if later
                  verification indicates that the actual amount has created an unapproved
                  debt-to-income ratio exception.




July 2004                                                                   Underwriting – 58
Credit Policy                                                            Chase Correspondent Division



Debt Analysis - Installment


Credit Cards     For revolving accounts/credit cards, use the total outstanding balances and
                 payments as reflected on the credit bureau report or disclosed by the
                 Borrower.

                 · If no payment appears on the credit report, estimate payments at 5% of the
                   outstanding balances:
                 · If a Borrower’s business expense account is reported on the credit report
                   that indicates the total outstanding balance is the minimum required
                   payments, obtain a statement from the employer that all business expenses
                   are paid by the company. If not paid by the company, make sure the
                   Borrower has sufficient assets to pay the debt in full.
                 · Lines of credit (i.e., a home equity line of credit) should be included in the
                   housing expense.
                 · Any revolving accounts listed on the application that are not on the credit
                   bureau should be incorporated into the analysis.


Installment      Installment debt with more than 10 months payments remaining must be
Debt             included.


Lines of         · Payments must be included for these loans if more than 10 payments
Credit/Balloon     remain.
Loans/Interest   · If a line of credit/balloon loan is matched to a specific asset conversion,
Only Loans
                   interest only payments calculated at prime +2 can be used. The asset
                   conversion must be deemed probable, however, to justify this treatment.
                 · If there is no asset conversion or the asset conversion is uncertain:
                   · We assume a monthly payment calculated at prime +2, amortized over 10
                     years, or the actual payment whichever is higher.
                   · The payment will be calculated on the higher of the balance reported on
                     the credit report or the application.




July 2004                                                                         Underwriting – 59
Credit Policy                                                        Chase Correspondent Division



Debt Analysis - Revolving


Lease Payments Lease Payments should be included regardless of the remaining term. If the
                 lease has 10 or fewer payments remaining, the borrower will be faced with
                 either:

                 · a buyout of the lease (purchase of the car), or
                 · a new lease obligation.




July 2004                                                                     Underwriting – 60
Credit Policy                                                            Chase Correspondent Division



Debt Analysis - Business


Employee          All unreimbursed business expenses must be subtracted from qualifying
Business          income.
Expenses
                  · Generally, these expenses are averaged over the last two years, unless
                    increasing.

                  NOTE: These expenses are usually found on Schedule A and Form 2106
                  of the personal tax return.


Relocation        The PITI on the existing residence can be eliminated from the debt-to-income
Benefits          ratio analysis in a relocation situation if the following conditions are met:

                  · A copy of the offer to purchase the existing residence must be provided,
                  · Any closing costs and points that may be included in the relocation package
                    can be used as closing funds. However, the borrower must provide funds
                    for prepaid items unless specifically stated in the relocation package,
                  · At loan closing, a copy of the equity advance or a settlement statement must
                    be provided as evidence of sale and release from liability,
                  · If any of these conditions are not met, the full PITI of the existing residence
                    must be included in the debt-to-income ratio calculation.


Sole-Proprietor   The underwriter must keep in mind that “business” debts for a sole proprietor
Debt              are usually indistinguishable from personal debts. The most obvious cases
                  are autos that are utilized as business vehicles and for which the
                  corresponding debt is written off as a business expense. The underwriter
                  must always be aware that there is no corporate legal entity that might shield
                  the borrower from having to pay this expense. The business debts of sole-
                  proprietors must be included in the analysis.

                  · The outstanding balance of the sole-proprietor’s business debts should be
                    reflected on the borrower’s personal financial statement or 1003.
                  · The business debt payments (principal and interest) must be addressed by:
                    · Including the debt payments in the borrower’s personal debt-to-income
                      ratio calculation, or
                    · Subtracting debt payments from the stable recurring income from the
                      proprietorship, or sufficient evidence that the business is paying the debt
                      (canceled checks from business checking account).

                                                                               Continued on next page




July 2004                                                                          Underwriting – 61
Credit Policy                                                        Chase Correspondent Division



Debt Analysis - Business, Continued


Travel and      · Debt payments for travel and entertainment credit cards can be excluded if
Entertainment     the borrower can provide verification that:
(T&E) Credit      · The credit card is used exclusively for business purposes, and
Cards
                  · The borrower’s employer reimburses 100% of these travel and
                    entertainment expenses.
                · Generally, two months T&E card monthly billing statements showing prior
                  balances paid in full meet this verification requirement.
                · Absent this verification:
                  · The monthly payment for T&E credit cards is estimated at 5% of the
                    outstanding balance as reported on the credit bureau.
                  · For accounts that indicate the total outstanding balance due, (i.e.,
                    American Express, Carte Blanche, Diners Club), the borrower’s cash
                    reserves can be reduced by the amount equal to the outstanding balance of
                    the account.

                NOTE: The underwriter must insure that the borrower still meets the
                cash reserve requirement for the program requested.




July 2004                                                                     Underwriting – 62
Credit Policy                                                          Chase Correspondent Division



                                           Capital
Overview


Introduction      The term capital in the broadest sense relates to how well the borrower has
                  managed his/her financial affairs. A borrower who has a good capital
                  position has invested prudently and has a propensity to save. There are three
                  dimensions of capital to consider: net worth, cash reserves, and cash at risk
                  (or risk capital).


In this Chapter   Included in this chapter are the following topics:

                                                Topic                                See Page
                  Net Worth                                                              2
                  Cash Reserves                                                          3
                  Measuring Cash Reserves                                                6
                  Cash Reserves Verification                                             9
                  Source of Funds                                                       11




July 2004                                                                               Capital – 1
Credit Policy                                                           Chase Correspondent Division



Net Worth


Definition      Net worth measures how much equity the person has in his/her assets. The
                basic formula to determine net worth is to subtract total liabilities from total
                assets; the remainder is net worth.


Analyzing Net   High values given to subjective elements (intangibles) such as personal
Worth           property, the value of a business, works of art, and other assets whose worth
                is ill-defined, will often inflate net worth. We must reduce our reliance on net
                worth in these circumstances. Accordingly, the Chase tangible net worth
                calculation is used for products and programs that have a net-worth
                requirement. The Chase tangible net worth calculation excludes personal
                property and other intangible assets, such as an overstated business value. A
                judicious consideration of net worth should focus on components such as
                unrestricted liquidity, retirement accounts, and conservatively estimated real
                estate equity.




July 2004                                                                                Capital – 2
Credit Policy                                                             Chase Correspondent Division



Cash Reserves


Overview        Cash Reserves, (often shortened to Reserves) relates to cash or the ability to
                convert assets to cash in a short time. Net worth without cash reserves is not
                enough. The borrower’s balance sheet should reflect and validate the
                estimates concerning his prior and current income stream. Higher incomes
                should translate into cash reserves found on the borrower’s balance sheet.


Eligible        The following lists assets that can be used in the calculation of cash reserve
Reserves        requirements at the indicated percentage of stated value. Generally,
                retirement accounts are counted at a lower percentage because of access
                restrictions and tax ramifications. Additionally, certain retirement accounts
                are not included in the reserve requirements due to severe access restrictions.
                These retirement accounts are, however, used as compensating factors.

                Assets counted at 100% of stated value

                              Asset                                   Guidelines
                Cash on Deposit                   Must be U.S. dollar deposits in institutions
                Checking Account                  located in the U.S.
                Savings Account
                Share Account
                Certificates of Deposit
                Marketable Securities             Must be traded on a major market (NYSE,
                Marketable Bonds                  AMEX, etc.)
                Cash from sale of current         Use for post-closing cash reserve requirements
                residence if the sale will take   only, applicable to Non-Agency products.
                place prior to or simultaneous
                with the subject.
                Cash surrender value of life      N/A
                insurance
                U.S. Savings Bonds (face value,   Actual cash surrender value can be counted if the
                plus accrued interest to this     cash surrender value for each bond is calculated.
                point)
                Cash from a self-employed         Provided the cash is not required to service the
                professional service business     business’ current liabilities.
                account

                                                                                Continued on next page




July 2004                                                                                   Capital – 3
Credit Policy                                                           Chase Correspondent Division



Cash Reserves, Continued


Eligible        Assets counted at 70% of stated value, net of any loans
Reserves
(continued)

                            Asset                                   Guidelines
                Cash Value of Annuities         Use only the cash value of the annuity as verified
                                                by the underwriter.
                Individual Retirement (IRA)     No additional guidelines.
                and Keogh Accounts
                401(k) Plan Accounts            · Review verifications for vested amount.
                                                · If the borrower is using a withdrawal or loan
                                                  secured by this account for the down payment
                                                  or other costs, reduce the account balance
                                                  amount to determine if the balance is sufficient
                                                  to cover reserves.

                Assets that are not counted in the cash reserve calculation, but can be used as
                compensating factors.

                · Pension Plans from known companies
                · Profit Sharing Plans from known companies
                · Retirement Accounts from known companies
                · 403(b) Plan Accounts
                · TIAA-CREF Accounts (annuity type accounts).


Non-Eligible    Generally, the following assets are not used to calculate cash reserve
Cash Reserves   requirements.

                · Bridge-loan proceeds
                · Cash accounts not vested solely in the borrower’s name (i.e., children’s
                  savings accounts)
                · Cash-out loan proceeds.

                                                                               Continued on next page




July 2004                                                                                 Capital – 4
Credit Policy                                                          Chase Correspondent Division



Cash Reserves, Continued


Non-Eligible    · Non-marketable securities - stocks and bonds:
Reserves          · That are not traded on a major stock market, and
(continued)
                  · For which valuation and market value cannot readily be obtained.
                  · Restricted securities - stocks that because of:
                  · Rule 144 and Security and Exchange Commission (SEC) regulations
                    cannot be readily traded.
                · Stock options - rights to purchase stock at a set price, often below market
                  price.
                  · These options are subject to market risk,
                  · May trigger significant tax ramifications, and
                  · May have an execution cost and may be restricted.
                  · Stock options can be used for closing funds if:
                · The options are liquidated, and
                · The receipt of funds are verified.
                · Custodial accounts for children or others.




July 2004                                                                               Capital – 5
Credit Policy                                                             Chase Correspondent Division



Measuring Cash Reserves


Cash Reserve     · Chase considers the number of months PITI to measure the Borrower’s cash
Measurements       reserves.
                 · The number of months PITI is always calculated on a post-closing basis
                   and also relates the cash reserves available to the borrower after the
                   mortgage transaction.


Calculating     To calculate cash reserve measurements the underwriter needs to know:
Measurements
                · the borrower’s cash reserves,
                · amount the borrower needs for closing funds, and
                · PITI amount.


Calculating     Refer to the following table to calculate the borrower’s cash reserves:
Cash Reserves

                  Step       Action                           Reserve Type
                   1          Add        Borrower cash (checking, savings, money market, and
                                         accounts)
                    2         Add        Unrestricted Marketable Securities and Bonds (net of
                                         margin debt)
                    3         Add        Cash surrender value of life insurance (CSVLI)
                    4         Add        70%:

                                         ·   Gross IRA,
                                         ·   Cash Value of Annuities,
                                         ·   Keogh accounts, and
                                         ·   401(k) accounts (net of loans if the same account will
                                             be used for the down payment or closing costs).

                                                                                 Continued on next page




July 2004                                                                                   Capital – 6
Credit Policy                                                           Chase Correspondent Division



Measuring Cash Reserves, Continued


Calculating     To calculate the PITI, use the following steps.
PITI

                  Step       Action                  Housing Expense Category
                   1          Add        Monthly P&I payment for subject mortgage.
                   2          Add        Monthly amount for:

                                         · Real Estate taxes,
                                         · Homeowner’s insurance,
                                         · Flood insurance, and
                                         · Mortgage insurance.
                    3         Add        Monthly homeowner’s association fees.
                    4         Add        Monthly special assessment fees.
                    5         Add        Monthly P&I payment on subordinate financing.
                    6         Total      Fixed monthly recurring home expenses.

                REFERENCE: Refer to the Products and Programs chapter of this
                guide for guidelines to provide the requirements for the number of
                months of PITI that are required for specific products.


Calculate       To calculate the amount the borrower will need for closing funds, use the
Closing Fund    following steps:
Needs

                  Step       Action                               Category
                   1          Add        Down Payment
                   2          Add        Loan Costs
                   3          Add        Prepaids
                   4          Add        Transaction Cost (costs borne by the Borrower in a
                                         purchase transaction)
                    5         Total      Closing Funds Requirements

                                                                              Continued on next page




July 2004                                                                                Capital – 7
Credit Policy                                                         Chase Correspondent Division



Measuring Cash Reserves, Continued


Calculate       To calculate Chase’s reserve requirement, use the following steps:
Reserve
Requirements    Agency Loans and Non-Agency Loans

                  Step          Action                          Category
                   1             Add          Cash Reserves
                   2           Subtract       Closing Funds
                   3           Divide by      Monthly PITI
                   4            Equals        Number of Months of PITI in Reserve


Minimum Cash    Refer to the following table for Chase’s general minimum cash reserve
Reserve         standards
Standards

                       Loan Amount                Credit Risk Score            Reserves
                £ $333,700                               620             2 months PITI
                >333,700 - $500,000                      620             4 months PITI
                >$500,000 - £$1.1 MM                     620             6 months PITI
                >$1.1 MM - £$1.5 MM                      700             12 months PITI
                > $1.1MM - £$1.5 MM                      720             6 months PITI
                > $1.5 MM - £$2.MM                       720             12 months PITI
                >$1.5 MM - £$2 MM                        740             6 months PITI

                NOTE: Specific product or program reserve standards may differ.
                Please review the applicable Product and Program Guide.




July 2004                                                                              Capital – 8
Credit Policy                                                            Chase Correspondent Division



Cash Reserve Verifications


Required          For purposes of reserve verification, we assume a base of 100% of cash,
Verification of   marketable securities, and retirement accounts as stated on the application and
Cash Reserves     that will be included in the cash reserves calculation on the approval
                  document. Written verification of liquid assets are subject to the following
                  minimum conditions:

                  · 100% of the required closing funds, and 100% of any product or program
                    cash reserve requirement must be verified.
                  · Whenever interest or dividend income is counted as part of qualifying
                    income, reserves sufficient to justify the income used must be verified.
                  · Additionally, at the underwriter’s discretion, the borrower may be asked to
                    verify additional cash reserves that will serve as a significant “profile”
                    strength or as a compensating factor for the borrower.

                  NOTE: Specific product, program, or underwriting system liquidity
                  standards may differ. Refer to the Products and Programs chapter of
                  this guide and/or systems findings’ reports for specific products.


Acceptable        · Verifications of funds on deposit in institutions (i.e., checking, savings,
Cash Reserve        certificates of deposit, marketable securities):
Verifications       · In the form of copies of statements from the actual depository institutions,
                      or
                    · Verification of deposit forms (VODs) completed by the depository
                      institution (i.e., Fannie Mae 1006).
                    · Internet/computer generated facsimile bank statements.
                      · Eligible for owner-occupied and 2nd homes only.
                      · Three months consecutive statements.
                      · Statement must clearly identify depository, account holder, time period
                        covered on statement, all transaction information, and balance.
                      · Statement must be within 45 days of application. If not, must
                        supplement with bank-generated statement.
                      · Facsimile and e-mail documents must show the “banner” of origin
                        and/or author of information.
                      · Verbal verification to depository institution, verifying existence of
                        depository, account-holder, and account number.

                                                                               Continued on next page




July 2004                                                                                 Capital – 9
Credit Policy                                                        Chase Correspondent Division



Cash Reserve Verifications, Continued


Acceptable      · Additionally the following guidelines apply:
Cash Reserve      · A minimum of the most recent two months of deposit verifications should
Verifications       be provided
(continued)
                  · Copies of actual stock certificates from originals are acceptable for
                    marketable securities.
                  · Liquidity verifications supplied from non-depository sources, (i.e.,
                    financial planner, CPA, etc) cannot be substituted for verification from
                    the actual depository institution.
                · In those cases where a depository verification is impractical (i.e., 401(k)
                  Plan, retirement fund managed by pension-fund trustee, etc.):
                  · The verification should, at minimum, reflect the borrower’s individual
                    retirement funds, and
                  · The composition of the funds (i.e., stocks, CDs, etc).
                  · Reasonable judgment should be applied to determine such
                    verifications/statements are from an independent third party.
                · The date of the documents used in verification must be within 120 days
                  prior to the date of the note.
                  · For retirement accounts (where account statements are not prepared
                    monthly), statements dated within six months of the date of the note are
                    acceptable.
                · Verbal re-verifications by the underwriter are acceptable provided they
                  include the depository name, telephone number, contact person, balance
                  information, and the date.
                  · Verbal re-verifications are not allowed for the following
                    products/programs: Liquid Express, and Income Express (All Express
                    Programs).
                · Should verification performed subsequent to approval indicate:
                  · A decrease in assets and this decrease creates /cash reserve exception,
                  · The loan must be submitted for appropriate re-approval.




July 2004                                                                            Capital – 10
Credit Policy                                                              Chase Correspondent Division



Source of Funds

Acceptable      The term closing funds relates the total cash or cash sources needed for any:
Source of       down payment, loan costs, prepaids, and transaction costs. The borrower
Funds           must also evidence sufficient closing funds to meet any minimum cash
                reserve standards. Generally, the two most recent statements are viewed.
                Refer to the following table for guidance:

                 Type of Liquid Asset                              Guideline
                Cash Surrender Value      The most recent statement that clearly indicates the cash-
                of Life Insurance         surrender value of the life insurance policy must be
                (CSVLI).                  reviewed.
                Checking, Savings         · Generally, the most two recent statements are reviewed.
                Accounts, and               · Verify that the earnest money deposit (down payment)
                Certificates of Deposit       has cleared to ensure that we do not double count the
                (CDs)                         deposit,
                                            · Any recent large deposits should be explained and
                                              verified,
                                            · New accounts should be explained van verified,
                                            · Review borrower’s name(s), type of account, account
                                              number, balance of account, term of a CD, average
                                              balance, and opening date.
                Earnest-Money             The deposit on the sales contract is an acceptable source
                Deposit                   for down payment and/or closing costs. When the deposit
                                          is used to make any portion of the borrowers down
                                          payment that must come from their own funds, the source
                                          must be verified with either

                                          · Bank statements for the most recent two months. (If the
                                            check has cleared the account, the statement should
                                            cover the period up to and including the date the check
                                            cleared.)
                                          · VOD with average balance for past two months
                                            evidencing the balance is sufficient to cover the deposit.

                                          NOTE: The DU system utilizes specific data entry
                                          approaches. The “user” must validate the entries
                                          according to the entry requirements and review the
                                          messages provided by the system.
                Marketable Securities     Marketable securities are subject to large swings in value.
                                          If a borrower is using marketable securities as the source
                                          of closing funds, the terms of the account must be
                                          verified, including the balance, account number, etc.
                                          Verification of liquidation of the account is not required
                                          unless specifically required by an automated underwriting
                                          system.

                                                                                 Continued on next page



July 2004                                                                                   Capital – 11
Credit Policy                                                              Chase Correspondent Division



Source of Funds, Continued


Acceptable Source of Funds (continued)

                  Type of Liquid Asset                           Guideline
                  Proceeds from the    To use proceeds from the sale of a currently owned other-
                  Sale of other Real   real-estate property for closing-fund requirements and
                  Estate               post-closing cash reserve ratio calculations, use the
                                       following guidelines:

                                         · The closing of the other real estate transaction must take
                                           place prior to or simultaneous with the subject closing,
                                           and
                                         · The net proceeds to the borrower must be verified via a:
                                           · HUD-1 statement,
                                           · Closing statement, or
                                           · Equity statement from the closing agent.
                  Trust Account Funds    To use trust account funds for closing funds and post-
                                         closing cash reserve ratio calculations:

                                         · The borrower must have access to the trust account
                                           funds, and
                                         · The trustee must verify the amount that the borrower can
                                           withdraw.
                  U.S. Savings Bonds     To use U.S. Savings Bonds for closing funds and post-
                                         closing cash reserve ratio calculations:

                                         · The borrower should provide a list of amounts, serial
                                           numbers, and maturity dates of the bonds.
                                         · Photocopies should not be made.
                                         · For closing funds, only the actual liquidation value can
                                           be used.
                                         · For the cash reserve calculations, use either:
                                           · The verified liquidation value of the bonds, or
                                           · 100% of the face value plus accrued interest to this
                                             point, of any remaining bonds after the loan closing.

                                                                                 Continued on next page




July 2004                                                                                   Capital – 12
Credit Policy                                                               Chase Correspondent Division



Source of Funds, Continued


Acceptable Source of Funds (continued)

                  Type of Liquid Asset                           Guideline
                  Stock Options        To use stock options (the right to purchase stock at a set
                                       price, the “strike price”) as closing funds:

                                          · The options should be exercised and only the net
                                            proceeds should be used.
                                          · To estimate net proceeds from stock options:
                                            · Multiply the number of options the borrower owns by
                                               the current market price - A,
                                            · Multiply the number of options by the strike price (the
                                               price the borrower can buy the stock for) - B,
                                            · Subtract B from A which equals C,
                                            · Subtract from this remainder (C) any costs to exercise
                                               the options (brokerage fees and transaction costs),
                                            · Subtract 20% of C to account for income taxes.
                                          · Only the net proceeds should be used for closing fund or
                                            cash reserve calculations.
                                          · If the brokerage firm or fiduciary that negotiated the
                                            execution of the options did not deduct income taxes
                                            from the net proceeds, the underwriter should insure
                                            that the borrower will not suffer severe cash flow or
                                            liquidity problems when the taxes come due.
                  Contribution by Third   Certain parties - seller, builder, realtor, etc, may choose to
                  Party                   pay a portion of the closing costs (which are normally
                                          paid by the borrower) for the borrower. This contribution
                                          has certain limits before it begins to impact the
                                          transaction. Once the contribution limits are exceeded,
                                          the amount that exceeds the limits must be deducted from
                                          the sales price, and the loan amount and LTV must be
                                          adjusted accordingly.

                                                                                   Continued on next page




July 2004                                                                                    Capital – 13
Credit Policy                                                           Chase Correspondent Division



Source of Funds, Continued


Other Funds -   The following guidelines are for borrowers whose source of closing funds do
Non-Standard    not come from standard liquid assets.

                Type of Closing Fund                           Guideline
                Borrowed Funds       · The loan must be secured by an asset already owned by
                                       the borrower (i.e., CDs, marketable securities, other real
                                       estate, life insurance policies, and retirement accounts),
                                     · The terms of repayment for the loan and the secured
                                       nature of the loan must be verified by obtaining a copy
                                       of the note,
                                     · Debt payments for the loan must be included in the
                                       Borrower’s debt-to-income ratio (Cash/marketable
                                       security-secured accounts need include only interest
                                       payments for the loan balance).
                                     · Borrowed funds cannot be used to calculate the number
                                       of months of PITI reserves.
                Bridge Loans (Non-   · Bridge loans secured by other real estate owned by the
                Agency Requirements    borrower will be acceptable in meeting required
                only)                  closing-fund requirements under the following
                                       conditions:
                                       · A copy of the bridge loan note or a commitment letter
                                         from the bridge-loan lender must be obtained that
                                         reflects:
                                         - The amount of the bridge loan (the amount cannot
                                            exceed the equity in the bridge-loan property);
                                         - The term, maturity date, and renewal provisions;
                                         - Required payments on the bridge loan; and
                                         - Description of the bridge loan security (property
                                            address of the bridge-loan security).
                                       · If payments are not scheduled on a monthly basis, at a
                                         minimum, monthly interest payments for the bridge
                                         loan must be included in the borrower’s debt-to-
                                         income ratio.
                                         *Generally, to calculate an interest only payment,
                                         multiply the bridge-loan principal by the prime rate
                                         plus 2%, and divide by 12.

                                                                              Continued on next page




July 2004                                                                               Capital – 14
Credit Policy                                                           Chase Correspondent Division



Source of Funds, Continued


Other Funds - Non-Standard (continued)

                    Type of Closing
                        Fund                                     Guideline
                 Bridge Loans (Non- · The bridge loan must be recorded on the borrower-owned
                 Agency               other real estate.
                 Requirements only)   *If not recorded, at minimum, the bridge loan must be in
                 (continued)          recordable form.
                                    · When another creditor’s bridge financing is contemplated, and
                                      the bridge loan will create a temporarily high transactional
                                      debt-to-income ratio; the underwriter may utilize what is
                                      considered a normalized debt-to-income ratio for qualifying
                                      ratio purposes. The transactional, or temporary, debt-to-
                                      income ratio excludes payments on the bridge loan, and any
                                      other payments (including PITI) on the “bridged” property.
                                      To use a transactional debt-to-income ratio with a bridge loan,
                                      the following additional guidelines must be followed.
                                      · Evidence must be provided that the bridge loan will pay off
                                        within 60 days of the subject loan closing.
                                         *This evidence should be in the form of a mortgage-loan
                                         commitment letter for the purchaser of the bridged property.
                                      · The borrower must have cash reserves equal to six months
                                        PITI on the other real estate owned in addition to Chase’s
                                        cash reserve standard for the requested mortgage product.
                                      · If cash reserves are not calculated as directed in the
                                        “Calculating Cash Reserves” section, the bridge loan
                                        payment and any other mortgage payments, taxes,
                                        insurance, special assessment fees and homeowner’s
                                        association fees must be included in the borrower’s
                                        recurring debt total in the debt-to-income calculation.
                                      · If a bridge loan does not have scheduled monthly payments,
                                        a monthly payment must be imputed as directed in the
                                        “Non-Eligible Liquid Asset/Reserves” section.
                                    · The bridge loan cannot be cross-collateralized on the Chase
                                      financed property.
                                    · Bridge-loan proceeds cannot be used to calculate the number
                                      of month’s PITI calculation.

                                      REFERENCE: For information on the Agency
                                      requirements, refer to the “Products and Programs”
                                      chapter of this guide.

                                                                               Continued on next page




July 2004                                                                                Capital – 15
Credit Policy                                                            Chase Correspondent Division



Source of Funds, Continued


Other Funds - Non-Standard (continued)

                    Type of Closing
                        Fund                                     Guideline
                 Business Assets      In some cases, business accounts are an acceptable source of
                                      down payment or reserves; however, they are not acceptable
                                      under all circumstances because these funds are typically
                                      required to meet current overhead and future capital
                                      requirements of the business, and are not, generally,
                                      representative of the borrower’s savings history. Chase does
                                      consider the use of business accounts as an “exception” to
                                      policy. Exceptions can be made by the underwriter and are
                                      eligible on loans where the borrower can evidence that the
                                      withdrawal of the funds will not impact the operation of the
                                      business. Generally, the following types of businesses can meet
                                      that criteria, although, it is not limited to these types.
                                      Businesses other than the following types may require
                                      additional supportive documentation:

                                      · Sole proprietor
                                      · Sub Chapter S
                                      · Individually owned Corporation

                                      Chase requires documentation from a disinterested third party
                                      (CPA, Tax Attorney, etc.) that confirms that the use of these
                                      funds will not adversely affect the business.

                                                                               Continued on next page




July 2004                                                                                Capital – 16
Credit Policy                                                            Chase Correspondent Division



Source of Funds, Continued


Other Funds - Non-Standard (continued)

                  Type of Closing Fund                          Guideline
                 Foreign Deposits        Foreign Deposits are defined as deposit accounts in
                                         either:

                                         · Deposit institutions located outside of the U.S., or
                                         · Non-U.S. denominated funds (i.e., French Francs or
                                           Japanese Yen) in a deposit institution located in the
                                           U.S.
                                         · These deposits can be subject to exchange-rate risk and
                                           country risk.
                                         · The use of foreign deposits for closing funds requires
                                           that:
                                           · Funds must be transferred into a U.S. bank/deposit
                                             account, and
                                           · Proof of wire transfer must be documented in the
                                             file.
                 Gift Funds              Borrowers who intend to occupy the property as their
                                         primary residence or second home may use gift funds
                                         to meet closing fund requirements and cash reserve
                                         requirements provided they are donated by a related
                                         person using the following guidelines:

                                         · Generally, the borrower must invest at least 5% of
                                           his/her own funds toward the down payment unless the
                                           gift is 20% of the lesser of the sales price or appraised
                                           value of the property. If the gift toward down payment
                                           is 20% or more, the borrower is not required to make
                                           an investment.
                                           REFERENCE: Due to varying minimum down
                                           payment investment requirements, refer to the e
                                           product and program guidelines in Products and
                                           Programs of this guide
                                         · The gift donor must be a relative or anyone who can
                                           demonstrate a history of a shared financial relationship
                                           with the borrower. A relative is any person related by
                                           blood, legal proceedings, marriage, or adoption.

                                                                               Continued on next page




July 2004                                                                                 Capital – 17
Credit Policy                                                            Chase Correspondent Division



Source of Funds, Continued


Other Funds - Non-Standard (continued)

                 Type of Closing Fund                              Guideline
                 Gift Funds (continued)   · Disclosure of the donor and specific gift amount which
                                            may be provided through one of the following options:
                                            · An executed “gift letter” must be provided from the
                                              donor that specifies:
                                              - Who the receiving party is (name, address, and
                                                 telephone number),
                                              - the donor’s relationship to the borrower/receiving
                                                 party,
                                              - the dollar amount of the gift,
                                              - A statement from the donor that no repayment is
                                                 expected, and
                                              - The property being purchased.
                                            · An executed application (Fannie Mae 1003/ Freddie
                                              Mac 65) that reflects the donor and gift information:
                                              - “Source of down payment” and “Assets” sections
                                                 must reflect that a gift is a source, and
                                              - donor’s name, address, telephone number,
                                                 relationship, and amount must be represented.
                                          · The gift funds must be transferred to the borrower:
                                            · Verify in the borrower’s account (if the gift has
                                              already been received).
                                            · Provide copy of canceled check or cashier’s check
                                              evidencing donor and receiving party.
                                            · If paid directly to Closing Agent must provide
                                              verification of source of receipt.
                                            · Specific Community Home Buyer products or
                                              programs require verification of the funds in the
                                              donor’s account and received by the borrower. Refer
                                              to specific product and program guidelines.

                                                                               Continued on next page




July 2004                                                                                Capital – 18
Credit Policy                                                           Chase Correspondent Division



Source of Funds, Continued


Other Funds - Non-Standard (continued)

                 Type of Closing Fund                            Guideline
                 Relocation Benefits     To utilize relocation benefits paid by an employer to a
                                         borrower for closing fund requirements:

                                         · A copy of the offer to purchase the existing residence
                                           must be provided.
                                         · Any closing costs and points that may be included in
                                           the relocation package can be used.
                                           *However, the borrower must provide funds for
                                           prepaid items unless specifically stated in the
                                           relocation package.
                                         · At loan closing, a copy of the equity advance or a
                                           settlement statement must be provided as evidence of
                                           sale and release from liability.
                                         · If these conditions are met, the PITI on the existing
                                           residence can be eliminated from the debt-to-income
                                           ratio analysis.
                 Rent or Lease Option    To use credits granted to a borrower from a rent with an
                                         option to buy lease arrangement as closing funds, the
                                         following guidelines should be followed:

                                         · The lease agreement must state how the credit will be
                                           accrued,
                                         · The borrower must provide:
                                           · Copies of canceled checks/money orders to evidence
                                             a history of a minimum of 12 months.
                                           · Copy of rental/purchase agreement evidencing a
                                             minimum original term of 12 months.
                                         · The appraiser must provide:
                                           · A statement of fair-market rent, or
                                           · A Fannie Mae 1007 single-family comparable rent
                                             schedule for the property,
                                         · Only the portion of the rental payment that exceeds the
                                           fair- market rent can be applied to the down payment
                                           or closing costs.
                                         · Rental or lease credits cannot be used to calculate the
                                           number of month’s PITI.

                                                                               Continued on next page




July 2004                                                                                Capital – 19
Credit Policy                                                           Chase Correspondent Division



Source of Funds, Continued


Other Funds - Non-Standard (continued)

                 Type of Closing Fund                             Guideline
                 Retirement Accounts     Retirement accounts (IRAs, Keogh accounts, 401-K
                                         accounts, etc.) are subject to withdrawal penalties and
                                         tax surcharges if withdrawn prior to normal distributions.
                                         Because of these restrictions, the following guidelines
                                         apply to the use of retirement accounts for closing-fund
                                         requirements :

                                         · 75% of IRAs, Keogh Accounts, 401(k) Accounts, U.S.
                                           Savings Bonds, and cash value of annuities can be used
                                           to determine funds available for withdrawal.
                                         · The borrower must provide evidence of the receipt of
                                           sufficient funds for closing.
                                         · If the borrower obtains a loan using retirement
                                           accounts as collateral:
                                           · The repayment terms must be verified, and
                                           · Any debt service (at minimum interest only
                                              payments) must be included in the borrower’s debt-
                                              to-income ratio.
                 Tax Deferred            The borrower’s down payment in a purchase may stem
                 Exchanges               from a tax-deferred exchange (TDE). To qualify for this
                                         favorable treatment, the original and replacement
                                         properties must be like-kind in nature or character.
                                         Most, if not all, exchanges of real properties qualify as
                                         like-kind exchanges-for example, exchanging an
                                         apartment for a commercial strip center would qualify
                                         whereas the exchange of a vacant lot for machinery
                                         would not.

                                         There are two types of acceptable tax deferred
                                         exchanges:

                                         · 1031: an exchange of equity in investment/business
                                           property for like kind. The property held and traded
                                           must be either business or investment property. This
                                           includes rental property (normally evidenced on
                                           Schedule E) such as residential properties, multi-family
                                           properties, apartments houses, or commercial property
                                           but does not include owner-occupied personal
                                           residences.
                                         · 1034: an exchange of equity in owner-occupied
                                           residential property for like kind

                                                                               Continued on next page



July 2004                                                                                 Capital – 20
Credit Policy                                                         Chase Correspondent Division



Source of Funds, Continued


Other Funds -   NOTE: 1031 and 1034 exchanges cannot be combined unless one of the
Non-Standard    properties is a 2-4-unit property.
(continued)
                Frequently, TDEs involve a “qualified intermediary,” an unrelated person
                who, for a fee, acts to facilitate the deferred exchange. A “qualified
                intermediary” may not be an employee, related family member, or one who
                has generally acted as a professional advisor (i.e., attorney, accountant,
                investment broker, real estate agent, or banker) within a two-year period
                preceding the exchange. Most often, a “qualified intermediary” or
                “accommodator” is an escrow company or licensed exchange company. It is
                the responsibility of the Correspondent to verify that the “qualified intermediary”
                or “accommodator” document all licensing requirements (if applicable).


                When the “down payment” stems from a tax deferred exchange, the following
                should be applied:

                · The property being traded must be reduced to cash in an arms-length-
                  transaction.
                · The property being acquired must be greater or equal in value to the
                  property being traded.
                · If the property being exchanged (for the subject property) was acquired
                  through a 1031 exchange, the borrower must have owned the property for a
                  minimum of two years prior to the subject exchange; otherwise the property
                  being exchanged must have been owned by the borrower for at least one
                  year.

                NOTE: Preliminary title reports may be one way of documenting time of
                ownership.

                                                                            Continued on next page




July 2004                                                                             Capital – 21
Credit Policy                                                              Chase Correspondent Division



Source of Funds, Continued


Other Funds -     · The borrower’s equity is calculated as the lower of:
Non-Standard
(continued)(con    · the net trade from the purchase contract
tinued)
                   · the gross trade value from the purchase contract less the sum of the
                     transfer fees and all lien balances on the currently owned property, and
                     transfer fees on the new property.
                   · the appraised value of the borrower’s currently owned property less the
                     sum of transfer fees and all lien balances on the property plus any transfer
                     fees on the new property.

                  For concurrent closings (where the property being traded is closing at the
                  same time as the new Chase transaction), we must obtain:

                  · Appraisals by a Chase-approved appraiser for all properties,
                  · Preliminary title reports for all properties,
                  · The sales contracts/escrow instructions on all properties, and
                  · Copy of the agreement from the “qualified intermediary” or
                    “accommodator.”
                  · For transactions closed prior to the new Chase transaction, we must obtain:
                    · A copy of the HUD-1 for all properties,
                    · The sales contracts/escrow instructions on all properties,
                    · Copy of the agreement from the “qualified intermediary” or
                      “accommodator,”
                    · Verification of available equity held by the “qualified intermediary” or
                      “accommodator” to be used as funds towards the down payment.

                                                                                 Continued on next page




July 2004                                                                                  Capital – 22
Credit Policy                                                            Chase Correspondent Division



Source of Funds, Continued


Other Funds -   Trade Equity
Non Standard    If the seller is to accept title to the borrower’s currently owned real estate in
(continued)     trade for a portion of the borrower’s down payment and closing fund
                requirements, the following conditions must be met.

                · A current (within 60 days) appraisal, acceptable to Chase, on the borrower’s
                  currently owned (to be traded) property must be obtained to verify the
                  market value of the property.
                · The ownership, lien holders, and lien balances on the borrower’s currently
                  owned property must be verified.
                · Liens on the borrower’s currently owned property must be assumable, or be
                  paid off.
                · Evidence of actual transfer to the seller of the borrower’s currently owned
                  property must be obtained.
                · The trade equity is calculated as the lower of:
                  · The net trade value from the purchase contract,
                  · The gross trade value from the purchase contract less transfer fees and all
                    lien balances on the currently-owned property plus any transfer fees, or
                  · The appraised value of the borrower’s currently owned property less
                    transfer fees and all lien balances on the property plus any transfer fees.
                · Trade equity cannot be used to calculate the number of month’s PITI
                  calculation.
                · Funds in a G’Mach account (group savings non-profit organization) are
                  non-interest paying funds that are contributed by members of a non-profit
                  “organization.” The G’Mach allows the depositors or other members of the
                  organization (who may not be depositors) to withdraw funds or borrow
                  funds on an interest free, short-term basis. The leadership of the
                  organization determines who may borrow based on the member’s need.
                  The following information explains how the withdrawal and loan work. Be
                  sure to exercise caution when using the loan as it may not be an eligible
                  source.
                · Withdrawal of Own Funds (no loan from organization).

                                                                               Continued on next page




July 2004                                                                                Capital – 23
Credit Policy                                                         Chase Correspondent Division



Source of Funds, Continued


Other Funds -     · Available on any product unless product/program guidelines state
Non Standard        different.
(continued)       · Borrower must make his/her own required contribution per the product
                    requirements (G’Mach funds cannot be used toward this required
                    contribution.)
                  · Funds withdrawn may be used only toward closing costs and prepaid
                    items, except as stated below:
                    - After borrower has made his/her required contribution, may use excess
                     G’Mach funds toward down payment.
                    - If borrower’s down payment equals 20% or more, G’Mach may be used
                     to pay all down payment, closing costs/prepaid items.
                  · Must obtain, as verification of account:
                    - Letter from Senior Executive Officer of “organization” stating
                       withdrawn funds were deposited by the borrower and borrower has no
                       outstanding loan from the organization.
                    - Account Statements (or other documentation) showing all account
                       activity for the past 90 days.
                    - Copy of check drawn on organization’s account from a depository
                       institution.
                · Interest-free loan
                  · Available on DreaMaker product only.
                  · Borrower must make his/her own required contribution per the product
                    requirements (G’Mach funds cannot be used toward this required
                    contribution).
                  · Funds borrowed may be used only toward closing costs and prepaid items,
                    except as stated below:
                    - After borrower has made his/her required contribution, may use excess
                     G’Mach funds toward down payment.
                  · Must obtain, as verification of account a letter from the Senior Executive
                    Officer of “organization” stating that funds obtained from the organization
                    represent an unsecured loan and repayment terms.
                  · Must obtain a copy of the check drawn on the account of the organization
                    at a depository institution.

                                                                            Continued on next page




July 2004                                                                             Capital – 24
Credit Policy                                                          Chase Correspondent Division



Source of Funds, Continued


Other Funds -    · Include the unsecured loan payment in the borrowers housing and debt to
Non Standard       income ratios
(continued)        - If repayment terms are unclear, calculate an interest-free payment over
                     12 monthly installments.
                 · Obtain a 3-file merged credit report just prior to closing to verify that no
                   new open loans have been obtained.
                   - Any new loans appearing must be satisfactorily explained and
                     calculated into the original loan decision.


Unacceptable    The following sources of funds are not acceptable to meet either closing-fund
Sources of      requirements or cash reserve requirements.
Funds

                Unacceptable Source                         Explanation
                Cash on Hand        Generally, cash on hand is not an acceptable source.
                                    However, it will be considered on an exception basis
                                    under our “Low to Moderate Income” products in cases
                                    where the borrower’s profile represents that the borrower
                                    does not use the service of depository or financial
                                    institutions and manages his/her finances on a cash basis
                                    as opposed to incurring credit card or other forms of
                                    consumer debt. (Refer to the “Low to Moderate Income
                                    Programs” section of this guide for more information.)
                Signature Loans     Unsecured loans, unsecured credit lines, advances against
                                    overdraft protection, or advances against credit cards or
                                    lines are not acceptable sources.
                Sweat (Work) Equity · Credits for labor performed or materials provided by the
                                      borrower are, generally, not an acceptable source for all
                                      products or programs. If allowed by the product or
                                      program, the following guidelines apply:
                                      · Borrower must make a minimum eligible down
                                        payment of 5% form his/her own sources.
                                      · Labor or materials must be explained and verifiable.
                                      · Work must be completed in a skillful, workmanlike
                                        manner and support the value, as verified by the
                                        appraiser.
                Cash-Out Proceeds   Cash-out proceeds from a cash-out refinance are not
                                    acceptable to meet either closing-fund requirements or
                                    cash reserve requirements.

                                                                             Continued on next page




July 2004                                                                              Capital – 25
Credit Policy                                                          Chase Correspondent Division



Source of Funds, Continued


Unacceptable      The following recaps non-standard closing funds that cannot be used to
Sources of Cash   calculate the number of month’s PITI calculation.
Reserves
                  · Unsecured borrowed funds, unless specifically allowed in the Product
                    Guide for the product your borrower has selected.
                  · Bridge loan proceeds.
                  · Rental or lease credits cannot be used to calculate the number of months
                    PITI calculation.
                  · Trade equity.




July 2004                                                                              Capital – 26
Credit Policy                                                    Chase Manhattan Mortgage Corporation



                                      Credit History
Overview


Introduction      A credit history provides valuable information to us on a borrower’s “use” of
                  credit. The definition of “use” of credit covers several aspects:

                  · The borrower’s payment history, which evidences his/her willingness to:
                    · pay obligations,
                    · adhere to contractual financial agreements, and
                    · fulfill financial commitments.
                  · How much credit a borrower requests
                  · The sources and type of credit
                  · How much credit a borrower has
                  · How much a borrower owes

                  To assess the credit history, a credit report is obtained from a credit-reporting
                  agency or by a direct request to the creditor. The value in a credit report is
                  not limited to providing evidence of a payment history - it provides historical
                  information of a borrower’s “use” of credit.


In this Chapter   The following topics are included in the chapter.

                                                Topic                                   See Page
                  Credit Bureau Reports                                                     2
                  Credit Risk Scores                                                        6
                  Obtaining and Selecting the Credit Risk Score                             8
                  Determining the Level of Review                                          11
                  Reviewing Credit History                                                 14
                  Derogatory Credit                                                        16
                  Authorized Users                                                         24
                  Stability of Residence and Employment                                    26
                  Business Credit Bureau Reference                                         27




July 2004                                                                            Credit History – 1
Credit Policy                                                 Chase Manhattan Mortgage Corporation



Credit Bureau Reports


Credit Bureau   Chase requires that the borrower’s current and past credit history be analyzed
Reports         through the review of a credit bureau report prepared by an independent credit
                reporting agency or credit reporting repository. Chase accepts four types of
                credit reports, depending on the circumstances of the mortgage request.

                ·   Residential Mortgage Credit Report
                ·   In-File Report
                ·   Electronically Obtained Credit Report
                ·   Non-Traditional Mortgage Credit Report

                NOTE: Except as specified in the topic “Electronically Obtained Credit
                Reports,” specific mortgage products, mortgage programs or mortgage
                processing types may specify the use of a particular type of credit bureau
                report.


Residential     This report provides current, verified, detailed information of the borrower’s
Mortgage        credit, employment, residence, and public record history. The reporting
Credit Report   agency verifies current employment and income, past employment to a
                minimum two-year history, residence history, and all debts listed on the
                application (including terms, balances, and ratings).

                · The RMCR must include any 30-, 60-, and 90-day past due payments.
                · All available legal information discovered by a search of public records
                  (lawsuits, judgments, foreclosures, garnishments, bankruptcies, divorces,
                  etc.) must be included on the RMCR.
                · A joint or combined report for a married couple must contain all debts of
                  both parties or separate reports must be provided.
                · The RMCR must contain a Fraud Alert

                                                                            Continued on next page




July 2004                                                                        Credit History – 2
Credit Policy                                                  Chase Manhattan Mortgage Corporation



Credit Bureau Reports, Continued


In-File and      An individual “in-file” report provides the borrower’s history of credit and
Merged In-File   residence that has been reported and is currently “on file” with a particular
Reports          credit-reporting repository. There are presently three major credit reporting
                 repositories: TRW, Trans Union, and Equifax.

                 Chase also allows the use of in-file reports that have been “merged” by a
                 credit reporting company. In the merging process, the credit reporting
                 company pulls two or three in-file reports from different credit reporting
                 repositories and merges the information to provide one report that contains
                 the most current reported information. Through the merge process, duplicate
                 records are eliminated.

                 Chase prefers a merged three-bureau in-file report. However, an individual
                 in-file reports will be accepted for the following circumstances:

                 · If the LTV is 80% or less, Chase requires either:
                   · Two in-file reports, or
                   · A two-bureau merged in-file report.
                   · In both cases the reports must be from different repositories, one of which
                     should be TRW.
                 · If the LTV is above 80% up to 95%, a three bureau merged in-file report is
                   required from different repositories, one of which must be TRW.
                 · The in-file report(s) must reveal 30-, 60- and 90-day past due payments.
                 · If conflicting information is reported, the most recent “date reported”
                   information should be used.
                 · A merged in-file report must clearly reflect:
                   · That information from two or three credit reporting repositories was
                     obtained.
                   · The identity of the repositories.
                 · A joint or combined report for a married couple must contain all debts of
                   both parties or separate reports must be provided.

                                                                             Continued on next page




July 2004                                                                         Credit History – 3
Credit Policy                                                  Chase Manhattan Mortgage Corporation



Credit Bureau Reports, Continued


Electronically   Chase allows the use of electronically obtained credit bureau reports for use
Obtained         in the Chase automated underwriting system as follows:
Credit Reports
                 · Credit Agency - the electronic credit bureau report must be ordered from an
                   approved credit agency: CBC, CredCo, Equifax, and TCN (The Credit
                   Network).
                 · Three Bureau In-file Merged Report - the electronic credit bureau report
                   will be a three bureau in-file merged report.
                   · If the credit agency informs that one credit repository is unavailable, a
                     two-bureau merged in-file report is acceptable.
                   · The two bureau merged in-file report should reflect that a three bureau in-
                     file report was initially ordered.
                 · Credit Risk Scores - The electronic credit bureau report shall make
                   available to the automated underwriting system the credit risk scores.
                 · Products/Programs - Chase allows this electronic credit report policy to be
                   used for all products and programs.


Non-             A NMCR, a/k/a Non-Traditional Mortgage Report (NTMR), is required on all
Traditional      programs/products when the credit repositories or credit reporting agencies
Mortgage         are unable to develop a RMCR on a borrower. If the borrower indicates at
Credit Report    time of application that he/she has no credit or limited credit, information on
(NMCR)           non-traditional sources of credit must be obtained. Only credit arrangements
                 that require the borrower to make periodic payments on a regular basis should
                 be considered. The lender must order a RMCR. Concurrently, the lender
                 must notify the bureau there may be insufficient repository information to
                 develop a RMCR (in-files or merged report, if allowed), and non-traditional
                 credit information is being provided. The bureau will attempt to develop a
                 NMCR based on these credit sources. Direct verifications obtained by the
                 lender are not acceptable.

                 The format of the NMCR is similar to that of a traditional credit report and
                 will specify that it meets the criteria for a NMCR.

                 The NMCR is designed to be a substitute or supplement to the RMCR in
                 those cases in which the borrower has insufficient or no credit references.
                 The NMCR cannot be used to offset a poor payment history reported on a
                 traditional credit report.

                                                                             Continued on next page




July 2004                                                                         Credit History – 4
Credit Policy                                                    Chase Manhattan Mortgage Corporation



Credit Bureau Reports, Continued


Community         The states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico,
Property Issues   Texas, and Washington are community property states. In these states, the
                  credit history review can be complicated when a married individual applies
                  for credit using sole and separate property. Except when permitted by state
                  law, the lender will not run credit on the non-applicant spouse. The sole and
                  separate income, assets, liabilities, and debts of the non-applicant spouse are
                  excluded from consideration in qualifying the applicant spouse.




July 2004                                                                           Credit History – 5
Credit Policy                                                   Chase Manhattan Mortgage Corporation



Credit Risk Scores


Overview        Credits Risk Scores provide the lender with the relative probability of default
                on a loan request for a borrower. The industry standard Credit Risk Scores
                developed by the Fair Isaacs Company have been used by the mortgage
                industry for over ten years and have proven statistically to be valuable tools in
                predicting relative loan performance over time. Automated Underwriting
                Systems utilize Credit Risk Scores as an indicator of the borrower’s credit
                history.


Credit Risk     · The Credit Risk Scores used by the three national credit repositories
Score             (Equifax, TransUnion, and Experian) produce a value in the range of 300-
                  900. This value represents the relative odds that an extended loan will go
                  bad (defined as 60 days delinquent).
                · The higher the credit risk score, the less likely it is that the loan extended to
                  the borrower would go bad (i.e., A loan to a borrower who has a 700 credit
                  risk score is less likely to go bad than a loan to a borrower with a 660 credit
                  risk score.).


Repositories    · The three Credit Repositories work with Fair Isaacs to develop Credit Risk
and Scores        Scores specific to the repository.
                · Because of variances in how and when creditor information is reported to
                  the credit repositories and differences in the creditors who report to which
                  repositories, specific Credit Risk Scorecards are built, monitored,
                  maintained, and updated by the repositories and Fair Isaacs.
                · The Repositories and the associated Credit Risk Score Trade Names are as
                  follows.

                               Repository                            Score Trade Name
                Equifax                                   Beacon
                TransUnion                                Emperica
                Experian                                  Experian Scorecard

                                                                               Continued on next page




July 2004                                                                           Credit History – 6
Credit Policy                                                    Chase Manhattan Mortgage Corporation



Credit Risk Scores, Continued


Analyzing        Credit Risk Scores are determined statistically by analyzing information
Information in   contained in the Credit Bureau report. This information includes the
Credit Bureau    following:
Report

                   Information Type                              Description
                 Repayment               30-, 60-, 90-, 120-, 150-day delinquency on mortgage
                 Performance             loans, installment loans, revolving lines, and credit cards;
                                         collection accounts and balances, and charge off
                                         information.
                 Credit History          Length of credit history, high credit amount, elapsed time
                                         between/since delinquencies, number of trade lines.
                 Credit Usage            Level of indebtedness, percentage of credit lines
                                         outstanding, amount of credit lines available, number of
                                         inquiries, and frequency of inquiries.
                 Public Record Items     Information contained in public records such as liens,
                                         judgments, wage assignments/garnishments, tax liens.


Score Reason     · Each repository will produce a Credit Risk Score and the Score Reason
Codes              Codes that reduced the Score from a theoretical Perfect score.
                 · These Reason codes differ from one repository to another because the data
                   reported, and used by the repository, in the generation of the Credit Risk
                   Score differs.
                 · As such, it is important that the credit reviewer utilize the detailed score
                   factor legend, applicable and specific to the appropriate repository, when
                   performing a full (cautious) review of credit history.




July 2004                                                                             Credit History – 7
Credit Policy                                                      Chase Manhattan Mortgage Corporation



Obtaining and Selecting the Credit Risk Score


Obtaining a     Credit risk scores must be requested for each borrower, whether the borrower
Credit Risk     is employed or not. A credit risk score must be obtained from each
Score           repository used in the compilation of the credit report data, regardless of
                the type of credit report obtained. The credit report documentation
                required may vary based on the loan product, documentation program, and
                LTV. Each RMCR or in-file report must have a credit risk score from each of
                the repositories that are reflected on the report.

                                   IF…                                        THEN…
                three repositories are reported,             three credit risk scores from those
                                                             repositories must be obtained for each
                                                             borrower.
                two repositories are reported,               two credit risk scores from those
                                                             repositories must be obtained for each
                                                             borrower.
                only one repository is reported,             a credit risk score from that repository
                                                             must be obtained for each borrower.
                the transaction is an Agency or Non-         a credit risk score for each borrower
                Agency automated underwriting                must be obtained.
                evaluations,
                the transaction is a FHA or VA               at least one credit risk score for one
                automated underwriting evaluation,           borrower must be obtained.
                no credit risk score can be obtained for a   a non-traditional credit report can be
                FHA or VA transaction,                       built for the underwriter to review.

                                                                                   Continued on next page




July 2004                                                                               Credit History – 8
Credit Policy                                                       Chase Manhattan Mortgage Corporation



Obtaining and Selecting the Credit Risk Score, Continued


Selecting the   A single “representative” credit risk score will be selected from the scores
Credit Risk     reported on the submitted report(s). Depending on the selected score, the
Score           “level of review” required for the credit report will be determined.

                                 IF…                                        THEN…
                three credit risk scores are reported,   use the middle score for each borrower:
                two credit risk scores are reported,     use the lower score.
                only one score is available,             use that score.
                there are multiple borrowers,            · determine the score to use based upon the
                                                           criteria above for each borrower,
                                                         · select the lowest score from these to
                                                           determine the level of review.

                NOTE: If a single repository reports more than one credit risk score, use
                the first score listed of the multiple scores listed for that repository as
                “the score” for that repository only. Continue with the selection process
                using that single score as one of the components in the score selection
                process. If the provided report does not contain a Fraud Alert, the
                procedures above are supplemented with an in-file report obtained in
                accordance with approved procedures.

                                                                                  Continued on next page




July 2004                                                                              Credit History – 9
Credit Policy                                                         Chase Manhattan Mortgage Corporation



Obtaining and Selecting the Credit Risk Score, Continued


Supplemental     If the initial report did not contain a Fraud Alert, the procedures noted in the
In-File Report   previous sections for obtaining and selecting credit risk scores are
                 supplemented with an in-file report obtained in accordance with the following
                 procedures. Refer to the “Processing Guidelines” section of this guide for
                 additional information regarding In-File Reports.

                   Step                                   Action
                    1      Develop the score from the submitted report.

                           REFERENCE: Refer to “Obtaining a Credit Risk Score” and
                           “Selecting the Credit Risk Score” sections in this chapter for
                           additional information on credit risk scores.
                     2     Compare the submitted report with the in-file report for any notable
                           discrepancies and resolve issues associated with those discrepancies.

                                             IF…                                  THEN the…
                             a discrepancy cannot be resolved        lower of the credit scores will be
                                                                     used from the in-file and the
                                                                     submitted report.
                             the in-file credit risk score is used   reviewer must make a comment on
                             when a discrepancy cannot be            the approval document as to why
                             resolved                                that credit score was used in place of
                                                                     the RMCR



                 NOTE: For delegated transactions, the Correspondent must generate an
                 in-file credit report under the above guidelines.




July 2004                                                                                  Credit History – 10
Credit Policy                                                  Chase Manhattan Mortgage Corporation



Determining the Level of Review


Overview         The level of review of the credit report is dependent on the selected
                 representative Credit Risk Score as outlined in “Selecting the Credit Risk
                 Score.” Generally, the higher the Credit Risk Score, the less detailed the
                 review; the lower the Credit Risk Score, the more detailed the review.


Title and Lien   Regardless of the level of review indicated, the borrower must pay in full and
Position         clear any “ item” that may impact the following:

                 · Title of the subject property.
                 · Lien position of the Chase extended mortgage.
                 · Sufficient funds to pay any such amounts must be available to the borrower
                   from cash/cash like assets or loan proceeds, and such funds must be
                   accounted for in reserve calculations and requirements.


Bankruptcy       In all cases, a disclosed or reported bankruptcy or foreclosure places the
and              request into a “Cautious Review” status, regardless of the Credit Risk Score.
Foreclosure
                 · To consider such requests, appropriate letters of explanation should be
                   obtained regarding the details of the Bankruptcy or Foreclosure and
                   mitigating circumstances.
                 · Follow Automated Underwriting guidance and messaging.

                                                                             Continued on next page




July 2004                                                                        Credit History – 11
Credit Policy                                                     Chase Manhattan Mortgage Corporation



Determining the Level of Review, Continued


Types of Credit   The following provides the information to be reviewed based on the type of
Report Review     review required:
                                   Credit
                  Review Type      Score                             Description
                  Cursory          720 or    ·   Ensure that the credit risk score is obtained and
                                   greater       selected per Chase policy.
                                             ·   Determine that there is no disclosed or reported
                                                 bankruptcy on the credit bureau report, the
                                                 application, or any other documentation in the file.
                                             ·   Ascertain that there is no disclosed or reported
                                                 foreclosures on the credit bureau report, the
                                                 application, or any other documentation in the file.
                                             ·   To consider such requests, appropriate letters of
                                                 explanation should be obtained regarding the details
                                                 of the bankruptcy or foreclosure and mitigating
                                                 circumstances.
                                             ·   Automated underwriting guidance and messaging
                                                 will provide detail and guidance on requirements.
                  Basic            660-719   ·   Ensure that the credit risk score is obtained and
                                                 selected per Chase policy.
                                             ·   Determine that there is no disclosed or reported
                                                 bankruptcy on the credit bureau report, the
                                                 application, or any other documentation in the file.
                                             ·   Ascertain that there is no disclosed or reported
                                                 foreclosures on the credit bureau report, the
                                                 application, or any other documentation in the file.
                                             ·   Verify that there are no mortgage trade
                                                 delinquencies, including Home Equity lines/loans,
                                                 indicated on the credit bureau report.

                                             NOTES:
                                             · To consider such requests appropriate letters of
                                               explanation should be obtained regarding the
                                               details of:
                                               · The bankruptcy or foreclosure and mitigating
                                                 circumstances.
                                               · The mortgage trade delinquencies indicated on
                                                 the credit bureau report, letters of explanation
                                                 for mortgage trade delinquencies within the
                                                 last 12 months.
                                             · Automated underwriting guidance and
                                               messaging will provide detail and guidance on
                                               requirements.
                                                                                 Continued on next page



July 2004                                                                            Credit History – 12
Credit Policy                                                   Chase Manhattan Mortgage Corporation



Determining the Level of Review, Continued


Types of Credit Report Review (continued)

                                    Credit
                   Review Type      Score                        Description
                  Comprehensive    620-659 · Ensure that the credit risk score is obtained and
                                             selected per Chase policy.
                                           · Determine that there is no disclosed or reported
                                             bankruptcy on the credit bureau report, the
                                             application, or any other documentation in the file.
                                           · Ascertain that there is no disclosed or reported
                                             foreclosures on the credit bureau report, the
                                             application, or any other documentation in the file.
                                           · Verify that there are no mortgage trade
                                             delinquencies, including Home Equity lines/loans
                                             indicated on the credit bureau report.

                                            NOTES:
                                            · Review serious derogatory items on the credit
                                              bureau report that are indicative of the
                                              borrower’s willingness to repay
                                              · collection accounts > $1,000
                                              · charge-offs > $1,000
                                              · judgments > $1,000
                                              · tax liens > $1,000
                                              · repossessions
                                            · To consider such requests appropriate letters of
                                              explanation should be obtained regarding the
                                              details of:
                                              · The bankruptcy or foreclosure and mitigating
                                                 circumstances.
                                              · The mortgage trade delinquencies indicated on
                                                 the credit bureau report, letters of explanation
                                                 for mortgage trade delinquencies within the
                                                 last 24 months or serious derogatory items.
                  Cautious           Less   Chase Underwriting or a Choice Contract Underwriter
                                   than 620 must review any file in which the credit score is 620
                                            or less.

                  NOTE: Often Home Equity Lines of Credit (HELOCS) are reported as
                  Revolving Lines or Unsecured Lines. Any Revolving Line or Unsecured
                  line in the amount of $50,000 or more with a repayment term of more
                  than 72 months shall be considered a mortgage trade line for credit
                  review purposes.




July 2004                                                                         Credit History – 13
Credit Policy                                                Chase Manhattan Mortgage Corporation



Reviewing Credit History


Introduction    As the primary measurement of the borrower’s credit history, the reported
                credit bureau information must be carefully reviewed to determine if the
                borrower demonstrates reliability and responsibility in the repayment of
                obligations.


Basic           A satisfactory repayment history is a requirement on all loans and is not
Requirements    considered a compensating or mitigating factor to offset weaknesses in other
                areas of the borrower’s credit profile. The borrower’s credit history should
                reflect the following:

                · No history of bankruptcy.
                · No history of foreclosure.
                · A history of meeting payments according to the terms and conditions of the
                  credit obligation.
                · A sufficient history to establish a favorable repayment pattern.
                  · Generally, a 12-month history with three accounts paid as agreed or a
                    twenty-four month history with two accounts paid as agreed meets this
                    requirement, or
                  · An acceptable obtained and selected credit risk score for the product and
                    program meets this requirement. See “Obtaining and Selecting the Credit
                    Risk Score” section for additional information on obtaining and selecting
                    Credit Risk Scores.
                  · For Non-Traditional Credit, a 12-month history with four accounts paid as
                    agreed meets this requirement.
                · Specific mortgage products, programs, or processing methods may require
                  the use of specific credit history requirements.

                                                                           Continued on next page




July 2004                                                                      Credit History – 14
Credit Policy                                                    Chase Manhattan Mortgage Corporation



Reviewing Credit History, Continued


Residence       For all transactions, the borrower must list all residences for the last two
Reference       years. Residency is verified in the following manner:

                 Type of Reference                                Description
                Mortgage                  Verification of the payment history for all mortgages on
                                          the subject property the borrower had during the past 12
                                          months must be obtained. This verification can be
                                          obtained by:

                                          · A Verification of Mortgage (VOM) - direct written
                                             request to the lender or servicer,
                                          · Reviewing a minimum 12-month payment history on
                                             the current credit bureau, or
                                          · Obtaining copies of canceled checks for the last 12
                                             months’ mortgage payments.
                                          · If the mortgage note is held by a private individual and
                                             not serviced by a lender or mortgage servicer, a copy of
                                             the note must be obtained in addition to copies of
                                             canceled checks for the last 12 months’ mortgage
                                             payments.
                                          · A properly obtained and selected credit risk score of
                                             720 or above eliminates the need for direct mortgage
                                             reference verification.
                Rental                    If the borrower is renting, verification of a 12-month
                                          satisfactory rental payment history should be obtained.
                                          This verification should be done by one of the following
                                          methods:

                                          · Verification of Rental (VOR) - direct written request to
                                            the landlord or his/her Management Company.
                                          · If a company does not manage the property, the
                                            borrower must provide, in addition to a copy of the
                                            lease, one of the following:
                                            · Copies of canceled checks or equivalent for the last
                                               12 months’ rental payments, or
                                            · An RMCR where the credit-reporting agency directly
                                               verified the rental history with the landlord’s
                                               management agency.
                                          · Specific mortgage products, programs, or processing
                                            methods may require the use of a specific Residence
                                            Reference verification method.




July 2004                                                                           Credit History – 15
Credit Policy                                                   Chase Manhattan Mortgage Corporation



Derogatory Credit


Introduction    Derogatory credit is an obligation(s) that has not been repaid according to its
                original agreed upon terms. It may be reflected in the delinquent manner in
                which a borrower repays the obligation or in how he/she is relieved of the
                debt through legal recourse by the creditor. The manner in which the
                borrower has managed his/her previous credit is a strong indicator of future
                performance. A history of derogatory credit and/or an instance of a major
                derogatory credit item increase the risk associated with the loan request. For
                these reasons, the derogatory credit occurrences must be carefully considered
                in the analysis of the loan request.


Serious         The following list of occurrences indicates areas of a borrower’s credit
Derogatory      history, which are defined as serious derogatory credit. For consideration, a
Items           loan request from a borrower with serious derogatory credit in his/her credit
                history must provide satisfactory written explanation accompanied by
                supporting documentation, in addition to compensating factors to offset the
                layers of risk.

                     Derogatory Item                             Description
                Bankruptcy                     Bankruptcy - Any chapter

                                               See “Bankruptcy” section for additional
                                               information on bankruptcies.
                Foreclosures                   See “Foreclosures” section for information on
                                               foreclosures.
                Mortgage Delinquency/          Any payment 30 days past due or more for all
                Housing Debt                   housing debt (all mortgages, rent, etc.) within the
                                               last 12 months.

                                               NOTE: Often Home Equity Lines of Credit
                                               (HELOCS) are reported as Revolving Lines or
                                               Unsecured Lines on credit bureau reports. Any
                                               Revolving Line or Unsecured line in the amount
                                               of $50,000 or more with a repayment term of
                                               more than 72 months shall be considered a
                                               mortgage trade line for credit review purposes.
                Collection Account             Any collection account in excess of $1,000 within
                                               24 months.
                Charge-off                     Any charge-off in excess of $1,000 within the last
                                               24 months.

                                                                               Continued on next page




July 2004                                                                          Credit History – 16
Credit Policy                                                   Chase Manhattan Mortgage Corporation



Derogatory Credit, Continued


Serious Derogatory Items (continued)

                       Derogatory Item                             Description
                  Judgment                      Any judgment in excess of $1,000 within the last
                                                24 months.
                  Tax Lien                      Any tax lien in excess of $1,000 within the last 24
                                                months.
                  Repossession                  Any repossession within the last 24 months.

                                                NOTE: The borrower must pay in full and
                                                clear any derogatory item that may impact
                                                either the title of the subject property or the lien
                                                position of the Chase extended first or second
                                                mortgage. In such cases the borrower must
                                                have sufficient funds to pay any such amounts
                                                from cash/cash like assets or loan proceeds, and
                                                the use of such funds must be accounted for in
                                                reserve calculations and requirements.
                  Specific mortgage products,   May require specific requirements for
                  programs or processing        “Comprehensive” credit history review levels as
                  methods                       per automated underwriting approval output
                                                messages.

                  NOTE: For Bankruptcy, Foreclosures and Mortgage Delinquency, go
                  to “Cautious Review” regardless of the credit risk score


Disputed         In some circumstances, the borrower may be disputing the reported
Derogatory       derogatory credit occurrence with the creditor. In those cases, the borrower
Credit           must provide documentation that verifies that there is a dispute (i.e., legal
                 documents, contractual documents, insurance papers, or correspondence
                 between the parties). The underwriter should evaluate the impact the disputed
                 derogatory credit item may have on the borrower’s ability to manage the
                 mortgage debt and how other debts have been managed in the past. The
                 underwriter should also take into consideration the equity investment in the
                 property, amount of the disputed credit item, the borrower’s asset position,
                 credit risk score, and repayment history with respect to other debts. If these
                 areas are acceptable, the serious or major derogatory credit may be considered
                 an isolated incident, with no material impact in the underwriting analysis.

                                                                                Continued on next page




July 2004                                                                          Credit History – 17
Credit Policy                                                  Chase Manhattan Mortgage Corporation



Derogatory Credit, Continued


Miscellaneous    The following are other factors to consider when performing a
Credit Bureau    “Comprehensive or Cautious Review”:
Review Items
                 · Inquiries - The underwriter must exercise his/her judgment to determine if
                   numerous inquiries reported on the credit bureau report require an
                   explanation from the borrower and/or an investigation to uncover if any
                   new credit obligations resulted from the inquiries. Some key indications are
                   numerous inquiries from mortgage lenders, banks, financial institutions,
                   credit unions, automobile financing lenders, etc.
                 · Undisclosed Debt - Debts that are not disclosed by the borrower on the
                   application (other than minimal revolving accounts and accounts paid
                   in full each month, such as a T & E account) must be explained by the
                   borrower and reported on the approval document. Substantial undisclosed
                   debt may be a reason for denial.
                 · Unstated Derogatory/Delinquent Credit Bureau Amounts - If an amount
                   is unstated on the credit bureau (for charge-offs, judgments, or collection
                   accounts), it is presumed to be $500 or less.


Defendant In a   Borrowers involved as a defendant in a lawsuit with pending litigation, may
Lawsuit          not be eligible for an extension of credit. The underwriter must determine the
                 impact that any additional financial obligations levied against the borrower as
                 a result of the lawsuit may have on the borrower’s ability to repay the
                 mortgage. To reach that level of analysis, supporting documentation
                 reviewed by the underwriter must support the conclusion that the potential for
                 income or asset interruption is minimal. In all cases, the borrower’s attorney
                 must provide a letter explaining the lawsuit with supporting documentation.
                 The following items must also be considered:

                 · Whether the potential obligation will be covered by an insurance policy or
                   by an escrow fund already established to cover it.
                 · Whether the Title Company will take exception to the pending litigation
                   and ensure Chase’s first lien position.
                 · Where the pending amount is minimal (less than $10,000), whether the
                   borrower has sufficient assets to establish an escrow account for 1½ times
                   the amount of the proposed damages to be held by the attorney representing
                   the borrower in the litigation.

                                                                             Continued on next page




July 2004                                                                        Credit History – 18
Credit Policy                                                   Chase Manhattan Mortgage Corporation



Derogatory Credit, Continued


A/K/As (Also    Credit bureau reports should also be requested under disclosed or otherwise
Known As)       noted AKAs and reviewed appropriately according to the Credit Risk Score
                and Review level assigned.


Bankruptcy      Any bankruptcy (regardless of chapter) whether disclosed on a credit report,
                acknowledged by the borrower on the loan application, or contained
                elsewhere in the loan file is considered significant and is a derogatory credit
                item.

                Automated Underwriting Approvals with Bankruptcies
                If the loan has been approved by an Automated Underwriting System and the
                following two conditions have been met, the additional documentation
                requirements listed below do not apply:

                · The Automated Underwriting System has recognized the bankruptcy,
                  evidenced by a findings statement or message that recognized the
                  bankruptcy.
                · Any additional documentation regarding the bankruptcy required by the
                  Automated Underwriting response findings or messages must be followed.

                Documentation Requirements

                   IF the filing
                  type was filed    and the reason
                      under          for the filing
                    Chapter…             was…                           THEN…
                        13,        for any reason,    · evidence that the borrower had an
                                                        acceptable credit history prior to the
                                                        extenuating circumstances, and
                                                      · the borrower must meet the criteria for re-
                                                        establishment of credit.

                                                                               Continued on next page




July 2004                                                                          Credit History – 19
Credit Policy                                                    Chase Manhattan Mortgage Corporation



Derogatory Credit, Continued


Bankruptcy (continued)

                    IF the filing
                   type was filed    and the reason
                        under         for the filing
                     Chapter…            was…                             THEN…
                     7,11, or 12,   extenuating        · the borrower must provide documentation,
                                    circumstances,       including a letter of explanation, to
                                                         evidence that the bankruptcy was not due
                                                         to financial mismanagement, but was the
                                                         result of extenuating circumstances,
                                                       · the borrower must provide copies of the
                                                         bankruptcy discharge papers in their
                                                         entirety,
                                                       · the underwriter must review the current
                                                         credit history and use the borrower’s
                                                         employment/income and stability, liquid
                                                         asset position and other aspects of the file
                                                         which evidence the borrower’s recovery
                                                         from the circumstance to determine that
                                                         the circumstances and events leading to
                                                         the bankruptcy are not likely to recur,
                                                       · evidence that the borrower had an
                                                         acceptable credit history prior to the
                                                         extenuating circumstances, and
                                                       · the borrower must meet the criteria for re-
                                                         establishment of credit.

                                                                                 Continued on next page




July 2004                                                                           Credit History – 20
Credit Policy                                                    Chase Manhattan Mortgage Corporation



Derogatory Credit, Continued


Bankruptcy (continued)

                    IF the filing
                   type was filed    and the reason
                       under          for the filing
                     Chapter…            was…                           THEN…
                  7,11,12,          financial        · the borrower must provide copies of the
                                    mismanagement,     bankruptcy discharge papers in their
                                                       entirety, including a letter of explanation.
                                                     · the underwriter must have sufficient
                                                       documentation to support his/her
                                                       conclusion that the borrower is now
                                                       creditworthy and has the capacity to repay
                                                       the obligation.
                                                     · the underwriter should confirm the
                                                       consistency and completeness of the credit
                                                       information and determine if there is any
                                                       additional and potential overlaying of risk.
                                                     · particular attention should be given to risk
                                                       score factor reason codes that accompany
                                                       the credit risk score, notably inquiries, age
                                                       of accounts, balance-to-limits, and any
                                                       adverse or derogatory information.
                                                     · the borrower must meet the criteria for
                                                       acceptable re-established credit.

                 Criteria for acceptable re-establishment of credit
                 · All re-established credit must be current.
                 · If Chapter 13 or if a Chapter 7, 11, or 12 due to extenuating
                   circumstances, must have re-established credit for at least two years and
                   should be “like” sources of previous credit (i.e., if revolving, should have
                   some revolving, if installment should have some installment.)
                 · If Chapter 7, 11, or 12 which was due to financial mismanagement, must
                   have re-established credit for at least four years and should be “like”
                   sources of previous credit (i.e., if revolving, should have some revolving, if
                   installment should have some installment.)
                 · A minimum of 4 trade lines are required, of which at least one must be a
                   traditional source of credit and one rating must be housing related. If
                   housing related debt is not reported on the credit report, provide evidence
                   to support timely payments (i.e., canceled checks, money orders, bank
                   statements)

                                                                                Continued on next page




July 2004                                                                           Credit History – 21
Credit Policy                                                  Chase Manhattan Mortgage Corporation



Derogatory Credit, Continued


Bankruptcy      · No new public records (e.g., foreclosure, unpaid judgments, collections,
(continued)       liens, garnishments)
                · No more than two 30 days past due notices in the last two years on
                  installment or revolving lines.
                · No 60 day past due notices since the discharge of bankruptcy.
                · No late payments on housing since the action was completed.
                · The borrower’s credit history should reflect a minimum credit risk score of
                  660.


Foreclosures    Any foreclosure, deed-in-lieu of foreclosure, or a short-payoff of a mortgage
                debt, whether disclosed on a credit report, acknowledged by the borrower on
                the loan application or contained elsewhere in the loan file is considered
                derogatory credit. Borrowers who have been subject to any of these may be
                considered for a mortgage. The following guidelines apply:

                Automated Underwriting Approvals with Foreclosures
                If the loan has been approved by an Automated Underwriting System and the
                following two conditions have been met, the additional documentation
                requirements listed below do not apply:

                · The Automated Underwriting System has recognized the foreclosure,
                  evidenced by a findings statement or message that recognized the
                  foreclosure.
                · Any additional documentation regarding the foreclosure required by the
                  Automated Underwriting response findings or messages must be followed.

                Documentation Requirements
                The following documentation requirements are required if the foreclosure was
                   a result of extenuating circumstances, financial mismanagement or the
                   extenuating circumstances cannot be supported or documented:

                · The underwriter must review the current credit history and use the
                  borrower’s job status and stability, liquid asset position and other aspects of
                  the file which evidence the borrower’s recovery from the circumstance to
                  determine that the circumstances and events leading to the foreclosure are
                  not likely to recur.

                                                                              Continued on next page




July 2004                                                                        Credit History – 22
Credit Policy                                                  Chase Manhattan Mortgage Corporation



Derogatory Credit, Continued


Foreclosures    · The underwriter should confirm the consistency and completeness of credit
(continued)       information and determine if there is any additional or potential overlaying
                  of risk.
                · Particular attention should be given to risk score factor reason codes that
                  accompany the credit risk scores, notably inquiries, age of accounts,
                  balance-to-limits, and any adverse or derogatory information.
                · The borrower must meet the criteria for re-established credit.

                Additional Documentation Requirements for a foreclosure, deed-in-lieu
                or short-payoff that was the result of extenuating circumstances
                · The borrower must provide documentation to evidence that the foreclosure
                  was not due to financial mismanagement but was the result of extenuating
                  circumstances beyond his or her control.
                · Evidence that the borrower had an acceptable credit history prior to the
                  extenuating circumstance.

                Criteria for acceptable re-establishment of credit
                · All re-established credit must be current.
                · If foreclosure was due to extenuating circumstances, must have re-
                  established credit for at least two years and should be “like” sources of
                  previous credit (i.e., if revolving, should have some revolving, if installment
                  should have some installment.)
                · If foreclosure was due to financial mismanagement must have re-
                  established credit for at least four years and should be “like” sources of
                  previous credit (i.e., if revolving, should have some revolving, if installment
                  should have some installment.
                · A minimum of four trade lines are required, of which at least one must be a
                  traditional source of credit and one rating must be housing related. If
                  housing related debt is not reported on the credit report, provide evidence to
                  support timely payments (i.e., canceled checks, money orders, bank
                  statements).
                · No new public records (e.g., foreclosure, unpaid judgments, collections,
                  liens, and garnishments).
                · No more than two 30 days past due notices in the last two years on
                  installment or revolving lines.
                · No 60 day past due notices since the foreclosure action.
                · No housing late payments since the action.
                · The borrower’s credit history should reflect a minimum credit risk score of
                  660.




July 2004                                                                        Credit History – 23
Credit Policy                                                    Chase Manhattan Mortgage Corporation



Authorized Users


Authorized         The term “Authorized User” means a creditor has given permission to the
User               obligor on the account to allow a spouse or other to make charges to the
                   account as an authorized user. Usually, this is without contractual obligation
                   to repay, except under any specific terms identified by the creditor or by any
                   state laws.


Considerations      For the purpose of evaluating creditworthiness, accounts that the
for Evaluating      applicant (either individually or jointly with another party) is obligated to
Creditworthiness    pay by contractual arrangement with a creditor must be considered.
                    Additionally, other accounts where the borrower is a permitted user or non-
                    obligor, must be considered in evaluating the applicant borrowers’
                    creditworthiness under the following circumstances:

                    · The borrower is an “authorized user spouse” on the account.
                    · The applicant requests that an account in the name of the applicant’s
                      spouse or former spouse be considered that demonstrates, accurately, that
                      the account reflects the applicant’s creditworthiness.


Guidelines for     The criteria below apply to borrowers who are authorized users on accounts
Evaluating         or wish to use the credit history of an account(s) held in the name of a spouse
Authorized         or former spouse.
Users

                                                                               Continued on next page




July 2004                                                                          Credit History – 24
Credit Policy                                                      Chase Manhattan Mortgage Corporation



Authorized Users, Continued


Guidelines for   Authorized User
Evaluating       In some circumstances, a borrower may be an “authorized user” only on a
Authorized       revolving account.
Users
(continued)
                 · If the “authorized user” is not a spouse, at the applicant’s request, the
                   account will be considered in the evaluation, provided the applicant can
                   evidence that he/she has been paying debt.
                 · If the borrower is responsible for paying the debt, the payment must be
                   included in the debt-to-income ratio.
                 · In those cases where a spouse is the authorized user, the use of such an
                   account, including its payment history, must be considered in the
                   evaluation.

                                  IF the…                                     THEN…
                 credit bureau, direct verifications, or   ·   applicant may provide evidence that
                 information indicate derogatory ratings       he/she is not obligated to repay the
                 are not caused by the applicant or            debt,
                 history does not accurately reflect the   ·   exclude from the D/I ratio, and
                 applicant’s history,                      ·   do not consider as derogatory credit
                                                               against applicant.
                 applicant indicates he/she is not         ·   verify via the credit report that the
                 responsible for the payment,                  applicant is an “authorized user” only,
                                                           ·   exclude from the D/I ratio, and
                                                           ·   do not consider history in analysis.


Account in the   At the applicant’s request, any account that is in the name of the applicant’s
Name of Spouse   spouse or former spouse that is disclosed by the applicant as accurately
or Former        demonstrating the applicant’s credit worthiness must be considered. The
Spouse           account must be verified either on the credit report or by direct verification.

                 · These accounts are generally used to help develop a credit history where
                   limited or no history is available, often referred to as a “thin file.”
                 · If these accounts do not satisfy the trade line requirements of the policy,
                   additional credit, such as alternative sources, (see “Non-Traditional
                   Mortgage Credit Report, NMCR” section) should be developed to establish
                   the borrower’s credit history, according to the requirements set forth.




July 2004                                                                             Credit History – 25
Credit Policy                                                  Chase Manhattan Mortgage Corporation



Stability of Residence and Employment


Overview        Evidence of stability in residence and in employment may be positive factors
                in the review of the credit history. These may be used as compensating
                factors to offset a negative piece of the borrower’s profile, such as a slightly
                high debt-to-income ratio on loans that are manually underwritten.




July 2004                                                                        Credit History – 26
Credit Policy                                                 Chase Manhattan Mortgage Corporation



Business Credit Bureau Reference


Overview        The following additional credit bureau guidelines should be followed for self-
                employed borrowers (non-agency only):

                · A report from Dun & Bradstreet (D&B), Business Credit Report, or a
                  business banking reference must be attempted in all cases in which the self-
                  employed borrower’s business is:
                  · Not in the name of the borrower or,
                  · Is not a shell or service corporation.
                · If no D&B file exists, no new file should be created.
                · A business credit report may be obtained in lieu of a D&B Report.
                · The business bank reference may be orally obtained, but must be
                  documented by the underwriter in the loan file and will include the
                  following:
                  · Date account established,
                  · Approximate balance in account (to nearest number of digits),
                  · Approximate level of credit facilities (to nearest number of digits),
                  · Whether experience is satisfactory,
                  · Name of person supplying information,
                  · Date information supplied,
                  · Name of individual recording the information




July 2004                                                                       Credit History – 27
Credit Policy                                                     Chase Correspondent Division

                                      Collateral
Overview


Introduction    Risk is, essentially, a function of uncertainty. Chase tries first to
                reduce uncertainty through good credit analysis. When the practical
                limits of good credit analysis have been reached, collateral becomes
                the fallback that mitigates the uncertainties of other analysis. While
                delinquency, default, and foreclosure will not normally occur when
                strong and effective credit policies and procedures are applied,
                unforeseen circumstances may arise causing a borrower to miss
                payments, fall delinquent in his/her mortgage payments, and
                ultimately, even go into foreclosure. In a foreclosure, the real estate
                collateral’s marketability and salability are critical factors that reduce
                loan losses. The underwriter must carefully evaluate the property
                securing the mortgage. The basic tool for real estate collateral
                evaluation is the appraisal and risk is assessed through the loan-to-
                value ratio calculations.


In this         The following topics are included in the chapter:
Chapter

                                              Topic                                  See
                                                                                     Page
                Fair Market Value                                                      3
                Collateral Value                                                       4
                 Loan to Value Concepts                                                5
                Appraisers - General Requirements                                      9
                Appraisals - General Requirements                                     11
                Selection of Comparables                                              17
                Appraisal Forms                                                       19
                Appraisals - Additional Information                                   22
                Eligible Residential Property Types                                   25
                Primary Residences                                                    26
                Second/Vacation Homes                                                 27
                Investor (Non-Owner occupied) Investor Properties                     28
                Single Family Residences with Fee Simple Property Rights              29
                2-4 Unit Residences                                                   30
                Condominium Projects                                                  31
                2-4 Unit Condominium Projects                                         33
                Site/Detached Condominium Projects                                    35
                Chase Condominium Project Classifications                             36
                Fannie Mae Condominium Project Classifications                        43

                                                                        Continued on next page



July 2004                                                                        Collateral – 1
Credit Policy                                               Chase Correspondent Division

Overview, Continued


In this Chapter (continued)

                                            Topic                         See Page
                 Freddie Mac Condominium Project Classifications             50
                 Combining Two Condominium Units                             55
                 Condominium Project Approval Specifics                      56
                 Planned Unit Development (PUD)                              57
                 Co-operative Units                                          61
                 Fannie Mae Type I Co-operative Share Program                67
                 Fannie Mae Pilot Share Program                              71
                 Freddie Mac Share Program                                   73
                 Special Property Types                                      74
                 Ineligible Residential Categories                           79
                 Reviewing the Appraisal                                     80
                 The Six Steps to Real Estate Appraisal Review               81
                 Special Appraisal Situations                                88




July 2004                                                                  Collateral – 2
Credit Policy                                                   Chase Correspondent Division

Fair Market Value


Fair Market     In a real estate appraisal the appraiser defines the market value for
Value Defined   the subject property. The fair market value (FMV) is the most probable
                price the subject property would realize:

                · in a competitive and open market,
                · under all conditions necessary for a fair sale,
                · with the buyer and seller each acting prudently and knowledgeably,
                  and
                · assuming the price is not affected by undue stimulus (e.g. a distress
                  sale).

                However, we as lenders do not solely rely upon the appraiser’s fair-
                market-value determination as the basis of the default assessment
                and loan-to-value calculations. We recognize that there are other
                factors involved in the determination of a borrower’s investment in the
                property such as:

                · contributions and sales concessions in a purchase,
                · improvements done to the property for a refinance, and
                · the actual cost to build a new home.

                We incorporate these factors into our collateral analysis and use the
                term collateral value as the basis for our risk assessment and
                customer investment evaluation.

                Chase requires the appraiser to follow appropriate practices in the
                property evaluation process. Our policies specifically prohibit the
                development of a value conclusion that is based on the applicant’s
                race, color, sexual orientation, religion, gender, handicap, familial
                status, or national origin. Appraisers are prohibited from using
                subjective racial and stereotypical terms, phrases, or comments in the
                appraisal report. The use of unacceptable terminology, such as (but
                not limited to) “pride of ownership,” “lack of pride of ownership,” “good
                neighborhood,” and “crime ridden area,” must be referred immediately
                to Appraiser Panel Management. A new or revised appraisal must be
                obtained before a loan decision is made and communicated to the
                customer.




July 2004                                                                      Collateral – 3
Credit Policy                                                       Chase Correspondent Division

Collateral Value


Collateral        In all cases, the collateral value, for determining loan-to-value ratios
Value             and for purposes of approval and identification of exceptions, is
                  determined using the following guidelines:

Transaction
    Type    Loan Type                           Requirements
Refinance,  Non-      If the property with improvements is owned less than 12
excluding   Agency    months, the collateral value will be the lower of
Land
Contracts             · Original purchase price
                      · Purchase price, plus the added value of any documented
                         improvements made within the last 12 months,
                      · Current appraised value of the property,
                      · Lowest appraised value, when two appraisals are obtained, or
                      · Verified cost when the subject property is a custom home built
                         by/for the borrower.

                             If the property with improvements is owned 12 months or
                             more the value is based on:

                             · Current appraised value of the property, or
                             · If two appraisals are required, the lowest appraised value is
                               used.
                Agency       The value is calculated from the new appraised value.

                           NOTE: Refer to the appropriate Product Guide to determine
                           if a new appraisal is required.
Purchase,       Non-       On all loans the value is based on the lesser of the sales price,
excluding       Agency and less the value of any concessions or excess contributions, or the
Land            Agency     appraisal value.
Contracts
                             IMPORTANT: If the subject property has sold within the last
                             12 months:
                             · The underwriter should review the prior sales price for the
                               subject property, and
                             · A significant sales-price increase over the prior sales price
                               should be explained and justified to the satisfaction of the
                               underwriter

                  NOTE: For Refinance Transactions, excluding Land Contracts,
                  refer to the Products chapter for the product your borrower has
                  selected to ensure compliance with the products guidelines.




July 2004                                                                           Collateral – 4
Credit Policy                                                    Chase Correspondent Division

Loan-to-Value Concepts


Loan-to-Value   The LTV of a property is the relationship of the mortgage amount(s) to
(LTV) Ratios    the property’s value. LTV plays an important role in the overall
                analysis of the loan request and final disposition. Where the borrower
                has subordinate financing, the combined or total LTV (CLTV/TLTV) of
                the junior liens and first lien must, also, be considered in determining if
                the loan request falls within the product or program parameters.

                The LTV ratio calculation depends on whether the property is a
                purchase or refinance transaction. Refer to the Product guide for
                specific limitations.

                       If the transaction is a…          Then divide the Chase first…
                refinance with a new appraised value   mortgage by the appraised value.
                and is not a Land Contract/Contract
                for Deed,
                purchase and is not a Land             mortgage by the lesser of the
                Contract/Contract for Deed,            appraised value or the purchase
                                                       price (or documented cost).


Combined        The CLTV ratio is calculated by dividing the total of all liens (Chase
LTV (CLTV)      first mortgage and all other recorded subordinate financing) by the
                lower of appraised value at the time the loan is closed or purchase
                price (or documented cost). Refer to the Product Guides for specific
                limitations on both Agency and Non-Agency loans.

                                                                       Continued on next page




July 2004                                                                       Collateral – 5
Credit Policy                                                   Chase Correspondent Division

Loan-to-Value Concepts, Continued


Purchase vs.     Whether a transaction is underwritten as a “purchase” or a “refinance”
Refinance        has implications with regard to the allowable maximum LTV and other
Transactions     product specific criteria and parameters. Below, are some guidelines
Overview         that should be applied.

                 Please note that these guidelines should be used only to determine
                 whether a transaction should be underwritten as a purchase or a
                 refinance. Federal law may categorize the transaction differently for
                 disclosure purposes. For example, mortgages created by modifying
                 an interim construction loan into a permanent mortgage loan are not
                 considered refinances for right of rescission purposes under any
                 circumstances, even where the borrower receives cash back. As the
                 following guidelines illustrate, for underwriting purposes, these loans
                 can be treated as either purchases or refinances depending on the
                 specific circumstances. Contact your Compliance Department or
                 Operations Manager for specific guidance on this matter.


Purchase         A “Purchase-money” transaction is one in which the proceeds are
Transactions -   used to finance the purchase of a home. The following Agency and
Agency AND       Non-Agency transactions should be underwritten as purchase loans:
Non-Agency
                 · A mortgage transaction, in which all of the proceeds are used to
                   retire an outstanding balance on an installment land contract,
                   including costs incurred for rehabilitation, renovation, or energy
                   conservation improvements.
                 · A new mortgage created by modifying an interim construction loan
                   within 180 days from completion as long as the borrower does not
                   receive cash back at closing.

                 NOTE: If the conversion occurs more than 180 days after
                 completion, the transaction must be treated as a refinance.

                                                                      Continued on next page




July 2004                                                                      Collateral – 6
Credit Policy                                                    Chase Correspondent Division

Loan-to-Value Concepts, Continued


Purchase        An additional option is available for Non-Agency loans in which the
Transactions-   transaction can be considered a purchase for LTV purposes, even
Non-Agency      where the proceeds are not used to finance the purchase of the home.
                This option is available where:

                · The subject property was purchased for cash or unsecured financing
                  within 90 days from date of application and the borrower now wishes
                  to encumber the property with secured financing (Technical
                  Refinance). NOTE: Cash-back to the borrower in excess of the
                  original purchase price, or appraised FMV, whichever is lower,
                  is not allowed.
                · The transaction is a “construction to permanent financing” loan
                  provided that the “Certificate of Occupancy” was issued within 90
                  days from date of application. This may occur when the construction
                  has been self-funded by the borrower. NOTE: Cash-back to the
                  borrower in excess of verified construction costs, or appraised
                  FMV, whichever is lower, is not allowed.
                · Applications for financing beyond 90 days of acquisition/date of
                  completion or are requesting cash back are governed by “cash-out”
                  limitations.


No Cash-Out     A standard “No cash-out” rate/term refinance is a transaction in which
Refinance       the loan amount is limited to the:
Definition
                · pay-off of the first mortgage,
                · pay-off of any junior lien(s) which is at least one year old (including
                  an equity line of credit), any related closing costs, financing costs,
                  prepaid items, and
                · cash back to borrower in an amount of up to 1% of the principal
                  amount of the new mortgage.


Cash-Out        A “cash-out” refinance is a mortgage in which the loan amount may
Refinance       include:
Definition
                · pay-off of the first mortgage,
                · pay-off of any junior lien(s) regardless of age, any related closing
                  costs, financing costs, and prepaids, in addition to
                · disbursing “cash out” to the borrower or any other payee.

                                                                       Continued on next page




July 2004                                                                       Collateral – 7
Credit Policy                                                           Chase Correspondent Division

Loan-to-Value Concepts, Continued


“Free and       Loans on property owned “free and clear” are treated in the following
Clear”          manner:
Property
Loans

                 If transaction is…              Then the loan is underwritten as a…
                Agency                   cash-out.
                Non-Agency               purchase.

                                         NOTE: Applications for financing beyond 90 days of
                                         acquisition/date of completion or are requesting cash
                                         back are governed by “cash-out” limitations.


Land Contract   Land contracts are installment purchases of land and any dwellings or
Loans           other structures on the land. The buyer executes a land contract that
                calls for the remittance of monthly payments to the seller, and
                frequently, a balloon payment. The buyer then takes possession of
                the land. In many instances, the buyer moves into the dwelling and
                occupies it as a primary residence. Upon payment in full of the land
                contract legal title to the property (land and dwelling) is conveyed to
                the buyer from the seller. If the buyer is obtaining mortgage financing
                to pay-off the land contract, it may underwritten as either a purchase or
                refinance, under the following conditions:
                     F the new
                 mortgage is used
                   to pay off the                                 THEN…
                 contract that was
                    executed…
                Within the   last   12   · Treat the transaction as a Purchase
                months                   · Include, in the acquisition cost:
                                            · Original purchase price
                                            · Rehab or renovation costs
                                            · Energy Conservation costs
                                         · Document the expenditures for
                                           rehab/renovation/conservation
                                         · Calculate the LTV on the lesser of the acquisition or the
                                           appraised value.
                                         Note: If the borrower occupied the property as a
                                         primary residence, the Right of Rescission applies.
                More than 12 months      · Treat the transaction as a Refinance
                prior                    · Include the closing costs and prepaid items in the new
                                           mortgage
                                         · Calculate the LTV from the appraised value




July 2004                                                                                Collateral – 8
Credit Policy                                                     Chase Correspondent Division

Appraisers - General Requirements


Introduction    To perform real estate appraisals that are acceptable to Chase, real
                estate appraisers must be state-certified or state licensed according to
                the Code of Federal Regulations, Title 12, and Chapter 34 - 12 CFR
                34. 12 CFR 34 instructs the states to qualify real estate appraisers.


Appraiser       There are three basic appraiser qualification levels under the federal
Qualification   guidelines:
Levels
                · Licensed
                · Certified Residential
                · Certified General

                NOTE: Trainee or Provisional licenses are not acceptable to
                Chase. The appraisal would have to be countersigned by a
                Supervisor who performed an interior inspection of the subject
                property.


Appraiser       Chase requires appraisers to hold the following qualifications:
Requirements

                  If the Loan Amount is…            Then the appraiser must be…
                less than or equal to       State licensed or state certified.
                $750,000
                greater than $750,000       · State certified residential, or
                                            · State certified general
                                            · The complete license number and license
                                              designation of the appraiser must be
                                              reflected in the appraisal report.

                Additionally, the following requirements apply:

                · A Chase-approved appraiser must conduct all complex transactions
                  (as defined in the “Appraisal - General Requirements” section)
                  appraisals above $250,000.
                · All transactions in IL, LA, OK, SD, and WI require an interior
                  inspection of the subject property by a “certified residential
                  appraiser.”

                                                                        Continued on next page




July 2004                                                                        Collateral – 9
Credit Policy                                                    Chase Correspondent Division

Appraisers - General Requirements, Continued


Appraiser     The Underwriter is responsible for confirming that the appraiser’s
License       license number appears on the appraisal. A copy of the
Documentation license/certification is required for the credit file, prior to closing. A
                 copy of the Appraiser Checklist is available in the Forms Section of
                 this Guide. Underwriters should condition each loan pursuant to the
                 Appraiser Checklist, as applicable.

                 An acceptable alternative to a copy of the license exists for the state
                 licensing authorities that maintain an appraiser-specific search feature
                 on their respective web site. A credit file may be documented with a
                 screen printout of the appraiser’s current licensing information, to
                 include the:

                 · level,
                 · expiration date, and
                 · license number of the appraiser.

                 NOTE: The Underwriter must reconcile the web site information
                 to the information contained in the appraisal.


Private          Certain Private Investor Programs may dictate an alternative
Investor         qualification level for appraisers. (See the specific Product or Program
Requirements     Guide for additional appraisal requirements).


Appraiser        Real Estate Appraisers cannot have a direct or indirect interest,
Impartiality     financial or otherwise, in the property or transaction for which the
                 appraiser is performing the appraisal or evaluation.


Review List      Chase maintains a “Review List” of appraisers who have had
                 deficiencies noted in their appraisals. Use of appraisals performed by
                 appraisers on this list will require a satisfactory field review by a
                 Chase-approved appraiser or one of the approved National Firms (at
                 correspondent expense). Appraisers on the Review List are not
                 eligible for assignments that require the use of a Chase-approved
                 appraiser.




July 2004                                                                      Collateral – 10
Credit Policy                                                   Chase Correspondent Division

Appraisals - General Requirements


USPAP           All real estate appraisals must be performed according to the Uniform
                Standards of Professional Appraisal Practice (USPAP) adopted by the
                Appraisal Standards Board of the Appraisal Foundation. While some
                standards are specifically incorporated into this Guide, complete
                requirements are available on line at Appraisalfoundation.org.


Complex         Complex transactions are defined as those in which the property to be
Transaction     appraised, the form of ownership, or market conditions are atypical.
Definition      Some examples of complex transactions are usually:

                · Architectural styles
                · Size of improvements
                · Size of lot
                · Neighborhood land use patterns/restrictions

                The following factors can also cause the transaction to be deemed
                “complex”:

                · Potential environmental hazard liability
                · Leasehold interest of non-owners

                                                                      Continued on next page




July 2004                                                                     Collateral – 11
Credit Policy                                                  Chase Correspondent Division

Appraisals - General Requirements, Continued


Loans of        For loans of $750M or greater, the comparable sales used by the
$750M or        appraiser must be six months or less from the appraisal date. If the
Greater         comparable sales exceed six months, Chase Underwriting may either
                approve the file or require a review appraisal to support value and
                comparables.


NIV             For all “No Income Verification” (NIV) loan transactions, regardless of
Transaction     loan amount, the comparable sales used by the appraiser must be six
Requirement     months or less from the appraisal date. If the comparable sales
                exceed six months, the loan must be reviewed and approved by
                Chase Underwriting Manager.


Second          Chase requires a second appraisal to be performed as determined by
Appraisal       the following:
Requirement
                · Location of the property,
                · Total liens secured by the property, and
                · LTV/CLTV.

                                                                     Continued on next page




July 2004                                                                    Collateral – 12
Credit Policy                                                  Chase Correspondent Division

Appraisals - General Requirements, Continued


Second          A second appraisal is required for all transactions (purchase, no-cash-
Appraisal       out and cash-out refinances) where the LTV/CLTV is above 80% and
Requirement     if the property meet the following conditions:
(continued)

                                      If the property               and the Chase total
                                     is located in…                       liens…
                · Aspen, Colorado                                  exceed $1,100,000,
                · Dallas, Texas
                · Houston, Texas
                · Metro Washington, D.C. (see Note)
                · Fairfield County, CT
                · California - entire state
                · New York - entire state
                · Metro Boston and Cape Cod, MA (Metro Boston
                  encompasses the counties of Suffolk, Norfolk,
                  Middlesex, Essex, and Plymouth),
                · Vail, Colorado                                   exceed $850, 000,
                · Illinois - entire state
                · Pennsylvania - entire state
                · Washington - entire state,
                all other states including Non-Metro Washington,   exceed $750,000,
                D.C. and Non-metro Boston,

                NOTE: The following definition of the “Metro” area must be used
                to determine when the Second Appraisal Requirement applies:

                The metro DC area is inclusive of the District of Columbia and all
                communities within the Interstate 495 Beltway. All communities
                through which the Beltway passes, and wherever the Beltway
                defines the border of a community, are considered to be in the
                metro DC area.

                                                                     Continued on next page




July 2004                                                                    Collateral – 13
Credit Policy                                                    Chase Correspondent Division

Appraisals - General Requirements, Continued


Second          Additionally, loans greater than or equal to $750,000 in a declining
Appraisal       market (as noted by the Appraiser) require:
Requirement
(continued)     · a second appraisal, and
                · the comparables must be six months old. or less*

                *NOTE: If the comps exceed six months, the loan must be
                reviewed and approved by Chase’s Underwriting Manager.


Appraisal       It the appraisals received differ substantially in appraised value (over
Variances       15% from low to high) or in description, this information must be
                identified on the approval document and brought to the attention of the
                underwriter.

                NOTE: In all cases, to determine the appraised value in the
                collateral value assessment, the lower of the two appraisals will
                be used.


Regional        Chase reserves the right to implement regional appraisal policies as
Appraisal       market conditions warrant.
Policies


Expired         · In all cases, the maximum age of any appraisal is 12 months from
Appraisal         the date of the Note.
                · Additionally, if the appraisal will be older than four months from the
                  date of the Note:
                  · The original appraiser must supply a re-certification of value that
                     attests that the value of the subject property has not decreased
                  · If the appraiser’s re-certification indicates that the subject property
                     has decreased in value, a new appraisal must be obtained.
                · In all cases, a new appraisal is required with every loan
                  approval/loan request , unless the product/program specifically
                  allows variance.
                · If the underwriter determines that the dynamics of the real estate
                  market merit re-appraisal sooner, he or she is encouraged to require
                  such.

                                                                       Continued on next page




July 2004                                                                      Collateral – 14
Credit Policy                                                     Chase Correspondent Division

Appraisals - General Requirements, Continued


Drive-by          A drive-by appraisal is an estimate of value given by the appraiser that
Appraisals        is based mainly on comparable-sale property analysis. The appraiser
                  does not examine the interior of the property. The market value for a
                  drive-by appraisal is usually expressed as a range of values. A drive-
                  by appraisal can only be utilized if:

                  · The specific product or program allows for the use of a drive by,
                  · The previously conducted full appraisal is no greater than 12 months
                    old, and
                  · The drive-by appraisal is performed by the same Chase-approved
                    appraiser/ appraisal firm as an update to a previously conducted full
                    appraisal.
                  · The market value to be used in the collateral value assessment is the
                    lower of any range of values given.

Appraisals         Chase will accept an original appraisal that has been assigned from
Assigned to the    the original lender to the Correspondent
Correspondent


Field Review      A field review is required for any appraisal performed by an appraiser
                  on the Chase Review Appraiser List. Additionally, the Underwriter
                  should order a field review whenever:
                  · he/she deems it necessary to clarify the appraisal, or
                  · when required by specific product, program or geographic
                    requirements.
                  · an appraisal is ordered, or is submitted to Chase, by one of the
                    principal in a real estate transaction, or
                  · the appraiser is selected by one of the principals

                  Principals are typically (but not exclusively) defined as borrowers,
                  buyers, owners, and sellers. For the purposes o this policy, the
                  definition includes Chase employees who are identified as one of
                  these parties to the transaction.

                  The field review requirement cannot be waived based on production
                  channel, line of business, geography, loan amount, LTV, or estimated
                  value. The field review may be obtained through any Chase approved
                  appraiser (but not one selected by the principals) or any of the
                  currently recognized national appraisal service providers; the field
                  reviewer cannot be affiliated with the original appraiser in any respect.

                                                                        Continued on next page



July 2004                                                                       Collateral – 15
Credit Policy                                                   Chase Correspondent Division

Appraisals - General Requirements, Continued


Special         · Termite Inspections
Appraisal         · If the appraiser notes any evidence of termites (or other wood-
Notations           boring insects), evidence must be provided that the condition does
                    not pose a structural threat to that property.
                  · If the damage is extensive, a professionally prepared report must
                    be obtained indicating the damage is not structural.
                  · Correction will be at the discretion of the underwriter if damage is
                    not considered extensive.

                · Well and Septic
                  · Private well and septic tanks are acceptable if located on the
                    subject site. If the appraiser recommends an inspection or analysis
                    of the sewage or water system, the underwriter should request an
                    explanation from the appraiser regarding the condition. Well,
                    septic, water, or bacteriological tests will generally not be required
                    unless considered necessary by the underwriter.
                  · The appraiser must comment on any conditions, including
                    environmental hazards that affect water or septic facilities and the
                    effect of marketability and the value of the property.

                · Property Zoning and Non-Conforming Use of Property
                  · The appraiser must attempt to obtain comparables with similar
                    characteristics and comment on any adverse impact on the value
                    or marketability the “non-conforming” use has on the property


Appraiser       An appraisal may contain an electronic (or facsimile) signature in lieu
Signatures      of an original signature, so long as the appraiser maintains sole control
                of affixing his/her signature to the report, as required by USPAP




July 2004                                                                     Collateral – 16
Credit Policy                                                  Chase Correspondent Division

Selection of Comparables


Established     For properties in established subdivisions or units in an established
Sites           condominium or PUD project, the appraisal report should reflect:

                · comparable sales from within the same subdivision, or
                · project as the subject property.

                 If comparable sales located outside of the subject’s subdivision or
                project are used, they must be from the subject’s market area (see
                neighborhood as described by the appraiser’s neighborhood
                boundaries for reasonableness), and the appraiser must include
                justification in a narrative analysis.


New Sites       For new construction properties in new subdivisions, the appraisal
                report should reflect:

                · one comparable sale must be within the subject’s subdivision, and
                · two must come from outside the subject’s subdivision, where the
                  subject’s developer/builder is not a party to the comparable sale
                  transaction.

                 The outside comparables must still be from the subject’s market area
                (see neighborhood as described by the appraiser’s neighborhood
                boundaries for reasonableness).


New/Recent      For units in new (or recently converted) condominium or PUD projects,
Condo or PUD    the appraisal should reflect:
Projects
                · one comparable sale must be from within the subject’s subdivision or
                  project,
                · one comparable must be from a competing project, and
                · the third comparable may originate either inside or outside the
                  subject project.

                                                                     Continued on next page




July 2004                                                                    Collateral – 17
Credit Policy                                                     Chase Correspondent Division

Selection of Comparables, Continued


Factory Built   For factory-built housing, the appraisal should reflect:
Housing
                · Comparable sales should be of similar design (i.e.: if subject is
                  panelized housing, comparables must also be panelized housing to
                  demonstrate market acceptance).
                · The appraiser should present dated or distant (but still competing)
                  market sales to meet this requirement before considering the use of
                  site/stick-built housing or alternative styles of factory-built housing for
                  comparables.
                · Support for any non-similar design comparable must be presented in
                  a well-developed narrative.

                NOTE: The appraiser cannot create sales data by combining
                vacant land sales with the contract/purchase price of a factory-
                built housing unit in order to develop comparable sales
                transactions.




July 2004                                                                       Collateral – 18
Credit Policy                                                     Chase Correspondent Division

Appraisal Forms


Introduction    The following is a listing of appraisal forms to be utilized for all property
                types eligible for financing by Chase. The most recent version of the
                Form should be used.

                      Appraisal Number                      Applicable Property Type(s)
                FNMA 1004/FHLMC 70                     · Single Family, both attached and
                                                         detached
                                                       · Planned Unit Development (PUD),
                                                         both attached and detached
                                                       · Site detached Condominium
                FNMA 1073/FHLMC 465                    Condominium
                FNMA 1075                              Co-operative (Co-op)
                FNMA 1025/FHLMC 72                     Two-to-Four Units
                                                       · duplex,
                                                       · triplex, or
                                                       · fourplex
                FNMA 2075                              As instructed by an automated
                · Streamlined Inspection Report        underwriting system.
                · Form is acceptable to Freddie Mac
                  in lieu of the FHLMC 2070.
                FHLMC 2070                          As instructed by an automated
                · Streamlined Inspection Report     underwriting system.
                · Form is not acceptable to Fannie
                  Mae in lieu of the Fannie Mae
                  2075
                · Only acceptable for Agency II
                  loans.

Investment      In addition to the single-family appraisal form, Chase requires the
Property        following additional forms for investment property:
Forms

                     Form Number and Name                          Requirement
                FNMA 216/FHLMC 998 - One-to-           Required for owner-occupied and
                Four Unit Investment Property          non-owner-occupied properties
                Operating Income Statement             where the borrower is using rental
                                                       income to qualify.
                FNMA 1007/FHLMC 1000 -                 This form is required for single-family
                Single Family Comparable Rent          units where the borrower is using
                Schedule                               rental income to qualify.

                                                                         Continued on next page




July 2004                                                                        Collateral – 19
Credit Policy                                                     Chase Correspondent Division

Appraisal Forms, Continued


Streamlined     Chase encourages the use of streamlined appraisal alternatives as
Appraisal       directed by the AU System. It is important to remember that any
Forms           changes to the transaction including but not limited to factors such as
                LTV, loan purpose, or property address may cause the automated
                system to upgrade the type of property appraisal required. The
                following is a listing of instructions for each streamlined
                alternative accepted by Chase.

                      Appraisal Form                             Instruction
                FNMA/FHLMC Form 2055          The appraiser is required to provide the
                Quantitative Analysis         following:
                Appraisal Report -            · An exterior building sketch of the
                Interior/Exterior               improvements that indicates the
                Inspection                      dimensions.
                                              · A street map that shows the location of the
                                                subject property and the location of the
                                                comparable sales.
                                              · A photograph that shows the front, the rear,
                                                and a street view of the subject property.
                                              · Photographs that show the front view of
                                                each comparable sale.
                                              · Certification of completion, if applicable
                FNMA/FHLMC Form 2055          · The appraiser must be able to obtain
                Quantitative Analysis           sufficient information, or reconcile
                Appraisal Report - Exterior     discrepancies between the data sources
                Inspection Only                 utilized.
                                              · If the appraiser is unable to do this, the
                                                report must be upgraded to include an
                                                “interior” inspection.
                                              · If the appraiser determines the property to
                                                be proposed construction or is undergoing
                                                renovation, the report must be upgraded to
                                                include an “interior” inspection
                                              · The appraiser is required to provide the
                                                following:
                                                · A street map showing the location of the
                                                   subject property and the comparable
                                                   sales.
                                                · A photo of the front of the subject
                                                   property. The appraiser is not required to
                                                   photograph the street scene or
                                                   comparables, but is required to physically
                                                   inspect the neighborhood and the
                                                   comparable sales.

                                                                        Continued on next page




July 2004                                                                       Collateral – 20
Credit Policy                                                    Chase Correspondent Division

Appraisal Forms, Continued


Streamlined Appraisal Forms (continued)

                     Appraisal Form                             Instruction
                FNMA/FHLMC Form 2075         · Comparable sales are not provided as the
                Desktop Underwriter            automated underwriting system has made
                Property Inspection Report     a value determination based on property
                                               information available within the automated
                                               system.
                                             · The appraiser is required to comment on
                                               the conformity of the subject property to
                                               zoning regulations and other properties in
                                               the neighborhood, the highest and best use
                                               of the property as improved, as well as any
                                               other adverse physical deficiencies or
                                               conditions where observed. If the property
                                               does not conform to the neighborhood, the
                                               appraiser must advise the lender that the
                                               report should be upgraded to the Form
                                               2055 with an “interior” inspection.
                                             · The required exhibits when using Form
                                               2075 are as follows:
                                               · A street map that shows the location of
                                                 the subject property.
                                               · A photograph that shows the front view of
                                                 the subject property
                FHLMC Form 2070              · Form 2070 should only be accepted if the
                Loan Prospector Condition      loan is a Freddie Mac product.
                and Marketability Report     · Follow 2075 instructions above when using
                                               this streamlined alternative.
                                             · Fannie Mae will not accept the 2070 Form
                                               in lieu of 2075.
                                             · The 2070-streamlined alternative may offer
                                               either an exterior only or interior/exterior.




July 2004                                                                      Collateral – 21
Credit Policy                                                    Chase Correspondent Division

Appraisals - Additional Required Documentation


Additional       CHASE requires each appraisal to include the following additional
Required         documentation and information:
Documentation

                        Additional                   Comments (if applicable)
                     Documentation
                FNMA1004B
                Statement of Limiting
                Conditions
                Appraiser Certifications   · A statement from the appraiser that the
                                             appraisal has been completed in compliance
                                             with the Uniform Standards of Professional
                                             Appraisal Practice Standards (USPAP).
                                           · A completed Multi-purpose (Supplemental)
                                             Addendum for Federally Related
                                             Transactions
                Location Map               That shows the location of the subject property
                                           and all comparable sale properties.
                Building Sketch            · For detached properties, a building sketch of
                                             improvements that reflects dimensions is
                                             required,
                                           · An interior building sketch that reflects
                                             interior perimeter dimensions for attached
                                             properties.
                Photographs                · Clear, descriptive original color or black and
                                             white photographs, or electronic images of
                                             the front, back, and a street scene for the
                                             subject property.
                                           · Clear, descriptive original color, or black and
                                             white photographs, or electronic images of
                                             the front for all comparable-sale properties.
                                             In some cases, you may accept copies of
                                             photographs provided they are from the
                                             appraiser’s files and are clear and
                                             descriptive.
                                           · For properties in excess of $1MM in value,
                                             descriptive photographs of the interior of the
                                             subject property.
                FNMA 1074                  Required for all Co-ops
                Request for Project
                Information

                                                                       Continued on next page




July 2004                                                                       Collateral – 22
Credit Policy                                                        Chase Correspondent Division

Appraisals - Additional Required Documentation, Continued


Additional Required Documentation (continued)

                      Appraisal Form                             Instruction
                Certifications               · Certifications of completion (usually
                                               completed on Freddie Mac form 442), for
                                               new construction or recent rehabilitations.
                                             · Certifications of value - (a letter that certifies
                                               the value on an appraisal is still valid for
                                               outdated appraisals.)


Potential        The following items may be required as additional documentation
Documentation    and information with an appraisal:
Requirements

                 Additional Requirement                            Comments
                Plat map                      Generally, Chase prefers that all appraisals
                                              include a plat map that indicates the subject
                                              property and its property lines
                Current Listings and          Under this requirement, current is defined as
                Conveyances (sales,           “within one year of the effective date for the
                transfers, options) of the    appraiser’s estimate of market value.” Such
                subject property.             listings may be active, expired, canceled, or
                                              withdrawn, and in each case must be
                                              reported.
                Income Producing              Commentary on current Economic Trends and
                Properties                    Market Conditions must be sufficient to
                                              support the indicated revenues, expenses and
                                              vacancies.
                Interior Inspection of the    · If the initial appraiser (left side
                Subject Property                 signatory/preparer on the Sales Comparison
                                                 Analysis page) is fully licensed (or certified,
                                                 if the value is over $1million) the supervisory
                                                 appraiser does not need to inspect the
                                                 subject property’s interior, except
                                              · Chase always requires an interior
                                                 inspection of the subject property by a state-
                                                 certified appraiser in Illinois, Louisiana,
                                                 South Dakota, Oklahoma, and Wisconsin
                                                 properties

                                                                           Continued on next page




July 2004                                                                            Collateral – 23
Credit Policy                                                 Chase Correspondent Division

Appraisals - Additional Required Documentation, Continued


Requirements (continued)

                 Additional Requirement                       Comments
                Environmental Hazards     The appraiser must comment on the efforts
                                          made to identify hazardous areas impacting
                                          the subject by reconciling to local, state, or
                                          federal maps or lists (CERCLIS, Superfund,
                                          etc), which identify known or potential sites.
                                          Commentary must include an analysis of
                                          market reaction and any impact on value.
                Narrative Analysis        Narrative analysis of the subject’s conveyance
                                          history for the 3-year period prior to the
                                          effective date of the appraisal, and details of
                                          the subject’s listing activity for the 1 year
                                          period prior to the effective date of the
                                          appraisal
                Purchase Transactions     For purchase transactions, the appraiser must
                                          affirmatively acknowledge that the contract
                                          was provided to, and reviewed by, the
                                          appraiser to support the appraiser’s narrative
                                          analysis of the sale. This includes
                                          transactions that are final payments pursuant
                                          to a contract for deed, which might be
                                          underwritten as refinance transaction. The
                                          appraiser must see the contract regardless of
                                          what form it takes.




July 2004                                                                   Collateral – 24
Credit Policy                                                   Chase Correspondent Division

Eligible Residential Property Types


Introduction    Lenders should be aware that the type of property financed often
                carries different risk components. In general, we adjust for this risk by
                adjusting the percentage we will lend (the LTV) according to the type
                of property and occupancy status. The following sections summarize
                the property types eligible for Chase financing. Most of the property
                types are determined by the appraisal designation in combination with
                the borrower’s statement on the loan application.


Property        Chase classifies residential properties into five major categories.
Categories      Although property types and occupancy are inter-linked, they are not
                always interchangeable. A generalized overview is outlined below;
                however, please reference the Product and Program Guide for
                specific Information.

                      Property Type                      Eligible Occupancy
                Single Family               Primary residence, Second home, Investment
                2-4 Unit                    Primary residence, Investment
                Condominium *               Primary residence, Second home
                PUD                         Primary residence, Second home, Investment
                Co-op Unit *                Primary residence

                * Agency I allows variances. Please check Product Guides.




July 2004                                                                     Collateral – 25
Credit Policy                                                 Chase Correspondent Division

Primary Residences


Primary         In cases where the borrower owns more than one property, the
Residence       primary residence is the property occupied the majority of the year by
Definition      the borrower, and is usually located in the same general area as the
                borrower’s income source. Typically, this is also the address of record
                used in filing the Individual Income Tax Return form 1040.


Lender         A primary occupancy has the lowest default rate of all residential
Considerations property types. As such, they are allowed the maximum financing
                available per the product or program.




July 2004                                                                   Collateral – 26
Credit Policy                                                   Chase Correspondent Division

Second/Vacation Homes


Definition       A residence the owner uses secondary to his/her primary residence,
                 most common, as a vacation home. However, sometimes a person
                 who works in the city, but maintains their primary residence in a distant
                 suburb, will have a second home in the city for convenience. The
                 residence should meet usage classification for a second home as
                 defined by Federal IRS regulations (as defined below).


Lender            Second homes are not considered a high default property type.
Considerations    However, the underwriter should carefully review loan requests for
                  second homes to ensure that the request is not for an investment
                  property


Additional       To be considered a second home, the following must be met:
Requirements
                 · NO significant rental income or rental expenses are reported on
                   Schedule E on the borrower’s personal tax returns for the subject
                   property. No rental income can be used to qualify the borrower.
                 · The borrower must have personally resided (or intends to personally
                   reside), in the property for some part of the year as evidenced
                   through:
                   · Mortgage interest tax deduction on the personal tax return on
                     Schedule A or,
                   · A signed statement (e.g., occupancy certification) affirming intent
                     from the borrower on a purchase.
                 · The property may not be leased or rented, or intended for lease or
                   rental, other than on an occasional basis.
                 · The property must be suitable for year round residence. Any
                   appraisal comment to the contrary (e.g., lack of year round
                   necessities or access), shall constitute reason for unacceptable
                   collateral.
                 · Property should be in a typical second home area, otherwise
                   satisfactorily justified by the borrowers as a second home.




July 2004                                                                     Collateral – 27
Credit Policy                                                 Chase Correspondent Division

Investor (Non-Owner-Occupied) Properties


Definition      Any property owned for the purpose of generating income and as a
                long term investment for the owner is considered an investment
                property.


Lender         This type of property is generally considered the highest risk default
Considerations property type for the lender. The borrower considers the property an
                investment. If the actual cash-at-risk is minimal, the borrower can
                easily decide that the investment was not a wise one if the real-estate
                market declines. The lender then faces potential losses from sale of
                real estate acquired through foreclosure or deed in lieu of foreclosure.
                For these reasons, loan-to-values for investor properties are usually
                lower than for other types of property.




July 2004                                                                   Collateral – 28
Credit Policy                                               Chase Correspondent Division

Single Family Residences (SFR) with Fee Simple Property
Rights


Definition      A fee simple single-family residence (SFR) is designed for occupancy
                by one family. Generally, the dwelling will not have common exterior
                walls with another residence. However, it may be attached and not be
                classified as either a condominium or PUD. The dwelling may be
                located on an individual lot, in a subdivision, or in a project.


Lender         An owner-occupied SFR has the lowest default rate of residential
Considerations collateral types. As such owner-occupied SFRs have higher LTV
                maximums.




July 2004                                                                 Collateral – 29
Credit Policy                                                    Chase Correspondent Division

2-4 Unit Residences


Definition      Generally, these residences are attached units, with one blanket
                mortgage, designed to be occupied by two, three, or four families, (one
                family for each unit), for the purpose of producing income to the
                owner. Examples include duplexes, triplexes, and fourplexes. The
                dwellings may be located on an individual lot, in a subdivision, or in a
                PUD.

Lender          Usually, multi-family residences have higher default rates than SFRs
Consideration   as they involve an element of rental income that assists the borrower
                in meeting their mortgage commitment. As a result, these properties
                generally carry lower LTV maximums.

Occupancy       If the borrower is not residing in one of these units, the property is
                considered investment property.

Additional      Use the following chart to determine additional underwriting criteria for
Requirements    2-4 unit residences:

                If the property is…                           Then…
                a primary           · the full PITI of the subject property should be
                residence,            included in the housing debt to income ratio.
                                    · a positive operating income (cash flow) derived
                                      from the rental unit can be added to qualifying
                                      income.
                                    · any negative operating income must be included in
                                      the borrower’s recurring debts.
                an investment,      · the full PITI of the primary residence should be
                                      used in the calculation of the debt-to-income ratio
                                    · a positive operating income (cash flow) as
                                      calculated per guidelines in this guide derived from
                                      the rental unit can be added to qualifying income.
                                    · any negative operating income must be included in
                                      the borrower’s recurring debts.
                                    · if annual amounts are used to determine the cash
                                      flow, divide by 12 before adding to income or debt.
                                      · The full PITI of the property should be included in
                                         the housing debt-to-income ratio.
                                      · Positive operating income can be added to
                                         qualifying income, and any negative annual
                                         operating income (loss) is amortized (divided by
                                         12) and included in the borrower’s recurring debts.




July 2004                                                                      Collateral – 30
Credit Policy                                                    Chase Correspondent Division

Condominium - Projects


Definition      A condominium is a real estate project formed according to state
                condominium statutes, a recorded declaration, and other constituent
                documents. The structure is generally of two or more units. The
                interior space of the units is individually owned. The balance of the
                property (both land and building) is owned in common by the owners
                of the individual units. The common areas are administered and
                maintained by an owners’ association that levies monthly maintenance
                charges against each unit owner.


Lender          Condominiums present additional default possibilities because of the
Consideration   creation of homeowner’s associations. The homeowner’s association
                has legal rights that could adversely impact mortgagee rights.
                Moreover, the performance of these associations (that are not party to
                our loan agreement) can impact the value of our collateral.


Ineligible      · The following types of condominiums are not eligible for financing
Condominium       under Chase, Fannie Mae, or Freddie Mac programs. Condominium
Projects          Hotels (Condotels), except for ChaseFlex program. Projects that
                  have hotel-type services such as:
                  · Short-term occupancy (less than weekly)
                  · Nightly Rental Bellman
                  · Daily Maid Service
                  · Food Service
                  · Advertisement of Hotel Type Services
                  · Shared revenue between hotel (or condo association) and unit
                    owner
                · Timeshare or segmented ownership projects.
                · Houseboat Projects.
                · Multi-dwelling unit condo projects that permit a borrower to hold title
                  to more than one dwelling unit with ownership of all units evidenced
                  by a single deed or mortgage.
                · Projects that represent a legal but non-conforming use of land if
                  zoning regulations prohibit re-building the improvements to current
                  density in the event of their partial or full destruction.
                · Mixed use (condo) projects with an excess of 25% commercial space
                  or any commercial use that is not compatible with the overall
                  residential nature of the project (cocktail lounge, nightclub, arcade, or
                  anything that would generate excessive noise or traffic).

                                                                       Continued on next page




July 2004                                                                      Collateral – 31
Credit Policy                                                    Chase Correspondent Division

Condominium - Projects, Continued


Ineligible       · Projects with leased recreational facilities (recreation lease) outside
Condominium        the State of Florida. In Florida, the recreation lease must meet
Projects           leasehold estate criteria and be subordinate to any mortgage, rent
(continued)        must be fixed and reasonable and paid as part of the HOA fee, and
                   contain an option for HOA to buyout the lease.
                   · All recreational leases involved in non-delegated transactions
                     must be submitted to Chase to determine acceptability.
                 · Projects in litigation.
                 · Assisted Living or Memory Impairment (Alzheimer care) Projects
                 · Manufactured Housing
                 · 15% maximum (30 days) delinquencies in the HOA assessments


High Rise         If the loan will be financed with a Preferred/Non-Agency fixed rate or
Condominium       an Income Express product, there may be loan amount and LTV
Considerations    restrictions. Refer to the program guides.


Inclusionary     To provide affordable housing for low - and moderate-income persons,
Zoning           state and local governments have introduced the concept of
Restrictions     inclusionary zoning. When a condominium project is located in an
                 area that has passed inclusionary zoning restrictions as a means of
                 providing affordable housing, the project’s declaration must address
                 all of the following:

                 · The source of the deed restrictions in the public land records.
                 · The subordination of the deed restrictions to a mortgage on the unit
                   estate and the priority of the mortgage holder’s right to any hazard
                   insurance settlement or condemnation award.
                 · The number of restricted units.
                 · Any provision of the deed restrictions that would impair a mortgage
                   holder’s legal rights to remedy a default under the mortgage or that
                   would require the mortgage holder to send a notice of default or
                   foreclosure to any third party (including the zoning authority or local
                   jurisdiction).
                 · The terms of any resale controls that affect the restricted units. (In
                   the event of a foreclosure or deed in lieu of foreclosure, future sales
                   of the unit must not be subject to any resale restrictions.)




July 2004                                                                      Collateral – 32
Credit Policy                                                  Chase Correspondent Division

2-4 Unit Condominium Projects


Introduction    Chase has established criteria that must be met for all condominium
                projects consisting of a 2-4 unit building. These criteria apply to
                Agency and Chase Preferred/Non-Agency Programs and should be
                used in lieu of the requirements for the Chase, Fannie Mae, or Freddie
                Mac project classifications Private investors may have special
                restrictions and program highlights should be consulted. With the
                exception of projects that meet Fannie Mae or Freddie Mac Limited
                Review guidelines, all 2-4-unit projects should be submitted to Chase
                for review. The guidelines noted below do not apply if the project
                meets Fannie Mae or Freddie Mac Limited Review guidelines.


Criteria        · 100% completion of the project, including all units, common areas,
                  amenities, and recreation facilities.
                · The presale requirements must be met by using only sales to
                  Primary Residence or Second Home purchasers.

                         # Units in Project                 # of Sales Required
                                  2                                  1
                                  3                                  2
                                  4                                  3


                · Primary Residence, Second Home, and Non-Owner-Occupied
                  borrowers are allowed.
                · No single entity may own more than one unit.
                · Maximum LTV per product limitations noted in the Products and
                  Programs Guides .
                · Fee simple and approved leasehold estates
                · This type of project must be typical to the area. Appraiser to address
                  this in the appraisal report.
                · The units must be separately metered for electricity and gas.
                · The 2-4 unit project cannot be part of a larger complex that consists
                  of multiple 2-4 unit projects (with separate HOA per each 2-4 unit
                  project).
                · The project must have its own, separate, legal documentation that
                  evidences compliance with the following criteria:
                  · Any lien placed on a unit after a first mortgage is recorded must be
                    subordinate to the first mortgage.
                  · Unit owner must pay a proportionate share for the maintenance
                    and replacement of common elements.

                                                                     Continued on next page




July 2004                                                                    Collateral – 33
Credit Policy                                                      Chase Correspondent Division

2-4 Unit Condominium Projects, Continued


Criteria          · Architectural controls are in place that require the exterior be
(continued)         maintained in a uniform manner.
                  · Arbitration agreement language in place to provide for settlement
                    of disputes between unit owners.
                  · If private road exists, language is in place to govern use and
                    maintenance requirements.
                · Concentration limits apply for the number of units in the project that
                  can be financed by Chase. We are limited to one unit in any 2-4 unit
                  project.
                · Must be an eligible project.
                · Insurance Requirements
                  · If the exterior is described as a common element, a master hazard
                    insurance policy must be obtained together with a homeowner’s
                    policy for the interior of the unit.
                  · If the exterior is not a common element, a homeowner’s policy is
                    acceptable.
                  · Liability insurance for common areas in the amount of $500,000
                  · Flood insurance (if applicable)



Required      · Underwriter Certification of Project Eligibility
Documentation · Project Legal Documents
                 · Statement of Insurance (C-6011A1) dated 06/00 or declaration of
                   insurance policy.
                 · Appraisal report on the subject unit (must include appraisers
                   statement that 2-4 unit projects are typical to the area).




July 2004                                                                        Collateral – 34
Credit Policy                                                      Chase Correspondent Division

Site/Detached Condominium Projects


Site Detached   A condominium project consisting of detached single-family units
Definition


Considerations If the project meets the criteria below, you may accept the project for
                 Primary Residence and Second Home borrowers (For non-owner
                 occupied transactions a full project review is required.) Chase will
                 allow the use of the Site/Detached classification for agency and
                 preferred/non-agency products. The Chase underwriter has authority
                 to determine project eligibility, for this project classification, as part of
                 the underwriting decision. for review. Chase will determine project
                 eligibility on loans underwritten by contract underwriters.
                 Development must consist only of single family, detached dwellings
                 under the condominium covenants (no manufactured housing.)
                 · No common area improvements (other than greenbelts, private
                   streets, parking)
                 · Occupancy is limited to Primary Residence and Second Home
                   borrowers. If the subject loan is Non-Owner-Occupied, the
                   Site/Detached classification cannot be used. Non-owner occupied
                   borrowers must be reviewed under Chase Fannie Mae, Freddie
                   Mac, and/or ChaseFlex classifications.
                 · Maximum CLTV is the product limitation per program guidelines
                 · Appraiser must comment on any market effect of buyer resistance
                   this type of ownership may have.
                 · Must be an eligible project.
                 · If the appraisal (or legal documents) indicates the condominium
                   project is located in an area that has passed inclusionary zoning
                   restrictions, it must meet the criteria outlined in the “Inclusionary
                   Zoning Restrictions” section.
                 · Property must be covered by hazard, flood (if applicable), liability,
                   either through the master condominium policy (if the unit consists
                   only of the air space for the unit, and the dwelling and site are
                   considered in the common or limited common areas), or by
                   individual policies (if the unit consists only of the entire structure,
                   site, and air space).
                 · Title Policy must meet title insurance requirements for condominium
                   projects.

Required      The following documentation is required:
Documentation
                 · Appraisal report on the subject property.
                 · Underwriter Certification of Project Eligibility.




July 2004                                                                        Collateral – 35
Credit Policy                                                     Chase Correspondent Division

Chase Condominium Project Classifications


Introduction    Chase’s Level I (Simplified Method) and Level II classifications are
                available as alternatives to the Fannie Mae and Freddie Mac condo
                project classifications. Project approvals are valid for a period of six
                months to one year from the project questionnaire completion date.

                Refer to the “Condominium” section for general information on
                Condominium requirements


Level I         Level I is for existing projects. If the project meets the criteria below,
                you may accept the project using the Simplified Method. Chase will
                allow the use of the Level I for Agency and Preferred Non-Agency
                products.


Level I         · 100% completion of the project, including all units, common areas,
Criteria          amenities, and recreation facilities. Cannot be subject to additional
                  phasing.
                · Homeowners are in control of HOA for at least one year.
                · 85% of the units in the project must be sold and closed.
                · A maximum of 30% investor/non-owner-occupied units is allowed in
                  the project.
                · Maximum LTV is the lesser of 90% or the product limitation.
                · Primary Residence or Second Home borrowers only.
                · Fee simple and approved leasehold estates.
                · If the subject property consists of a high rise building or buildings
                  over eight stories and the subject unit is financed using
                  Preferred/Non-Agency fixed rate or Income Express, there may be
                  loan amount and LTV restrictions. Refer to the applicable Product
                  and Program Guide.
                · If the appraisal (or legal documents) indicate the condominium
                  project is located in an area that has passed inclusionary zoning
                  restrictions, it must meet the criteria outlined in the Inclusionary
                  Zoning Restrictions Section
                · If the subject project is a 2-4 unit building or part of a larger project
                  containing 2-4 unit buildings, it must meet the criteria outlined in the
                  2-4 Unit Condominium Projects Section
                · Blanket insurance coverage for the project - relative to fire, hazard,
                  flood (if applicable), and liability - to be reviewed by Chase ) to
                  determine acceptability.

                                                                        Continued on next page




July 2004                                                                       Collateral – 36
Credit Policy                                                        Chase Correspondent Division

Chase Condominium Project Classifications, Continued


Documentation The following documentation is required:

                · approval
                · Appraisal report on the subject property
                · Underwriter Certification of Project Eligibility


Level II        Level II offers the flexibility to finance new projects with various
                presale levels determined by the length of time the project or legal
                phase has been marketed. Level II is available on:

                · Preferred ARM, and
                · Agency I products.

                Chase must determine the project eligibility.


Level II        · The project or legal phase must fall into one of the following
Criteria          categories:
                  · Project or legal phase (common areas, amenities, and recreation
                    facilities) is under construction and will be completed within 30 days
                    of project acceptance. If project/legal phase is one year or
                    older, the common areas, amenities, and recreation facilities
                    must be complete.
                  · New conversion and all rehabilitation work complete or will be
                    completed within 30 days of project acceptance. If the project or
                    legal phase is one year or older, the common areas, amenities, and
                    recreation facilities must be complete.
                  · Fully completed project or legal phase (all units, common areas,
                    amenities, and recreation facilities), but does not meet Agency or
                    Level I requirements due to presale or HOA control date.
                · Presale requirements are based on the length of marketing time for
                  the project or legal phase. The units must have been sold to
                  borrowers who intend to occupy the unit as their primary residents.
                  These three presale requirements apply:

                         Marketing Time                                Presale %
                Six months or less                                        25%
                7-12 months                                               50%
                Over 12 months                                            70%

                                                                           Continued on next page




July 2004                                                                          Collateral – 37
Credit Policy                                                       Chase Correspondent Division

Chase Condominium Project Classifications, Continued


Level II        · Concentration limits apply for the number of units in the project that
Criteria          can be financed by Chase based on the number of units in the
(continued)       project/legal phase and the presale.

                                If Presale is…                 Then Chase may finance…
                25% Presale                                  10% of total units.
                within first six months of marketing time,
                50% Presale                                  15% of total units.
                within 7-12 months of marketing time,
                70% Presale                                  20% of total units.
                over 12 months of marketing time,

                · Chase will track the project concentration. After the initial project
                  approval has been issued, contact Chase to check the concentration
                  before issuing additional loan applications for units in an approved
                  Level II project. At that time, the Correspondent should furnish the
                  borrower’s name and the unit number to ensure that the subject loan
                  will be included in the maximum number of units available for
                  concentration limit. If the loan should cancel, the Correspondent
                  should forward documentation to support this to open the
                  concentration back up.
                · Occupancy is limited to Primary Residence borrowers. Exceptions
                  will be considered for Second Home borrowers in geographic
                  locations where second homes are common and customary
                  (provided the primary residence requirement outlined above has
                  been satisfied).
                · Maximum CLTV is the lesser of the product limitation. or one of the
                  following:
                  · 90% Primary Residence
                  · 80% Second Home (allowed by exception only)
                · Mortgage Insurance Requirements for Agency I products are:
                  · 80.01 - 85.00% LTV - 25% coverage required
                  · 85.01 - 90.00% LTV - 30% coverage required
                · Refer to the Product Requirements for Preferred ARMs
                · Developer or homeowners may have control of HOA
                · No single entity may own more than 10% of the total units in the
                  project.
                · Fee simple and leasehold estates.

                                                                           Continued on next page




July 2004                                                                          Collateral – 38
Credit Policy                                                     Chase Correspondent Division

Chase Condominium Project Classifications, Continued


Level II        · Blanket insurance coverage for the project-relative to fire, hazard,
Criteria          flood (if applicable), and liability to be reviewed by Chase to
(continued        determine acceptability
                  · Must be an eligible project.
                · If the appraisal (or legal documents) indicates the condominium
                  project is located in an area that has passed inclusionary zoning
                  restrictions, it must meet the criteria outlined in the “Inclusionary
                  Zoning Restrictions” section.


Required         The following documentation is required:
Documentation
                 · Streamlined Project Questionnaire (C-6028)
                 · Certification of sales (C-6012)
                 · Statement of Insurance (C-6011A) or declaration of insurance
                   policy
                 · Appraisal report on one unit from the project/legal phase
                 · Clear photographs of the project, amenities, and recreation
                   facilities
                 · Engineer’s report if conversion within previous three years


Level III       The Level III classification is utilized for qualifications for viable new
                construction projects:

                · with the developer still in control, or
                · projects that are subject to phasing or annexation.

                This classification offers the flexibility to finance new projects with
                various presale levels determined by the strength and track record of
                the developer. Level III is available on Preferred ARM and
                Preferred Fixed rate products. Chase must determine the project
                eligibility.

                                                                        Continued on next page




July 2004                                                                       Collateral – 39
Credit Policy                                                  Chase Correspondent Division

Chase Condominium Project Classifications, Continued


Level III       · Common areas, amenities, and recreational facilities must be
Criteria          substantially complete.
                · Pre-sale requirements and concentration limits apply. The units
                  must have been sold to borrowers who intend to occupy the units as
                  primary and/or second home residences. Pre-sale and concentration
                  limits as follows:

                    If Pre-sale Percentage is…          Then Chase may finance…
                               0-19.99                           10 %
                             20.00-29.99                         15%
                             30.00-39.99                         20%
                             40.00-49.99                         25%
                             50.00-59.99                         30%
                             60.00-69.99                         35%
                           70.00 or greater                     No limit

                · Chase will track the project concentration
                · Multiple purchases by one owner are counted as one sale when
                  determining presale eligibility
                · A maximum of 30% investor/non-owner occupied units are allowed in
                  the project
                · Primary Residence, and Second Home borrowers are allowed
                  (Rental/Investor Transactions are not eligible)
                · 97% CLTV or product limitations noted in the Products and Programs
                  Guidelines
                · Fee simple and leasehold estates
                · Project’s legal documents (Recorded copies of Master Deed and By-
                  laws including any Amendments to date) must comply with FHLMC
                  Class I Warranty Requirements.
                · Satisfactory review of developer’s/builder’s reputation and history of
                  previous condominium developments.
                · Satisfactory analysis of marketability of condominium project, current
                  economic status of location.
                · Satisfactory review of condominium budget to verify that enough
                  units are under contract to support common expenses.
                · If project is professionally managed, the management contract must
                  be for a reasonable term, not to exceed three years. The agreement
                  must provide for termination by either party without cause and
                  without payment of a termination fee on 90 days or less written
                  notice.
                · Must be an eligible project

                                                                     Continued on next page




July 2004                                                                    Collateral – 40
Credit Policy                                                      Chase Correspondent Division

Chase Condominium Project Classifications, Continued


Level III Criteria   · If the subject project consists of a high rise building or buildings over
(continued)            eight stories and the subject unit is financed using Preferred/Non-
                       Agency fixed rate or Income Express, refer to the Product and
                       Program Guidelines
                     · If the appraisal (or legal documents) indicate the condominium project
                       is located in an area that has passed Inclusionary zoning restrictions, it
                       must meet the criteria outlined in the “Inclusionary Zoning Restrictions”
                       section
                     · If the subject project is a 2-4 unit building or part of a larger project
                       containing 2-4 unit buildings, it must meet the criteria outlined in “2-4
                       Unit Condominium” section.
                     · Blanket insurance coverage for the project-relative to fire, hazard,
                       flood (if applicable), and liability, to be reviewed by Chase determine
                       acceptability.
                     · Enhanced project review process (three months, instead of six
                       months)
                     · Project Champion Letter (Letter from Account Executive outlining
                       project details. i.e., location, marketing conditions, developer
                       reference, and Chase’s need to lend in subject project)

Required             · Statement of insurance (C-6011A) or declaration of insurance policy
Documentation        · Certification of sales (C-6012)
                     · Appraisal report on subject unit.
                     · Budget or analysis of annual income and expenses-operating budget
                       (FHLMC 465 Addendum B)
                     · If improvements are legal non-conforming use relative to current
                       zoning, documentation is needed to outline conditions under which
                       and to what extent any reconstruction is permitted, if damage to the
                       units or common amenities occurs.
                     · Project’s legal documents (Recorded copies of Master Deed and By-
                       laws)
                     · Plat of survey, plat map, or hand drawing showing the location of
                       improvements and common elements on the site.
                     · Clear photographs showing buildings, common elements, amenities,
                       recreational facilities, and neighboring improvements.
                     · Copy of engineer’s report if project is a conversion within previous
                       three years.
                     · Developer’s/builder’s reputation (Resume) and history of previous
                       condominium developments.
                     · Analysis of Marketability of condominium project.
                     · Current economic status of location.
                     · Project Champion Letter
                                                                         Continued on next page


July 2004                                                                        Collateral – 41
Credit Policy                                                  Chase Correspondent Division

Chase Condominium Project Classifications, Continued


Preferred       The following criteria must apply in order for a loan to be delivered
Non-Agency      under Preferred Non-Agency Limited Review. As part of the
Limited         underwriting decision the underwriter has authority to determine
Review          project eligibility for this project classification unless the project is
                currently declined or new construction.
                · Project or subject legal phase (new construction) is 100% complete
                  including all units, common areas, amenities, and recreation
                  facilities.
                · If the subject loan is being financed with the Preferred Non-Agency
                  Fixed Rate Product, or the Income Express Product, 70% of the units
                  in the project or legal phase must be sold or closed.
                · Non-Owner occupied borrowers are not permitted.
                · Max CLTV:
                  · 80% CLTV for Primary Residence and Second Home borrowers.
                · Fee simple and approved leasehold estates
                · Must be an eligible project
                · If the subject property consists of a high rise building or buildings
                  over eight stories and the subject unit is financed using Preferred
                  Non Agency Fixed Rate or Income Express, there may be loan
                  amount and LTV restrictions. Refer to the applicable Product or
                  Program Guide.
                · If the appraisal or legal documents indicate the condominium project
                  is located in an area that has passed inclusionary zoning restrictions,
                  it must meet the criteria outlined in the “Inclusionary Zoning
                  Restrictions” section.
                · Blanket insurance coverage for the project relative to fire, flood (if
                  applicable), and liability - to be reviewed by Chase to determine
                  acceptability.


Required          · Underwriter Certification of Project Eligibility (of the condo
Documentation       classification on the 1008 or
                  · Contract Underwriter Limited Review Condo and PUD Checklist
                    (applicable when Contract underwriter issues limited review
                    approval.)
                  · Appraisal report on the subject unit
                  · Engineer’s report if conversion within previous twelve months




July 2004                                                                    Collateral – 42
Credit Policy                                                   Chase Correspondent Division

Fannie Mae Condominium Project Classifications


Introduction    Fannie Mae uses the following classification system for condominium
                projects. Chase allows the use of the following Fannie Mae
                Classifications for loans sold to Fannie Mae, and Chase
                Preferred/Non-Agency products:

                · Type A,
                · Type B,
                · Type C, and
                · Limited Review


Fannie Mae      The Type A classification is for existing projects.
Type A


Fannie Mae      · 100% completion of the project, including all units, common areas,
Type A            amenities, and recreation facilities (must include those that are part
Criteria          of a master association).
                · Homeowners in control of HOA for at least one year.
                · 90% of the units in the project must be sold and closed.
                · A maximum of 40% investor/non-owner-occupied units are allowed in
                  the project.

                NOTE: Fannie Mae Occupancy Enhancement (Agency I Products
                Only) classification is utilized in lieu of Fannie Mae Type A if the
                transaction is for a primary residence or second home, purchase
                or no cash-out refinance, and the project complies with all other
                requirements for Type A including no single entity may own more
                than 10% of the total units in the project.

                · No single entity may own more than 10% of the total units in the
                  project.
                · Primary Residence, Second Home, and Non-Owner-Occupied
                  borrowers are allowed.
                · Maximum LTV/CLTV per the product limitations noted in the
                  Products and Programs Guides.
                · Fee simple and approved leasehold estates. See “Leasehold Estate
                  Guidelines” section”

                                                                      Continued on next page




July 2004                                                                     Collateral – 43
Credit Policy                                                     Chase Correspondent Division

Fannie Mae Condominium Project Classifications, Continued


Fannie Mae      · Project cannot be subject to additional phasing or annexation.
Type A            · Must be an eligible project.
Criteria        · If the subject property consists of a high rise building or buildings
(continued)
                  over eight stories and the subject unit is financed using
                  Preferred/Non-Agency fixed rate or Income Express, there may be
                  loan amount and LTV restrictions. Refer to the applicable Product or
                  Program Guide
                · If the appraisal (or legal documents) indicates the condominium
                  project is located in an area that has passed inclusionary zoning
                  restrictions, it must meet the criteria outlined in the “Inclusionary
                  Zoning Restrictions” section.
                · If the subject project is a 2-4 unit building or part of a larger project
                  containing 2-4 unit buildings, it must meet the criteria outlined in the
                  “2-4 Unit Condominium” section.
                · Blanket insurance coverage for the project - relative to fire, hazard,
                  flood (if applicable), and liability - to be reviewed by Chase to
                  determine acceptability.


Required         · Underwriter Certification of Project Eligibility
Documentation    · Streamlined Project Questionnaire (C-6028)
                 · Statement of Insurance (C-6011A) or declaration of insurance
                   policy.
                 · Appraisal report on the subject unit.
                 · Engineer’s report if conversion within previous three years.


Fannie Mae      The Type B classification is utilized for qualification of:
Type B
                · new construction projects with the developer still in control, or
                · projects that are subject to phasing or annexation, or
                · for established projects with the homeowners in control of the HOA
                  (generally, less than one year).

                NOTE: NOTE: Correspondents may sell CHASE loans on Fannie
                Mae Type B condos only if the project has been previously
                approved by Chase

                                                                        Continued on next page




July 2004                                                                       Collateral – 44
Credit Policy                                                    Chase Correspondent Division

Fannie Mae Condominium Project Classifications, Continued


Type B          · 100% completion of common areas, amenities, and recreation
Criteria          facilities.
                · 70% closed or under contract to close (project/legal phase.)
                · No single entity may own more than 10% of the total units in the
                  project.
                · A maximum of 30% investor/non-owner-occupied units are allowed in
                  the project.
                · Primary residence, second home and non-owner occupied borrowers
                  are allowed.
                · Maximum LTV per limitations noted in the Products and Programs
                  Guides
                · Fee simple and leasehold estates
                · If project is professionally managed, the management contract must
                  be for a reasonable term, not to exceed three years. The agreement
                  must provide for termination by either party without cause and
                  without payment of a termination fee on 90 days or less written
                  notice.
                · Must be an eligible project
                · If the subject project consists of a high-rise building or buildings over
                  eight stories and subject unit is financed using the Preferred Non-
                  Agency Fixed Rate or Income Express, there may be loan amount
                  and LTV restrictions. Refer to the applicable Product or Program
                  Guide.
                · If the appraisal (or legal documents) indicate the condominium
                  project is located in an area that has passed inclusionary zoning
                  restrictions it must meet the criteria outlined in the “Inclusionary
                  Zoning Restrictions” section.
                · If the subject property is a 2-4 unit building or part of a larger project
                  containing 2-4 unit buildings, it must meet the criteria outlined in the
                  “2-4 Unit Condominium” section.
                · Blanket insurance coverage for the project relative to fire, hazard,
                  flood (if applicable), and liability to be reviewed by Chase to
                  determine acceptability.

                                                                       Continued on next page




July 2004                                                                      Collateral – 45
Credit Policy                                                 Chase Correspondent Division

Fannie Mae Condominium Project Classifications, Continued


Required         · Statement of Insurance (C-6011A) or declaration of insurance
Documentation      policy.
                 · Certification of Sales (C-6012).
                 · Appraisal report on subject unit.
                 · Budget or analysis of annual income and expenses - operating
                   budget (Appraisal Report Addendum B).
                 · If improvements are legal non-conforming use relative to current
                   zoning, documentation is needed to outline conditions under which
                   and to what extent any reconstruction is permitted, if damage to the
                   unit or common amenities occurs.
                 · Project’s legal documents (recorded copies of Master Deed and
                   By-laws).
                 · Plat of survey, plat map, or hand drawing showing the location of
                   improvements and common elements on the site.
                 · Clear photographs showing buildings, all common elements,
                   amenities, recreation facilities, and neighboring improvements.
                 · Copy of engineer’s report if conversion within previous three years.


Fannie Mae      The Type C classification is generally used for new projects and
Type C          requires a formal submission to Fannie Mae of certain documentation.
                Approval process may begin prior to construction of project, but each
                Legal Phase will be subject to a 70% presale requirement before
                Fannie Mae will issue final approval document known as Form 1028.
                Chase allows the use of Fannie Mae Type C for loans sold to Fannie
                Mae, private investors which specify Fannie Mae classification, and
                Chase Preferred/Non-Agency products.

                                                                    Continued on next page




July 2004                                                                   Collateral – 46
Credit Policy                                                  Chase Correspondent Division

Fannie Mae Condominium Project Classifications, Continued


Fannie Mae       If a Fannie Mae office has already issued Form 1028, , no additional
Type C - 1028   documentation is required to close loans within the approved project or
Already         legal phase. The Form 1028 should be placed in the loan file to
Issued          document the project approval.

                · Statement of Insurance (C-6011A) or declaration of insurance policy
                · Appraisal report on the subject unit
                · Copy of Fannie Mae 1028 Approval Form (Project Acceptance form)


Fannie Mae      · 100% completion of the project or legal phase, including all units,
Type C            common areas, amenities, and recreation facilities (must include
Criteria          those that are part of a master association.)
                · 70% of the units in the project or legal phase must be sold or closed
                  to Primary Residence or Second Home purchasers.
                · No single entity may own more than 10% of the total units in the
                  project.
                · Primary Residence, Second Home, and Non-Owner Occupied
                  borrowers are allowed.
                · Maximum LTV per the product limitations noted in the Product &
                  Program Guidelines.
                · Fee simple only; unit owners must have sole ownership interest in
                  the project’s facilities and common elements once the HOA has been
                  turned over to the homeowners.
                · The project must be acceptable under either a Phase I or a Phase II
                  environmental hazard assessment.
                · If less than three years since the conversion, all rehabilitation work
                  involved in a conversion must have been completed in a workman
                  like manner and the original architect’s or engineer’s report must
                  comment favorably on sound transmission, structural integrity, and
                  condition/remaining life of major project components (heating,
                  cooling, electrical systems, etc.).

                                                                     Continued on next page




July 2004                                                                    Collateral – 47
Credit Policy                                                      Chase Correspondent Division

Fannie Mae Condominium Project Classifications, Continued


Fannie Mae      · If project is professionally managed, the management contract must
Type C            be for a reasonable term not to exceed three years. The agreement
Criteria          must provide for termination by either party without cause and
(continued)       without payment of a termination fee on 90 days or less written
                  notice.
                · The project’s budget must be reasonable with adequate replacement
                  reserves.
                · If the subject property consists of a high-rise building or buildings
                  over eight stories and the subject unit is financed using
                  Preferred/Non-Agency fixed rate or Income Express, see the Product
                  and Program Guidelines.
                · If the subject project is a 2-4 unit building or part of a larger project
                  containing 2-4 unit buildings, it must meet the criteria outlined in the
                  “2-4 Unit Condominium” section.
                · If the appraisal or legal documents indicate the condominium project
                  is located in an area that has passed inclusionary zoning restrictions,
                  it must meet the criteria outlined in the “Inclusionary Zoning
                  Restrictions” section.
                · Blanket insurance coverage for the project relative to fire, hazard,
                  flood (if applicable), liability, and fidelity bond (if more than 20 units),
                  will be reviewed by Chase to determine acceptability.


Required         · Streamlined Project Questionnaire
Documentation    · Appraisal Report on each unit type
                 · Non-refundable fees ($1200 Application Fee plus $300 per unit fee)
                 · Developer’s Resume including previous condo project experience
                 · Attorney Opinion Letter
                 · Project’s Legal Documents (Recorded copies of Master Deed and
                   Bylaws)
                 · See Fannie Mae’s Sellers Guide for additional requirements


Fannie Mae      In certain circumstances, Fannie Mae will modify criteria set forth
Limited         under type A, B and Type C project approvals. The following criteria
Review          must apply in order for a loan to be delivered under Limited Review.

                                                                         Continued on next page




July 2004                                                                        Collateral – 48
Credit Policy                                                  Chase Correspondent Division

Fannie Mae Condominium Project Classifications, Continued


Fannie Mae      · Project or subject legal phase (new construction) is 100% complete
Limited           including all units, common areas, amenities, and recreation facilities
Review          · Non-Owner occupied borrowers are not permitted
Criteria
                · Max CLTV: *80% CLTV for Primary Residence and Second Home
                  borrowers.
                  NOTE: DU Limited Review (Desktop Underwriting) classification
                  is utilized when Fannie Mae’s DU Findings and Analysis indicate
                  “Approve/Eligible” and provide the option for limited review.
                  Chase will consider LTV/CLTV per the DU analysis (primary and
                  second home).
                · Fee simple and approved leasehold estates
                · Must be an eligible project
                · If the subject property consists of a high rise building or buildings
                  over eight stories and the subject unit is financed using
                  Preferred/Non-Agency fixed rate or Income Express, there may be
                  loan amount and LTV restrictions. Refer to the applicable Product or
                  Program Guide.
                · If the appraisal or legal documents indicate the condominium project
                  is located in an area that has passed inclusionary zoning restrictions,
                  it must meet the criteria outlined in the “Inclusionary Zoning
                  Restrictions” diction.
                · Blanket insurance coverage for the project-relative fire, hazard, flood
                  (if applicable) and liability-to be reviewed by Chase to determine
                  acceptability.


Required      · Underwriter Certification of Project Eligibility ) or
Documentation · Contract Underwriter Limited Review Condo and PUD Checklist
                  (applicable when a Contract Underwriter issues a limited review
                  approval.)
                · Appraisal report on subject unit
                · Engineer’s report if conversion within previous twelve months.




July 2004                                                                    Collateral – 49
Credit Policy                                                     Chase Correspondent Division

Freddie Mac Condominium Project Classifications


Introduction    Freddie Mac uses four categories for classifications of condominium
                projects. We allow the use of Freddie Mac classification (Class I,
                Class II, Class III and Limited Review) for loans sold to Freddie Mac,
                private investors which specify Freddie Mac classifications, and Chase
                Preferred/Non-Agency products. Project approvals are valid for a
                period of six months (from project questionnaire completion date).


Freddie Mac     Class I classification is utilized for qualifications of new construction
Class I         projects with the developer still in control or projects that are subject to
                phasing or annexation.

                NOTE: Correspondents may sell CHASE loans on Class 1
                condos only if the project has been previously approved by
                Chase


Class I         · 100% completion of common areas, amenities, and recreation
Criteria          facilities
                · 70% closed or under contract to close (project/legal phase.)
                · Multiple purchases by one owner are counted as one sale when
                  determining presale eligibility
                · A maximum of 30% investor/non-owner occupied units are allowed in
                  the project
                · Primary Residence, Second Home, and Non-Owner Occupied
                  borrowers are allowed
                · Maximum LTV per product limitations noted in the Products and
                  Programs Guides
                · Fee simple and leasehold estates
                · If project is professionally managed, the management contract must
                  be for a reasonable term, not to exceed three years. The agreement
                  must provide for termination by either party without cause and
                  without payment of a termination fee on 90 days or less written
                  notice.
                · Must be an eligible project
                · If the subject project consists of a high rise building or buildings over
                  eight stories and the subject unit is financed using Preferred/Non-
                  Agency fixed rate or Income Express, here may be loan amount and
                  LTV restrictions. Refer to the applicable Product or Program Guide.

                                                                        Continued on next page




July 2004                                                                       Collateral – 50
Credit Policy                                                     Chase Correspondent Division

Freddie Mac Condominium Project Classifications, Continued


Class I         · If the appraisal (or legal documents) indicate the condominium
Criteria          project is located in an area that has passed inclusionary zoning
(continued)       restrictions, it must meet the criteria outlined in the “Inclusionary
                  Zoning Restrictions” section.
                · If the subject project is a 2-4 unit building or part of a larger project
                  containing 2-4 unit buildings, it must meet the criteria outlined in the
                  “2-4 Unit Condominium Projects” section.
                · Blanket insurance coverage for the project-relative to fire, hazard,
                  flood (if applicable), and liability, to be reviewed by Chase to
                  determine acceptability.


Required      · Statement of insurance (C-6011A) or declaration of insurance policy
Documentation · Certification of sales (C-6012)
                · Appraisal report on subject unit.
                · Budget or analysis of annual income and expenses-operating
                  budget (FHLMC 465 Addendum B)
                · If improvements are legal non-conforming use relative to current
                  zoning, documentation is needed to outline conditions under which
                  and to what extent any reconstruction is permitted, if damage to the
                  units or common amenities occurs.
                · Project’s legal documents (Recorded copies of Master Deed and
                  By-laws)
                · Plat of survey, plat map, or hand drawing showing the location of
                  improvements and common elements on the site.
                · Clear photographs showing buildings, all common elements,
                  amenities, rec facilities, and neighboring improvements.
                · Copy of engineer’s report if project is a conversion within previous
                  three years.


Freddie Mac     Class II classification is utilized for established projects with the
Class II        homeowners in control of the HOA for no minimum length of time
                (generally less than one year).

                NOTE: Correspondents may sell CHASE loans on Class II
                condos only if the project has been previously approved by
                Chase.

                                                                        Continued on next page




July 2004                                                                       Collateral – 51
Credit Policy                                                 Chase Correspondent Division

Freddie Mac Condominium Project Classifications, Continued


Class II        · 100% completion of the project, including all units, common
Criteria          amenities, rec facilities (must include those that are part of the
                  master association)
                · Homeowners in control of the HOA
                · 70% closed
                · a maximum of 40% investor/non-owner occupied units are allowed in
                  the project
                · 15% maximum (30 days) delinquencies in the HOA assessments
                · Primary residence, Second Home, and Non-owner-occupied
                  borrowers are allowed
                · Maximum LTV per the product limitation noted in the Products and
                  Programs Guide
                · Fee simple and leasehold estates
                · If the subject property consists of a high rise building or buildings
                  over eight stories and the subject unit is financed using
                  Preferred/Non-Agency fixed rate or Income Express, there may be
                  loan amount and LTV restrictions. Refer to the applicable Product or
                  Program Guide.
                · If the appraisal (or legal documents) indicate the condominium
                  project is located in an area that has passed inclusionary zoning
                  restrictions, it must meet the criteria outlined in the “Inclusionary
                  Zoning Restriction: section.
                · Blanket insurance coverage for the project-relative to fire, hazard,
                  flood (if applicable), and liability to be reviewed by Chase to
                  determine acceptability


Required      · Statement of insurance (C-6011A) or declaration page of insurance
Documentation   policy
                · Streamlined Project Questionnaire (C-6028)
                · Appraisal report on the subject unit
                · If improvements are legal non-conforming use relative to current
                  zoning, documentation is needed to outline conditions under which
                  and to what extent any reconstruction is permitted, if damage to the
                  units or common amenities occurs.
                · Project’s legal documents (Recorded copies of master deed and
                  bylaws)
                · Copy of engineer’s report if conversion within previous three years.

                                                                    Continued on next page




July 2004                                                                   Collateral – 52
Credit Policy                                                     Chase Correspondent Division

Freddie Mac Condominium Project Classifications, Continued


Freddie Mac     The Class III classification is utilized for established projects with
Class III       proven marketability.


Class III       · 100% completion of the project, including all units, common areas,
Criteria          amenities, and rec facilities.
                · Homeowners in control of HOA for at least one year.
                · 90% of the units in the project must be closed or under contract to
                  close.
                · Multiple purchases by one owner are counted as one sale when
                  determining if presale has been met.
                · A maximum of 40% investor/non owner occupied units are allowed in
                  project.
                  NOTE: Freddie Mac Occupancy Enhancement classification is
                  utilized in lieu of Freddie Mac III if the transaction is for a primary
                  residence or second home, purchase or no cash out refinance, and
                  the project complies with all other requirements for Class III including
                  minimum presale of 90%. Freddie Mac Products only.
                · Primary Residence, Second Home, and Non-Owner Occupied
                  borrowers are allowed.
                · Maximum LTV per product limitations noted in the Product &
                  Programs Guide.
                · Fee simple and approved leasehold estates.
                · Project cannot be subject to additional phasing or annexation.
                · Must be an eligible project.
                · If the subject property consists of a high-rise building or buildings
                  over eight stories and the subject unit is financed using
                  preferred/non-agency fixed rate or income express product, there
                  may be loan amount and LTV restrictions. Refer to the applicable
                  Product or Program guide.
                · If the appraisal (or legal documents) indicate the condominium
                  project is located in an area that has passed inclusionary zoning
                  restrictions, it must meet the criteria outlined in the “Inclusionary
                  Zoning Restrictions” section.
                · If the subject project is a 2-4 unit building or part of a larger project
                  containing 2-4 unit buildings, it must meet the criteria outlined in the
                  “2-4 Unit Condominium Projects” section.
                · Blanket insurance coverage for the project - relative to fire, hazard,
                  flood (if applicable), and liability - to be supplied prior to closing and
                  reviewed by Chase to determine acceptability.

                                                                        Continued on next page




July 2004                                                                       Collateral – 53
Credit Policy                                                    Chase Correspondent Division

Freddie Mac Condominium Project Classifications, Continued


Required      · Underwriter Certification of Project Eligibility
Documentation · Streamlined Project Questionnaire (C-6028)
                 · Statement of Insurance (C-6011A) or declaration page of insurance
                   policy
                 · Appraisal report on the subject unit
                 · Engineer’s report if conversion within previous three years

Freddie Mac      In certain circumstances, Freddie Mac will modify criteria set forth
Limited         under Class II and III criteria. The following criteria must apply in order
Review          for a loan to be delivered to Freddie Mac under this Limited Review
                process. Correspondent must warrant that all eligibility requirements
                are met.

Freddie Mac     · Freddie Mac agency products only
Limited         · Purchase or no-cash out refinance only
Review
                · 100% completion of the project common areas, amenities, and rec
Criteria
                  facilities
                · Non-owner occupied borrowers are not permitted
                · Max LTV/CLTV: 90% for primary or second homes Fee simple and
                  leasehold estates
                · Can not be subject to any timesharing ownership arrangements
                · Must be an eligible project.
                · If the appraisal (or legal documents) indicate the condominium
                  project is located in an area that has passed inclusionary zoning
                  restrictions, it must meet the criteria outlined in the “Inclusionary
                  Zoning Restrictions” section.
                · Blanket insurance coverage for the project-relative to fire, hazard,
                  flood (if applicable), and liability-to be reviewed by Chase to
                  determine acceptability
                · ChaseFlex and Private Investor. Refer to Product and Program
                  Guides for requirements.
                · Condominium Insurance Requirements. See “Insurance
                  Requirements” section.

Required      · Underwriter Certification of Project Eligibility
Documentation · Contract Underwriter Limited Review Condo & PUD Checklist
                   (applicable when limited review approval is issued by a Contract
                   underwriter.)
                 · Appraisal report on the subject unit
                 · Engineer’s report if conversion within previous 12 months.




July 2004                                                                      Collateral – 54
Credit Policy                                                 Chase Correspondent Division

Combining Two Condominium Units


Combining       · Individual adjoining units that will be combined to function as one
Two Units         contiguous living space.
                · For Purchase transactions, the contract price of unit 1 and 2 equals
                  the total purchase price. The CLTV will be based on the lesser of the
                  combined sales price or the appraised value. A transaction is
                  considered a purchase if the borrower does not currently own either
                  one of the units.
                · For Refinance transactions, the loan will be considered a cash-out
                  transaction and the maximum CLTV is restricted by product. A
                  transaction is underwritten as a refinance if the borrower owns one
                  unit and is now purchasing the second unit.
                · The condominium project must meet all applicable criteria.
                · The appraisal report must be prepared based on the combination of
                  units and must be subject to the completion of the necessary
                  alterations required to make the combination of two units into one.
                · The combined unit must functionally appear as one unit, including
                  complete removal of one kitchen.
                · Written permission from the Condominium Association to combine
                  the units is required.
                · A written estimate from a licensed contractor that outlines the costs
                  to combine the units is required. Borrower must have sufficient
                  assets to cover the estimated costs.
                · Escrow will be held for the greater of $10,000 or 1.5 times the cost
                  to convert the unit.
                · Chase must be able to obtain a blanket Mortgage on the combined
                  unit.
                · A final inspection to verify satisfactory completion of combined
                  improvements is required prior to release of escrow funds to the
                  borrower.




July 2004                                                                   Collateral – 55
Credit Policy                                                   Chase Correspondent Division

Condominium Project Approval Specifics


Project         Approvals are valid for a period of six months from the completion date
Approval        of the Project Questionnaire. If the project    classification does not
Expiration      require a questionnaire, then the expiration date is determined from
                the appraisal report completion date. The approval expiration date
                may be extended to twelve months for ChaseFlex Warrantable III,
                Freddie Mac III, Fannie Mae A, Level I if the project meets the
                following:

                · Owner-occupancy is 70% or greater
                · No potential for condotels, short-term rentals, etc.
                · No litigation
                · Project consists of more than 20 units
                · Delinquencies are below 10%




July 2004                                                                     Collateral – 56
Credit Policy                                                      Chase Correspondent Division

Planned Unit Developments (PUDs)


Definition        A PUD is a real estate development formed according to a recorded
                  declaration and other constituent documents. Each unit owner has
                  title to a residential lot and dwelling and has certain legal rights to use
                  the project common areas. The common areas are administered,
                  maintained, and owned by an owners’ association that levies monthly
                  charges against lot owners for expenses. Membership in the
                  association is mandatory and transferred with the transfer of title to the
                  individual units.


Lender             Chase utilizes Fannie Mae classification criteria to determine
Considerations     eligibility of PUD projects for financing agency and preferred/non-
                   agency products. The Freddie Mac PUD classification may only be
                   used with Agency II products or with private investor products, which
                   permit use of Freddie Mac criteria.


Detached PUD       There are no special requirements for a property classified as a
                   detached PUD. It will not be necessary to have any special approval
                   for this property type, however a PUD rider should always be
                   recorded with the mortgage.


Fannie Mae        Chase allows the use of Fannie Mae classifications (Type E and Type
PUD Project       F and Limited Review) for loans sold to Fannie Mae, and Chase
Classifications   Preferred Non-Agency Products.


Fannie Mae        The Type E classification is utilized to establish eligibility of existing
Type E PUD        projects. Eligibility criteria are as follows:
Criteria
                  · Attached housing
                  · Homeowners Association turned over to unit owners (no specific
                    time).
                  · Blanket insurance coverage for the project relative to flood (if
                    applicable) to be reviewed by Chase to determine acceptability.
                  · Must be an eligible project.

                                                                         Continued on next page




July 2004                                                                        Collateral – 57
Credit Policy                                                     Chase Correspondent Division

Planned Unit Developments (PUDs), Continued


Fannie Mae    · Underwriter Certification of Project Eligibility
Type E        · Contract Underwriter Limited Review Condo & PUD Checklist
Required        (applicable when approval is issued by a Contract underwriter).
Documentation
                · Appraisal report on the subject property
                · Statement of Insurance (C6011A) or declaration of insurance policy.


Fannie Mae      This classification is utilized to establish eligibility of new projects with
Type F PUD      Homeowners’ Associations still in developer control. Eligibility criteria
Criteria        are as follows:

                · Attached housing
                · Project does not contain multi-dwelling units (separate living spaces
                  under one deed).
                · Presale requirements are based on length of marketing time for the
                  project or legal phase:

                     Length of time marketed             Requirement (Sold or Closed)
                         Under one year                             25%
                          Over one year                             40%

                · The project or legal phase that has met the presale requirement
                  must contain enough sold units to support the fiscal responsibilities
                  of the homeowners association
                · Fee simple estate or approved leasehold.
                · Blanket insurance coverage for the project relative to flood (if
                  applicable) to be and reviewed by Chase to determine acceptability.
                · Must be an eligible project.

                                                                        Continued on next page




July 2004                                                                       Collateral – 58
Credit Policy                                                      Chase Correspondent Division

Planned Unit Developments (PUDs), Continued


Fannie Mae        · Underwriter Certification of Project Eligibility
Type F            · Appraisal report on the subject unit
Required
                  · Statement of Insurance (C6011-A) or declaration of insurance
Documentation
                    policy.
                  · Certification of Sales (C6012), if applicable. See “Presale
                    Requirements.”


Fannie Mae      In certain circumstances, Fannie Mae will modify criteria set forth
Limited         under Type F review requirements. The following criteria must be met
Review          in order for loan to be delivered under Limited Review classification


Fannie Mae      · Project or subject legal phase is 100% complete including all
Limited           buildings, amenities, etc.
Review          · Max LTV: 75% Primary residence 70% Second Home
Criteria
                · Investor transactions are not permitted
                · Subordinate financing is not permitted
                · Must be an eligible project
                · A presale requirement applies for the preferred/non-agency fixed rate
                  or income express product only. 70% of the units in the project or
                  legal phase must be sold or closed.


Required      · Underwriter Certification of Project Eligibility
Documentation

                                                                         Continued on next page




July 2004                                                                        Collateral – 59
Credit Policy                                                  Chase Correspondent Division

Planned Unit Developments (PUDs), Continued


Freddie Mac     Freddie Mac Class III classification can be used for
Class III
                · proposed,
                · New, and
                · existing PUD properties.

                Chase allows the use of the Freddie Mac classification for loans sold
                to Freddie Mac and private investors, which specify Freddie Mac
                classifications.


Freddie Mac     · Project may contain attached dwellings with the developer in control
Class III         of the HOA for Freddie Mac products only.
Criteria        · Blanket insurance coverage for the project relative to flood (if
                  applicable) to be reviewed by Chase to determine acceptability.
                · Must be an eligible project.


Freddie Mac   · Underwriter Certification of Project Eligibility
Class III     · Contract Underwriter Limited Review Condo & PUD Checklist
Required        applicable when project approval is issued by a Contract
Documentation
                  Underwriter.
                · Appraisal report on the subject unit
                · Statement of Insurance (C6011-A) or declaration of insurance policy




July 2004                                                                    Collateral – 60
Credit Policy                                                   Chase Correspondent Division

Co-operative Units


Definition      A Co-operative (Co-op) is a multi-family residential building that has
                the following features:

                · a Corporation holds title to the property,
                · individual units are conveyed to owners by issuing shares of stock,
                  and
                · A Proprietary Lease or an occupancy agreement details
                  requirements of owners.

Project         The following criteria are applicable for all loan transactions registered
Eligibility     as Preferred Non-Agency or Agency I products. The maximum LTV
                permitted is the lesser of 80% or product maximum.
                · The Co-operative Corporation must be in existence for at least three
                  years.
                · The project documents must comply with New York State Laws.
                · The Co-operative share loan must be secured by:
                  · Stock or shares in the Co-operative Corporation, or,
                  · By a membership certificate or other contractual agreement
                    evidencing ownership and,
                  · The exclusive occupancy rights related to a single family dwelling,
                    as evidenced by the Proprietary Lease that should extend beyond
                    the term of the mortgage.
                · The Co-operative Corporation must acknowledge our lien by signing
                  a CHASE (Aztec) Recognition Agreement. Chase Legal Counsel
                  must review any riders to this document.
                · The project must meet hazard, flood, liability, and fidelity insurance
                  requirements as determined by CHASE and State or Federal
                  requirements.
                · A Co-operative project must qualify as a Co-operative Housing
                  Corporation under Section 216 of the Internal Revenue Code of
                  1986, as amended. The Co-operative Corporation cannot receive
                  more than 20% of its annual maintenance fees from its Commercial
                  Tenants and not less than 80% from its Residential Unit Holders.
                  (IRS 80/20 Ruling)
                · The Co-op Corporation must have marketable title to the property
                  and own the property in fee simple or an acceptable leasehold
                  estate.
                · Projects may contain condominium units (Condo-Ops) as long as the
                  residential Co-operative units are owned by a Co-operative housing
                  Corporation, as defined by Section 216 of the Internal Revenue
                  Code.

                                                                      Continued on next page


July 2004                                                                     Collateral – 61
Credit Policy                                                  Chase Correspondent Division

Co-operative Units, Continued


Project         · To be eligible for financing the Sponsor must have previously sold
Eligibility       and closed:
(continued)       · 51% of the residential units. This includes units sold to owner
                    occupants and investors.
                · The Co-operative project must contain at least 20 units, however,:
                  · Projects with 11-19 residential units will be considered if the total
                    sold is 100% and investor concentration is less than 25%.
                  · Projects that contain less than 5-10 units will be considered if
                    100% of the units are sold to owner occupants.
                · Co-operative projects that contain no elevator service are referred to
                  as walk-ups. These projects may be considered if they are common
                  and customary in the geographic area and the unit we are financing
                  is located below the 6th floor. The appraised value must be
                  supported by use of two comparables from similar floor level as
                  subject property.
                · The co-op unit must contain a minimum of 600 square feet of living
                  space.
                · Investor concentration
                  · Investors may own a maximum of 25% of the Co-operative units.
                    (Non-occupant owners)
                  · If the original Sponsor transfers unsold shares of stock, the new
                    Holder of Unsold Shares will generally be considered an investor.
                    If a Sponsor defaults on his obligations and the unsold shares of
                    stock have been transferred to the Co-operative Corporation, the
                    Co-operative Corporation will generally be treated as a substitute
                    sponsor and will not be subject to investor concentration guidelines.
                · The maximum collective lending, by CHASE, on units located in the
                  same project is 20% of the total units in the project.
                · Flip Tax
                  · All flip tax is deducted from the lower of the purchase price or
                    appraised value for the purpose of LTV calculation.
                  · If lender is exempt from project flip tax requirements or if tax is
                    based on profit from sale of unit only, no deductions are required.
                · Pro Rata Share
                  · Chase uses Fannie Mae formula for calculation of pro rata share.
                    · Maximum pro rata share is 35%.
                · Occupancy is limited to Primary & Second Home borrowers.

                                                                     Continued on next page




July 2004                                                                    Collateral – 62
Credit Policy                                                 Chase Correspondent Division

Co-operative Units, Continued


Financial       · Co-operative Corporation’s audited financial statements for the two
Review            (2) most recent calendar years. If the Project has 50 or more units,
                  then audited financial statements or the 1120 Corporate Tax Returns
                  are required. If the Project has 49 units or less, the Project can
                  submit compiled, reviewed, audited financial statements or the 1120
                  Corporate Tax Returns. A favorable underwriting review will confirm
                  that a project is well managed, has sufficient assets to maintain a
                  positive position in the real estate, has sufficient income to meet
                  expenses, does not have a history of delinquency, does not have
                  excessive liens against the building and that there are no adverse
                  structural hazardous conditions which exist.
                · The most recent Attorney General Disclosure Statement (A.G.)
                  · This will disclose the financial condition of the Sponsor holding
                    10% or more of the unsold shares in the project.
                · Sponsor Cash Flow - Monthly rents collected on the unsold units
                  should be sufficient to cover maintenance charges on the unsold
                  units. When a negative cash flow exists, a thorough analysis of
                  sponsor strength and track history is necessary. A maintenance
                  increase exceeding 10% should not occur. If state rental control
                  laws protect the project, no negative cash flow may exist when
                  financing under Agency I Products.
                · Pledged Unsold Shares - It is acceptable for sponsor to pledge
                  unsold shares as collateral providing that:
                  · Overall strength and track history of sponsor has been determined
                  · Impact of negative cash flow for unit owners is minimal.
                · The CHASE Co-operative Project Information Form provides
                  additional information and must be completed by a member of the
                  Co-op Board of Directors and/or the Sponsor.
                · Amendments are required when the Sponsor holds more than 10%
                  of the total shares in the project.
                · Unsold shares held by RTC, FDIC, or other government agencies
                  · Caution is used in reviewing financial stability of the project. In
                    many instances, the project will be considered ineligible for
                    financing.

                                                                    Continued on next page




July 2004                                                                   Collateral – 63
Credit Policy                                                    Chase Correspondent Division

Co-operative Units, Continued


Ineligible      The Co-operative project must meet all of the general requirements as
Projects        described above. In addition the projects may not be:

                · Subject to additional phasing or annexation
                · A Co-operative hotel or time-share project, projects that have
                  individual stock ownership and allocated occupancy rights must
                  operate as a commercial hotel with short-term occupancy, rental
                  desks, and cleaning services.
                · Limited equity Co-operative projects in which the Co-op Corporation
                  places a limit on the amount of return that can be received when
                  stock or shares are sold.
                · Projects where a Sponsor or co-op Corporation is currently in default
                  of obligations in the subject buildings or other projects.
                · Auctioned Building.
                · A co-op project that represents a legal but non-conforming use of
                  land that is, zoning regulations will not allow the improvements to be
                  rebuilt in the event that are partially or completely destroyed.
                · Project with unsold units held by institution.
                · Single detached units and manufactured units.


Ineligible      The following units types are ineligible for financing:
Units
                · Studio units
                · Basement units
                · Lobby units where commercial space exists


Geographic      Chase will finance Co-operatives in the following counties within the
Restrictions    State of New York subject to restrictions imposed by product and/or
                loan type: Brooklyn, Bronx, Manhattan, Queens, Staten Island,
                Nassau, Suffolk and, Westchester.

                                                                          Continued on next page




July 2004                                                                         Collateral – 64
Credit Policy                                                  Chase Correspondent Division

Co-operative Units, Continued


Closing       · Assignment and physical possession of stock certificates,
Documentation · Execution of blank stock power,
Requirements
                · Aztec Recognition agreement executed by the Co-op Board
                  acknowledging our security interest in the property,
                · Loan security agreement,
                · Name, address and phone number of Co-op managing agent,
                · Signed copy of proprietary lease between Co-op Board and the
                  purchaser,
                · UCC-1 financing statement (filed copy) - the UCC-1 MUST be filed
                  prior to loan closing.


Combining       · Individual adjoining units that will be combined to function as one
Two Units         contiguous living space.
                  · For Purchase transactions, the contract price of unit 1 and 2
                    equals the total purchase price. The LTV will be based on the
                    lesser of combined sales price or appraised value. A transaction
                    is a purchase if the borrower does not currently own either
                    one of the units.
                  · For Refinance transactions, the loan will be considered a cash-out
                    transaction and the maximum LTV is restricted by product. A
                    transaction is underwritten as a refinance if the borrower owns one
                    unit and is now purchasing the second unit. For regulatory
                    compliance and disclosure purposes, these transactions are
                    handled as purchases; the right of rescission does not apply.
                · The co-op building must meet Chase Non-Agency, Chase Agency I,
                  or Fannie Mae Type 1 criteria if transaction is a refinance. With
                  purchase transactions, Fannie Mae Pilot criteria may also be utilized.
                · The appraisal report must be prepared based on the combination of
                  units and must be subject to the completion of necessary alterations
                  required to complete the combination of two units into one.
                · The combined unit must functionally appear as one unit, including
                  complete removal of one kitchen.
                · Written permission from the Co-operative Corporation to combine the
                  units is required.
                · A written estimate from a licensed contractor that outlines the cost to
                  combine the units is required. Borrower must have sufficient assets
                  to cover the estimated costs.

                                                                     Continued on next page




July 2004                                                                    Collateral – 65
Credit Policy                                                  Chase Correspondent Division

Co-operative Units, Continued


Combining       · An escrow will be held for the greater of $10,000 or 1.5 times the
Two Units         cost to convert the unit.
(continued)     · Correspondent must be able to provide a blanket Security
                  Agreement on the combined unit to Chase.
                · A final inspection of combined improvements is required prior to
                  release of escrow funds to borrower.


Underlying      Balloon
Mortgage        · For loans maturing within a 2-year period, estimate the impact of a
Maturity Date     refinance on the borrower housing expense. The Underlying
                  Mortgage Increase Calculation Form is to be completed.

                ARM
                · For ARM loans that have a scheduled increase within the next three
                 years, estimate the impact of the increased payment on the
                 borrowers housing expense.




July 2004                                                                    Collateral – 66
Credit Policy                                                  Chase Correspondent Division

Fannie Mae Type I Co-operative Share Program


Definition      This program is available for use in established buildings in which
                Chase will provide financing on a spot-loan basis to owner occupants
                only with specified delivery only to Agency I. Maximum LTV is limited
                to the lesser of 95% or product maximum. Other products not
                scheduled for sale to Agency I may not be considered under this
                project category. Co-operative project Offering Plan and Amendments
                must be provided for review.


Eligibility     · Borrower must receive “approve eligible” from D/U if the LTV is
Requirements      between 90.01% and 95%.
                · The project documents must comply with state laws.
                · The Co-op share loan must be secured by:
                  · Stock or shares in the Co-op Corporation, or,
                  · By a membership certificate or other contractual agreement
                    evidencing ownership and,
                  · The exclusive occupancy rights related to a single family dwelling,
                    as evidenced by the Proprietary Lease that should extend beyond
                    the term of the mortgage.
                · The Co-op Corporation must acknowledge our lien by signing an
                  Aztec Recognition Agreement.
                · The project must meet hazard, flood, liability, and fidelity insurance
                  requirements in accordance with Fannie Mae, State, and Federal
                  requirements.
                · A Co-operative project must qualify as a Co-operative housing
                  Corporation under Section 216 of the Internal Revenue Code of
                  1986, as amended. The Co-operative Corporations income must
                  come primarily from its shareholders. (IRS 80/20 Ruling)
                · The Co-op Corporation must have marketable title to the property
                  and own the property in fee simple or an acceptable leasehold estate
                · The project cannot be subject to additional phasing or annexation.
                · The construction of the project (or all rehabilitation work involved in
                  the conversion of the building to a Co-o project) must be complete,
                  except that minor items that do not affect livability may be incomplete
                  as long as the completion is assured by the escrow of sufficient
                  funds.
                · To be eligible for financing the Sponsor must have previously sold
                  and closed 80% of the residential units to borrowers intending to
                  occupy the property as primary residence.

                                                                     Continued on next page




July 2004                                                                    Collateral – 67
Credit Policy                                                 Chase Correspondent Division

Fannie Mae Type I Co-operative Share Program, Continued


Eligibility     · The projects operating budget must be consistent with the nature of
Requirements      the project, provide for adequate cash flow to service the current
(continued)       debt and operating expenses, and provide for adequate replacement
                  reserves.
                · No more than 10% of the owners of Co-op units may be over one
                  month delinquent in the payment of their financial obligations to the
                  Co-op Corporation.
                · The underlying mortgage for the project must not be a balloon
                  mortgage with a remaining term of less than three years or a
                  mortgage that provides for interest rate adjustments.
                · The project may not be the recipient of any subsidies or similar
                  benefits (such as tax or assessment abatements) that will terminate
                  partially or fully within the next three years
                · The project cannot consist of manufactured housing units.
                · Investor concentration
                  · Investors may own a maximum of 20% of the Co-operative units.
                    (Non-occupant owners)
                  · No more than 10% of Co-operative units may be owned by any
                    single entity (including the same individual, investor group,
                    partnership, or corporation, as well as the developer or sponsor).
                  · Project Concentration limits - Chase may only deliver 20% of the
                    units in a project to Fannie Mae when using the Fannie Mae Project
                    Criteria.
                  · There is no minimum square footage, but the unit must be
                    marketable and customary for the area with the value supported by
                    recent comparable sales.
                  · Pro-Rata Share - 35% maximum.



Geographic      Fannie Mae limits Co-operative financing to areas with established
Restrictions    marketability for this type of ownership.

                Chase determines such areas to be the following counties within the
                State of New York: Brooklyn, Bronx, Manhattan, Queens, Staten
                Island, Nassau, Suffolk, and Westchester.

                                                                    Continued on next page




July 2004                                                                   Collateral – 68
Credit Policy                                                     Chase Correspondent Division

Fannie Mae Type I Co-operative Share Program, Continued


Ineligible      Fannie Mae will not purchase mortgages that are secured by units with
Projects        the following characteristics:
                · Co-op Hotel
                · Time-Share
                · Multi Dwelling Co-op that would permit an owner to hold ownership to
                  more than one unit with ownership evidenced by a single deed and
                  share loan.
                · Project represents a non-conforming use of land and zoning prohibits
                  rebuilding in the event of the destruction of the structure.
                · A tax shelter syndicate’s leasing to a Co-op or “leasing” Co-ops -
                  projects that involve the leasing of the land and the improvements to
                  the Co-op Corporation, even if the Co-op Corporation owns part of the
                  building.
                · Limited equity Co-ops - projects in which the Co-op Corporation places
                  a limit on the amount of the return that can be received when stock or
                  shares are sold.
                · Co-op projects in which the developer or sponsor has an ownership
                  interest or other rights in the project real estate or facilities, other that
                  the interest or rights it has in relation to unsold units.
                · Combined Units.
                · Single detached units and manufactured units.

Project       · Project documents must require that all financial statements and
Documentation   project documentation will be available for inspection by tenant
Review          stockholders or by holders, insurers, and guarantors of the share loans
                  for the project.
                · If project contains 50 or more units, documentation must provide for
                  the Co-op Corporation to make an audited statement for the preceding
                  fiscal year available to all parties as listed in section “a” above.
                · The project’s documents must provide for the tenant stockholders to
                  have the right to amend them. Additionally, the Co-op Corporation
                  must be legally bound to notify holder of the co-op share loan about
                  any proposed material changes to co-op project.
                · If the purchaser right to membership or occupancy is subject to
                  approval by the co-op board, evidence of such approval must be
                  supplied.
                · The Co-op documents must not restrict the lender from assuming
                  ownership of the shares in the event of default by the borrower.
                  Additionally, the lender must be allowed to rent the co-op unit for a
                  period up to three years if marketing attempts are unsuccessful within
                  a 60-day period after the unit is actively listed for sale.

                                                                        Continued on next page


July 2004                                                                       Collateral – 69
Credit Policy                                                  Chase Correspondent Division

Fannie Mae Type I Co-operative Share Program, Continued


Project         · The project documents must grant the lender financing a share loan
Documentatio      the right to cure the tenant-stockholder defaults in assessment
n Review          payments and the right to review and approve the following actions
(continued)       before the Co-op Corporation can consent to them:
                  · Surrender, cancellation, modification, or assignment of any
                    documents evidencing ownership, possession, and use of a unit.
                  · Sublease of unit.
                  · Further or additional pledge or mortgage of any documents
                    evidencing ownership, possession, and use of a unit.
                  · The addition of any blanket financing that is superior to the share
                    loan if it would result in an annual increase of more than 10% in
                    units monthly assessment fee.
                  · Any action to change the form of ownership of the project.
                  · Any provisions that expressly benefit the blanket mortgage holder.
                  · The contract, expansion, or termination of the Co-op project.




July 2004                                                                    Collateral – 70
Credit Policy                                                    Chase Correspondent Division

Fannie Mae Pilot Co-operative Share Program


Definition      The program is available only for primary owner occupant loans that
                are scheduled for delivery to Agency I. The program is limited to
                purchase or no cash-out refinance transaction with LTV permitted up
                to 95%. Unless specifically indicated, projects must also meet Chase
                General Project Eligibility Guidelines and documentation requirements


Eligibility     · Borrower must receive “approve eligible” from D/U if the LTV is
Requirements      between 90.01% and 95%
                · Ineligible Projects: The project is not eligible for sale to Fannie Mae
                  if the developer or sponsor has interest or other rights in the project’s
                  real estate or facilities other than unsold shares or units.
                · Presale Requirement: 51% of the residential units must be sold,
                  closed, and conveyed to owner occupants.
                · Number of Units: The coop project must contain a minimum of five
                  residential units.
                · There is no minimum square footage requirement, but the unit must
                  be customary for the area with value supported by recent
                  comparable sales.
                · Other than the Sponsor, no single entity may own more than 10% of
                  the stock or shares in the Co-operative Corporation.
                · There is no investor concentration maximum imposed by Fannie
                  Mae but project must meet pre-sale and single entity requirements
                  as listed above.
                · The maximum collective lending by Chase on units in the same
                  project is 20%.
                · Tax Abatements and Subsidies: If termination of either is scheduled
                  in less than three years, the expected increase in housing expense
                  must be considered in borrower’s qualifying ratios.
                · Pledge of Unsold Shares: The Sponsor cannot have pledged any of
                  the shares of the Co-operative project as security for any loan other
                  than to secure in whole or in part the financing to acquire the Co-op
                  project, except to a Financial Institution.
                · Flip Tax: The Co-op units market value will be reduced by the flip tax
                  except when:
                  · 3% or less of the market value
                  · Based on net profit
                  · A flip tax that does not have a stated value (either percentage or
                     dollar amount) is not acceptable and the unit is ineligible for
                     financing.

                                                                       Continued on next page




July 2004                                                                      Collateral – 71
Credit Policy                                                  Chase Correspondent Division

Fannie Mae Pilot Co-operative Share Program, Continued


Eligibility     · Community Homebuyer Product - Loans may be originated under
Requirements      this program with the following additional restrictions:
(continued)       · 3/2 option is not available
                  · Attorney General Disclosure Statements may not indicate any
                    negative cash flow from unsold units.
                  · Borrowers income may not exceed 100% of the HUD median
                    income.
                · Combined units not acceptable.
                · Projects subject to a ground lease are not permitted under the Pilot
                  Program.


Underlying      Balloon
Mortgage        · Must have remaining term of not less than two years. Calculate
                  anticipated increase in monthly maintenance by using the current
                  interest rate plus 5%. Consider increase when calculating borrower
                  qualifying ratios. The increased monthly maintenance fee cannot
                  exceed 10% of the current fee.

                ARM
                · Analysis will assume an interest rate would increase within three
                  years to the lesser of the ARM lifetime interest rate ceiling, fully
                  indexed rate, plus 5% or in the absence of lifetime ceiling, the fully
                  indexed rate plus 5%. Consider increase when calculating borrower
                  qualifying ratios. The increased monthly maintenance fee cannot
                  exceed 10% of the current fee.
                · If Fannie Mae owns an interest in the underlying mortgage for the co-
                  op project, the new unit loan amount, combined with the unit pro rata
                  share of the mortgage (dollar amount) may not exceed the Fannie
                  Mae maximum loan amount.


Financial       Financial Statements: A review of the financial statement must ensure
Statement       compliance with the following requirements:
Review
                · Negative cash flow must not exceed 5% of the project’s annual
                  operating income.
                · Exclusive of Sponsor, no more than 10% of the unit owners are more
                  than 30 days delinquent in payment of their financial obligations to
                  Co-op Corporation.
                · If the sponsor fails to pay the monthly maintenance, the unit owners’
                  assessments will not increase by more than 10%.




July 2004                                                                    Collateral – 72
Credit Policy                                                  Chase Correspondent Division

Freddie Mac Co-operative Share Program


Requirements    · These criteria are identical to those reflected above for the Fannie
                  Mae Pilot with the exception of items stated below. When these
                  criteria are used, loan must be registered under Agency II
                  products only.
                · Pre-sale: 51% of the units must be sold, closed, and conveyed to
                  owner occupants.
                · Leasehold estate is acceptable provided the terms of the lease meet
                  the requirements as stated in the “Special Property Types” section .
                · The rental income received by sponsor from unsold units must be
                  sufficient to cover maintenance fees. If not, the LTV for transaction
                  may not exceed 80%. If the sponsor fails to pay the maintenance
                  fees, the unit owner’s assessment should not increase by more than
                  10%.
                · No combined units
                · Flip tax is deducted from the lower of purchase price or appraised
                  value unless flip tax is based on profit or lender exemption.
                · Pledged unsold shares is acceptable with minimum negative cash
                  flow and reliable Sponsor track record.




July 2004                                                                    Collateral – 73
Credit Policy                                                   Chase Correspondent Division

Special Property Types


Leasehold        Generally, a leasehold property is a property type where the property
Property-        owner possesses (owns) the improvements and the land is owned by
Definition       another individual who leases the land to the property owner. The
                 appraiser should denote the leasehold nature of the property. This
                 property type normally indicates that the underlying land is leased for a
                 stated period of time and not owned outright.

Lender            Given the dependence on the maintenance of a contractual
Considerations    leasehold agreement with a third party, leaseholds are considered to
                  have more legal implications than properties owned outright,
                  regardless of the stated length of the lease.

Additional       The Correspondent must review the lease and sublease and issue a
Requirements     written statement to Chase warranting that the leasehold meets the
                 following requirements:
                 · lease must provide that the borrower will pay taxes, insurance, and
                   owner’s association dues relative to the land in addition to those
                   being paid on the improvements.
                 · lease is valid, in good standing, and all assessments due are paid
                 · lease is assignable and transferable without restriction, or upon
                   payment of a reasonable fee and delivery of reasonable
                   documentation to the lessor. The lessor may not require a credit
                   review or impose other qualifying criteria on any assignee,
                   transferee, mortgagee, or sublessee. The leasehold estate and the
                   mortgage must not be impaired by any merger of title between the
                   lessor and lessee or by any default of a sublessor.
                 · lease must provide for no default provisions except for non-payment
                   of lease rents, or failure to adhere to typical covenants and
                   restrictions.
                 · lease must provide for notification of default by borrower to the
                   mortgagee (usually within 30 days)
                 · lease must allow the mortgagee to cure the default, at least a 30-day
                   cure period, or take over borrower’s rights under the lease
                 · lease must protect mortgagee’s interest in the event of
                   condemnation.
                 · lease must constitute real property that is subject to a mortgage lien
                   that can be insured by title policy and hazard policy
                 · lease must be recorded in public land records and executed by all
                   parties.
                 · lease must provide borrower will retain voting rights in any owner’s
                   association.

                                                                      Continued on next page


July 2004                                                                     Collateral – 74
Credit Policy                                                    Chase Correspondent Division

Special Property Types, Continued


Additional      · term of the lease must extend five years beyond the date of our
Requirements      mortgage. This requirement does not apply if fee simple title will vest
(continued)       in the borrower, an owner’s association, or a cooperative corporation
                  at an earlier date.
                · mortgage must cover the property improvements as well as the
                  leasehold interest in the land.
                · leasehold must be common for the area and readily marketable. The
                  appraiser should address this and advise if there is any negative
                  impact on value or marketability. Comparables provided should also
                  be leasehold properties.
                · If lease has an option for borrower to purchase the fee interest in the
                  land, the option must be the borrower’s sole option and must not
                  have a time limitation to exercise option. Option must be assignable.
                  If any option to purchase the fee title is exercised, the mortgage must
                  become alien on the title with the same degree of priority it had on
                  the leasehold.
                  · When the property improvements for a leasehold estate are
                     already constructed as the same time the lease is executed, the
                     initial purchase price should be established as the appraised value
                     of the land on the date the lease is executed. (If the lease is tied to
                     an external index, - such as the Consumer Price Index (CPI) - the
                     initial land rent should be established as a percentage of the
                     appraised value of the land that the lease is executed, and the
                     purchase price may be adjusted annually during the term of the
                     lease to reflect the percentage increased or decreased in the index
                     from the preceding year).
                · When the property improvements for a leasehold estate will be
                  constructed after the lease is executed, the purchase price of the
                  land should be the lower of:
                  · the current appraised value of the land or
                  · the amount that results when the percentage of the total original
                     appraised value that represented the land alone is applied to the
                     current appraised value of the land and improvements. (If lease is
                     tied to an external index, the initial land value may not exceed 40%
                     of the combined appraised value of the lands and improvements).
                · The lease may/may not have a limitation on the increases or
                  decreases in rent payments.
                  · If lease has a potential large increase in rent, this needs to be
                     factored into the borrower’s housing payment when calculating
                     debt/income. The appraiser must assess the impact of such
                     increase to the future marketability of project/property.

                                                                       Continued on next page




July 2004                                                                      Collateral – 75
Credit Policy                                                   Chase Correspondent Division

Special Property Types, Continued


Factory Built   Chase finances certain factory-built housing units if they are classified
Housing -       as real estate under specific conditions. All types of Factory built
Including       housing must assume the characteristics of site-built housing,
Manufactured    therefore modular, prefabricated panelized or sectional housing must
                meet local building codes. Manufactured housing is also considered
                factory built housing but is constructed away from the property site,
                may include its own chassis and wheels, and permanently affixed to a
                permanent foundation in accordance with the manufacturer’s
                requirements for anchoring, support, stability and maintenance.

                NOTE: The Chase Correspondent Division only purchases
                Government loans secured by Manufactured Housing.
                Conventional loans secured by Manufactured Housing are
                ineligible for purchase.

                · Must be permanently affixed to a permanent location
                  · Foundation must have been designed by an engineer to meet soil
                     conditions of the area,
                  · Footings for the foundation must be located below the frost line,
                  · Unit must be anchored, if required by state law.
                · Must assume the characteristics of site built housing
                  · If manufactured housing:
                  · Unit must have been built under the Federal Home Construction
                     and Safety Standards, which were established by HUD in June,
                     1976,
                  · The wheels, axles, and hitches must be removed.
                  · If factory/modular built:
                  · Must meet local building codes.
                · Appraiser must comment on the marketability of this type of
                  construction in the area,
                · Appraiser must compare to “like” construction or comment on
                  reasons for comparing to site-built,
                · If the property is a single width manufactured unit, it must be in a
                  subdivision, which must be approved by Fannie Mae. Double width
                  units may be individual lots or in a subdivision.
                · Must meet title insurance requirements of Fannie Mae and Freddie
                  Mac.
                · Chattle cannot be included in the value (other than major
                  appliances).

                                                                      Continued on next page




July 2004                                                                     Collateral – 76
Credit Policy                                                   Chase Correspondent Division

Special Property Types, Continued


Mixed Use       Chase will finance properties, which have been modified to
Properties-     accommodate a small business, such as: day care facility, hair care
Agency          salon, professional service office (medical, accounting, etc.), small
Products Only   grocery, and “Bed and Breakfast.” These types of properties must
                meet specific eligibility criteria, but are eligible for single family
                residential financing:

                · Property must be a one unit dwelling, which is occupied by the
                  borrower as a primary residence. Multiple unit occupancy is not
                  eligible for mixed use (such as a two family with a third unit used for
                  business).
                · The occupant borrower must be the owner and operator of the small
                  business.
                · Property zoning must represent a legal permissible use of the
                  property under the local zoning requirements.
                · Property must be residential in nature and not modified to such an
                  extent that the elimination of the business would render the property
                  no longer usable as a residence.
                · Value must be based on the residential characteristics of the
                  property, not the business, and supported by comparable residential
                  properties
                · The appraiser must address the business use and compatibility to
                  the neighborhood
                · The appraiser’s opinion of the property’s highest and best use must
                  be residential, not commercial
                · For “Bed and Breakfast” properties:
                  · No long term boarders other than family members
                  · Comparables must be residential properties, not other Beds and
                    Breakfast
                  · Income from guests cannot be used to qualify
                  · There can be no characteristics, which indicate hotel use (i.e., no
                    registration desk, no commercial lounge or restaurant, etc.)

                                                                      Continued on next page




July 2004                                                                     Collateral – 77
Credit Policy                                                    Chase Correspondent Division

Special Property Types, Continued


Outbuildings    Generally, outbuildings are common to rural properties; however, they
                may also be present on urban or suburban properties. The appraisal
                report must comment on any consideration the appraiser gives for
                value or value adjustment.

                Minimal outbuildings (such as storage shed, small barn, or stable) are,
                typically, acceptable provided their contribution to the value conclusion
                is relatively insignificant in relation to the total value of the property,
                and, provided they are commonly and customarily accepted by the
                market. On rural properties, when the building is significant, whether
                or not the appraiser assigns a value, the existence of the building may
                indicate that the property is agricultural in nature, and, as such, is
                ineligible. The appraisal must be reviewed carefully to ensure that the
                property is primarily residential.


Rural           Chase finances properties, which are residential in nature, whether the
Properties      property is urban, suburban, or rural. Even though a property is rural
                and may contain considerable land, it may, actually be residential and
                used only for residential purposes.

                · Properties, which are secured by agriculture type land (such as
                  farms, orchards, ranches), undeveloped land, or land development
                  purposes are not eligible.

                Chase does not impose a limit on the acreage nor a percentage of the
                value to which the excess land is attributed. However, the property
                and excess land must be:

                · Residential in nature, and
                · Not for income producing purposes. The appraiser must comment
                  fully on the excess land and must compare it to properties with like
                  characteristics. For example, a comparison with a similar amount of
                  land and dwelling, but land, which is used for farming, is not a similar
                  comparison.
                · Must have adequate utilities and roads which meet local standards
                  and the property must be accessible for year round use.




July 2004                                                                      Collateral – 78
Credit Policy                                                  Chase Correspondent Division

Ineligible Residential Categories


Prohibited      The following categories of properties are prohibited:
Categories
                · Builder model homes (on owner occupied purchases) that will not be
                  occupied within 60 days of closing
                · Condominium hotels (not eligible on agency products - refer to
                  product guides for eligibility on non-agency products)
                · Structures containing more than four units
                · Time sharing units
                · Units managed in rental pools




July 2004                                                                    Collateral – 79
Credit Policy                                                  Chase Correspondent Division

Reviewing the Appraisal


Background      Collateral is the safety net that can minimize loan losses when the
                assumptions made in the analysis of the other Cs of credit fail.
                Additionally, certain products and programs (e.g., the Liquid Express
                Program) minimize the analysis of particular credit parameters and
                place additional reliance upon Collateral by lowering the loan-to-value
                standard, the market value represented in the appraisal must be
                validated through a thorough review by the underwriter.




July 2004                                                                    Collateral – 80
Credit Policy                                                  Chase Correspondent Division

The “Six Steps” to Real Estate Appraisal Review


Step 1 -        Review the “Subject” section (Page 1) of the Appraisal for the
“Subject”       following:
section
                · The property address must be the subject property,
                · For a purchase, ensure that the sales price is correct.
                · The appraiser must be state-certified (found on the bottom lines of
                  the back page of the appraisal form).
                  · For any loan over $ $750M, the appraiser must have the Certified
                    Residential or Certified General Classification.


Step 2 -        Review Photographs of Subject Property and the Comparable-Sale
Photographs     Properties
                Photographs of the property help provide support for the appraiser’s
                adjustments because they provide a “visual” to assist in the analysis of
                the property and its surroundings. The points below will help in your
                review of the photographs:

                · The comparable properties should be similar to the subject property
                  in their internal/external and positive/negative influences.
                  · The elevations (style, exterior) of the comparable sales may be
                    different in appearance; however, that will not, necessarily, exclude
                    them from the selection of comparable sales. It is important to
                    carefully analyze the appraiser’s data and review his/her comments
                    regarding the comparable selections.
                · The photos should not have been altered in any way. Photos where
                  sections have been cut or alterations have been made should be
                  questioned and replaced.

                                                                     Continued on next page




July 2004                                                                    Collateral – 81
Credit Policy                                                  Chase Correspondent Division

The “Six Steps” to Real Estate Appraisal Review, Continued


Step 3 -        Review the Subject Property’s Neighborhood to ensure that the
Neighborhood    subject property and the comparables are from the same
                neighborhood:

                · Read the map attachment to the appraisal.
                · Define the neighborhood on the map.
                  · Look for boundaries, man-made (major roads, highways, and
                     railroads) and natural (streams, lakes, parks, and hills).
                  · Street patterns also define neighborhoods.
                     · Straight streets usually indicate flat level terrain.
                     · Winding streets usually denote hilly terrain.
                · If there are comparables used from outside the neighborhood, they
                  may not be true comparables.
                · The appraisal should define the method used for neighborhood
                  adjustment if a comparable property is used outside of the subject’s
                  neighborhood.
                · Review flood zone information.


Step 4 - Plat   Review Plat Map attachment to the Appraisal
Map
                · Review the plat map and review for lot conformity.
                  · The subject property should have a similar size and shape lot as
                    compared to the neighborhood and the comparables,
                  · Generally, the land value for the lot should not exceed 30% of the
                    total value.
                · Marketplace variances dictate Regional differences in this guideline.
                · Also, review the plat map to discern items not noted on the appraisal.
                  · Freeways, large roads, drainage ditches, access paths, roads,
                    large utility poles/devices, and other non-residential uses may be
                    uncovered by reviewing the plat map.

                                                                     Continued on next page




July 2004                                                                    Collateral – 82
Credit Policy                                                    Chase Correspondent Division

The “Six Steps” to Real Estate Appraisal Review, Continued


Step 5 -        Review the Market Approach (Sales Comparison Analysis) of the
Market          Appraisal
Approach        The appraiser will adjust the comparable to the subject property by
                making adjustments to the comparable to make the comparable “like”
                the subject property. If a comparable has a feature that is better than
                the subject property a dollar amount is subtracted from the comparable
                to make it similar to the subject property. Conversely, if the
                comparable has a feature worse than the subject property, an amount
                is added to the comparable. The following guidelines provide a
                framework for review in the sales comparison section of the appraisal.
                If the appraisal does not meet these general guideline standards, the
                appraiser must provide an explanation acceptable to the underwriter.

                · General Comments - Sales Comparison Analysis The appraiser
                  should reflect bracketing (by using a comparable property that is
                  slightly superior, a comparable property that is slightly inferior, and a
                  comparable property that is very similar) in determining adjustments
                  made to the comparable.
                  · The adjustments should never all go in the same direction (e.g., all
                    positive adjustments or all negative adjustments for a particular
                    feature),
                  · Adjustments should not be made by a blanket or formula approach
                    and should be supported by the appraiser’s comments,
                  · Generally, a comparable property’s lot size should be less than
                    20% greater or smaller than the subject property.
                · Specific Guidelines - Sales Comparison Analysis
                  · A minimum of three closed-sale comparable must be used,
                  · Net adjustments (total) made by the appraiser to a comparable
                    property should not exceed 15% of the indicated sales price of that
                    comparable property,
                  · The dollar amount for gross adjustments for each comparable sale
                    property should not exceed 25% of the indicated sales price of the
                    comparable property,
                    · Calculate the total-gross-adjustment percentage by totaling all the
                      dollar adjustments, regardless of direction (consider negative
                      adjustments as positive and sum all the adjustments), and divide
                      by the sales price of the comparable,
                  · The comparable properties should be within reasonable proximity
                    and location of the subject property,
                    · The comparable should not be located all in the same direction
                      from the subject property.

                                                                       Continued on next page




July 2004                                                                      Collateral – 83
Credit Policy                                                   Chase Correspondent Division

The “Six Steps” to Real Estate Appraisal Review, Continued


Step 5 -         · The sale dates of comparable should be no more than six months
Market             of the date of the appraisal,
Approach           · If need be, the appraiser may use comparable with sales dates
(continued)          no more than 12 months of the date of the appraisal.
                   · The appraiser must comment on the reasons for using any
                     comparable more than six months old,
                   · Preferably, the sales dates of the comparable should be as recent
                     as possible.
                 · The sales price of each comparable sale property should be within
                   the general range of the estimate of market value for the subject
                   property,
                 · The effect of “financing concessions” (a/k/a contributions) must be
                   reflected as negative adjustments to comparable sale properties.
                   · The financing concession adjustment is never a positive
                     adjustment.
                   · The financing concession adjustment must be based upon the
                     actual influence that the concession had on the sale of the
                     property as determined by the appraiser.
                     NOTE: This adjustment should not be a mechanical dollar-
                     for-dollar adjustment.
                 · Only finished above-grade areas will be included in the gross living
                   area (GLA) calculation.
                   NOTE: Basements and partially below-grade areas should be
                   excluded from the GLA calculation.


Step 6 -        Review the “adjusted sales prices” of the comparable:
Adjusted
Sales Prices    · If there is more than a 15% difference from the lowest adjusted sales
                  price to the highest adjusted sales price, the appraisal may not be a
                  good representation of market value,
                · In such cases, the original appraiser must be contacted to justify this
                  variance
                · At underwriter’s discretion, another appraisal from another appraiser
                  may be obtained.

                                                                      Continued on next page




July 2004                                                                     Collateral – 84
Credit Policy                                                     Chase Correspondent Division

The “Six Steps” to Real Estate Appraisal Review, Continued


Additional        Additionally, the underwriter must obtain a satisfactory written
Considerations    explanation from the appraiser and identify the condition on the
                  approval document when:

                  · Any unusual negative or cautionary comment appears on the
                    appraisal,
                  · Any departure from cost or market valuation (e.g., raw land valued
                    separately) exists,
                  · Any indication that the property is on or near a designated
                    environmentally hazardous or “clean-up” site, including Super-fund
                    or EPA Hazard sites is indicated
                    · Requires a final inspection with photos (usually completed on
                      FHLMC form 442),
                    · Any appraisal “subject to completion per plans and
                      specifications,”


Summary          One of the basic reflections of the quality of an appraisal is the quality
                 of the appearance of the appraisal. After a thorough review of an
                 appraisal, the underwriter can feel comfortable with the market value
                 estimate of the subject property

                 · The estimate of market value from an appraisal rife with
                   typographical errors and math errors should be questioned by the
                   underwriter.
                 · Conversely, an appraisal that is orderly, without obvious
                   typographical or math errors, is much more reassuring.




July 2004                                                                       Collateral – 85
Credit Policy                                                     Chase Correspondent Division

Special Appraisal Situations


Purchase        In a purchase situation, where the purchase price is below the
Price vs.       appraised value (or lowest appraised value when two appraisals are
Appraised       obtained), the purchase price (as adjusted for contributions and sales
Value           allowances as described below) will always be utilized to determine
                loan-to-value ratios.


Contributions   Contributions, or financing concessions, are defined as the cost of
                items normally paid by the borrower but picked up by the seller or
                another interested third party to the transaction (i.e., a builder or a real
                estate agent). Such items include but are not limited to interest rate
                buy-downs, financing fees, etc.

                Lender Consideration
                · Contributions, above the allowable percentages reflected in the
                  Product Guides, should be subtracted from the sales price and the
                  loan-to-value should be calculated using the lower of the:
                  · Reduced sales price, or
                  · The appraised value (or lowest appraised value when two
                    appraisals are obtained).
                · The amount of the reduction in sales price shall be for the amount
                  that exceeds the percentages in the product charts.

                Funds not Considered Contributions
                The following situations are not considered contributions and are not
                limited by the percentages listed in the above Lender Considerations:
                · Funds from non-participant to the sale transaction (i.e., the property
                  purchaser’s employer, or relative),
                · Any unplanned permanent buy-down points that result from a shift in
                  market interest rates during the period between the date of the sales
                  contract and the date of loan closing (when the sales contract “locks-
                  in” specific financing terms that relate to the points that will be paid),
                · Funds the lender provides for a temporary interest rate buy-down (or
                  for some of the closing costs) as long as the lender is not affiliated
                  with an interested party to the transaction.

                                                                        Continued on next page




July 2004                                                                       Collateral – 86
Credit Policy                                                  Chase Correspondent Division

Special Appraisal Situations, Continued


Sales           Sales allowances, or sales concessions, include “give-aways” such as
Allowances      personal property, trips, or moving expenses not paid for by the
                borrower. Additionally, sales allowances can include decorator
                allowances or upgrades.

                Lender Consideration
                · Allowances are give-away items such as personal property (i.e.,
                  furniture, cars, etc.) or moving expenses that do not become a
                  permanent part of the real property. We determine the impact on the
                  sales price as follows:
                  · The appraiser must determine and report the fair-market value of
                    the non-real property allowance (separately from any financing
                    concessions),
                  · The value for the non-real property allowances must be deducted
                    from the sales price,
                  · The loan-to-value will be calculated using the lower of the reduced
                    sales price or the appraised value (or lowest appraised value when
                    two appraisals are obtained).
                · Any allowance (i.e., decorator, landscape, etc.) must be deducted
                  from the sales price and the LTV calculated accordingly. All credits
                  or rebates on agency loans must be deducted.


Lack of         When all comparables are older than six months, “under contract” and
Comparable      current listings should be requested as supplemental comparables. A
Inventory       current listing is defined as “within 1 year of the effective date of the
                appraiser’s estimate of market value.” In extreme cases, there may be
                no active listings. In this event, expired, cancelled, or withdrawn
                listings may be the only other properties available for comparison.

                Loans > $750M
                · The comparable sales used by the appraiser must be < 6 months
                  from the appraisal date.
                  · If the comparable sales exceed 6 months, you may either:
                  · obtain a review appraisal to support value and comparables or
                  · submit the loan for review and approval by Chase Underwriting .

                “No Income Verification” (NIV) loan transactions
                · Regardless of loan amount, the comparable sales used by the
                  appraiser must be < six months from the appraisal date.
                  · If the comparable sales exceed six months, the loan must be
                    reviewed and approved by Chase Underwriting.

                                                                     Continued on next page



July 2004                                                                    Collateral – 87
Credit Policy                                                 Chase Correspondent Division

Special Appraisal Situations, Continued


Time            The appraiser is required to provide supporting documentation such as
Adjustments     paired sales analysis or under contract comparables. In a narrative
                commentary, the appraiser must reconcile the adjustments made (to
                the market trend indicated by the appraiser) by citing the annualized
                rate of change in housing prices and the source of the information.


Value           Changes in the market valuation of a property must be accompanied
Revisions       by a narrative addendum detailing the circumstances/request that
                prompted the reconsideration, and the basis for the change.
                Reference to the original value must be included in the narrative for
                any change in comparables and any change in adjustments to the
                original comparables.




July 2004                                                                   Collateral – 88
Credit Policy                                                           Chase Correspondent Division



                                        Conditions
Overview


Introduction      Conditions are factors that can impair or enhance the borrower’s ability to
                  meet his/her commitments. Conditions can be classified into macro-
                  conditions or micro-conditions.


In this Chapter   This Chapter contains information on “Addressing Conditions.”




July 2004                                                                             Conditions – 1
Credit Policy                                                          Chase Correspondent Division



Addressing Conditions


Macro-          Macro-conditions are factors “outside” the control of the borrower. These
Conditions      factors include international, national, regional, or local trends and
                developments that may impact the borrower’s profession or the collateral
                value. Some macro-conditions are:

                    Macro-Condition                                 Definition
                Economic Cycles              The booms and busts of economic cycles help some
                                             borrowers and harm others.
                Interest Rate Cycles         Rising interest rates harm some industries and
                                             generally depress real estate value.
                Governmental Regulations     New environmental laws or labor laws can impact
                                             neighborhoods and industries.


Micro-          A part of every credit extension involves conditions specific to the request,
Conditions      the borrower, or the collateral.

                These micro-conditions include:

                Chase Refinances: If the information is readily available, the following items
                should be addressed:

                · Application (Balance Sheet) Comparison. Does a comparison with the
                  prior application (balance sheet) reveal significant shifts in cash reserves,
                  assets, or debt?
                · Collateral Concerns. The underwriter should review the collateral to ensure
                  that:
                  · Any change in vesting from the original loan is accounted for in the
                    execution of the security instrument,
                  · There are no junior liens that may need to be subordinated to the new
                    Chase loan.

                                                                             Continued on next page




July 2004                                                                            Conditions – 2
Credit Policy                                                         Chase Correspondent Division



Addressing Conditions, Continued


Micro-          · Previous Refinances. Do previous refinances reflect that the borrower is
Conditions        “pyramiding” debt?
(continued)
                Current Debt Structure: A mortgage should not simply “rearrange” the
                borrower’s balance sheet without providing some tangible benefit to the
                borrower, such as lower payments.

                Unique Properties: The proposed collateral may have unique characteristics
                that overlay additional risk considerations, and severely reduce the salability
                of the property.

                Use of Proceeds: The borrowers proposed use of the proceeds from the
                mortgage should make sense given the background and profile of the
                customer.

                · Some cash-out transactions may be:
                  · Disguised working investment (working capital) infusions to self-
                    employed borrowers, or
                  · Down payment funds for significant asset purchases such as other real
                    estate.


Importance of   An assessment of the borrower’s capacity, based upon a projection of past
Conditions      performance, assumes that conditions affecting the borrower will be as
                favorable in the future, as they were in the past. Whenever there is reason to
                challenge this assumption, conditions become an important credit factor. The
                underwriter should keep abreast of the economic, social, and legal changes
                within his/her area of responsibility and assess risks appropriately. In short,
                attention to conditions is not simply identification of external risks, but the
                assessment of the likelihood of occurrence.




July 2004                                                                           Conditions – 3
Credit Policy                                                           Chase Correspondent Division



                           Final Review of Credit Files
Overview


Introduction      To make a lending decision, the underwriter uses documentation and
                  information of the present, and from the past, to predict the future. At best,
                  the decision is based upon a sum of probabilities; it is not an exact science.
                  Chase uses policy guidelines and procedures to standardize underwriting and
                  credit analysis. However, there will always be situations that will fall into
                  “gray” areas. With a consistent approach to reviewing the credit file, we can,
                  to the best of our ability, clarify most situations. Finally, the underwriter
                  must recognize that it is his/her responsibility to use sound judgment and to
                  seek advice/expertise, when necessary, in making lending decisions.


In this Chapter   Included in this chapter are the following topics:

                                            Topic                                       See Page
                  Approach to Reviewing the Credit File                                     2
                  Compensating Factors                                                      6
                  The Final Decision                                                        9




July 2004                                                              Final Review of Credit Files – 1
Credit Policy                                                              Chase Correspondent Division



Approach to Reviewing the Credit File


Phase One -      Use the following steps to review the borrower’s application
1003

                   Step                                      Action
                    1      Ensure the request is feasible. (Does it meet the minimum standards for
                           the product, program, or processing method?)
                    2      Review the employment history.
                    3      Consider the stated income and income sources.
                    4      Review the listed debts.
                    5      Evaluate the cash reserve sources.
                    6      Survey the miscellaneous section for additional information regarding:

                           · Additional Debts
                           · Resident/Citizenship Status
                           · Credit History


Phase Two -      Use the following steps to review the borrower’s credit history.
Credit History

                   Step                                     Action
                    1      Review the contents of the credit report to:

                           · ensure the credit report is for the borrower,
                           · compare the credit report summary items and individual trade lines to
                             the application,
                           · assess the borrower’s payment history, and
                           · note all delinquent and derogatory items.
                             · Derogatory items should be detailed on the approval document.
                    2      Scan the miscellaneous information section of the application for any
                           derogatory credit items.
                    3      Review any direct verifications from other creditors such as a VOM or
                           VOR.
                    4      Assess any credit-related information reported in the title search, if
                           available.

                                                                                  Continued on next page




July 2004                                                                 Final Review of Credit Files – 2
Credit Policy                                                              Chase Correspondent Division



Approach to Reviewing the Credit File, Continued


Phase Three -   Use the following steps to review the borrower’s income sources.
Capacity

                  Step                                     Action
                   1      Assess the income qualifying documentation.
                   2      Calculate the qualifying income level:

                          · Compare the calculated qualifying income to stated amounts on the
                            application and Verification of Employment, Tax Returns, or W-2s.


Phase Four -    Use the following steps to review the borrower’s debts.
Capacity

                  Step                                       Action
                   1      Consider the debts listed on the application or financial statements.
                   2      Compare these debts to the debts listed on the credit report.
                   3      Incorporate the total PITI for the requested mortgage.


Phase Five -    Use the following steps to calculate the debt-to-income ratios.
Capacity

                  Step                                     Action
                   1      Divide the PITI (as determined in Phase 4) by the qualifying income (as
                          calculated in Phase 3) to determine the housing debt-to-income ratio.
                   2      Divide the total monthly debt (as determined in Phase 4) by the
                          qualifying income (as calculated in Phase 3) to determine the total debt-
                          to-income ratio.

                                                                                 Continued on next page




July 2004                                                                Final Review of Credit Files – 3
Credit Policy                                                              Chase Correspondent Division



Approach to Reviewing the Credit File, Continued


Phase Six -     Use the following steps to assess and calculate the cash reserve ratios.
Capital

                  Step                                      Action
                   1      Review the asset verification information.

                          · Incorporate any additional debt into the Phase 4 review.
                    2     Separate the assets into Chase’s classifications (refer to the chapter
                          entitled “Capital”).
                    3     Compare the verifications to the application.
                    4     Determine the required funds to close (down payment, closing costs,
                          prepaids, and other payoff expenses) and the total of these funds from
                          available sources.
                    5     Calculate the cash reserve ratios.

                                      Ratio                              Formula
                            Cash Reserves              Divide the calculated cash reserves by the
                                                       total PITI.
                            Post-Closing Reserves      Divide the calculated cash reserves by the
                                                       qualifying income.




Phase Seven -   Use the following steps to review the appraisal.
Collateral

                  Step                                      Action
                   1      Ensure the appraisal has been performed by the appraiser meeting
                          Chase’s guidelines.
                    2     Assess the appraisal through the previously discussed, “Six Steps of
                          Appraisal Review.”
                    3     Add any homeowner’s association fees or assessments revealed in the
                          appraisal review into the PITI figure calculated in Phase 4.

                                                                                 Continued on next page




July 2004                                                                Final Review of Credit Files – 4
Credit Policy                                                          Chase Correspondent Division



Approach to Reviewing the Credit File, Continued


Phase Eight     · The Underwriter should review any additional file documentation that may
                  provide support for income sources, cash sources, or may provide
                  explanations of weakness in the credit file.
                · Examples of additional documentation include:
                  · divorce decrees or property settlements
                  · trust documents, and
                  · rental leases
                · Borrowers may also provide explanation letters to clarify situations such as:
                  · employment gaps,
                  · frequent employment changes, and
                  · buying a house of lesser value.


Phase Nine      The Underwriter should evaluate credit parameters noted in the prior phases
                to the underwriting guidelines for the particular product, program, or
                processing method.

                · Requests not conforming to guidelines should be accompanied by
                  additional documentation, explanations, or addenda.
                · The Underwriter should realize that a loan not meeting the guidelines
                  should be balanced by compensating factors. (For additional information
                  on compensating factors, refer to the topic “Compensating Factors” in this
                  chapter.)


Phase Ten       The Underwriter summarizes the assessment of the loan request on the
                approval document and, if necessary, composes a credit memo supporting the
                Underwriter’s assessment of the file. The credit memo should include:

                · approaches used to derive qualifying income,
                · background experience of self-employed borrowers,
                · closing funds sources,
                · appraisal comments,
                · derogatory credit history explanations,
                · unusual situations or circumstances in the file, or about the request that may
                  be unclear or hard to identify, and
                · compensating factors or mitigants to underwriting guideline exceptions.




July 2004                                                            Final Review of Credit Files – 5
Credit Policy                                                         Chase Correspondent Division



Compensating Factors


Introduction    In the development of products and policies, minimum standards are applied
                as the basis for originating and underwriting that product. Many times the
                profile of the borrower or property exceed those minimums in all areas. In
                some cases, however a borrower may have a weakness in one parameter of
                the product or in one “C” of Credit. When a weakness is apparent, it is
                important to look for strengths in the other “Cs” of Credit in the borrower’s
                profile. These strengths are called “compensating factors.” Compensating
                factors are positive aspects of a borrower’s or property’s profile and exceed
                the parameters of a policy or product. These Compensating Factors (or
                borrower financial-profile strengths), not only balance credit strengths with
                weaknesses and may compensate for a borrower weakness that fails a
                minimum underwriting guideline or standard. It is not possible, in most cases
                to balance a specific compensating factor against a particular borrower
                financial-profile weakness; instead, all the positive factors should be
                considered against all the negative factors.


Using           Most often, compensating factors are used to offset the use of high debt-to-
Compensating    income ratios or insufficient cash reserves however, compensating factors
Factors         may also be used to offset other borrower financial profile weaknesses. Each
                borrower’s financial profile must be viewed independently and the positive
                factors applied appropriately to the credit issues involved in the request.


Examples of     The following lists some commonly used compensating factors.
Compensating
Factors         Capacity - Income Considerations
                Borrowers who have strong historical earnings or the potential for increased
                earnings can evidence compensating factors. Some examples are:

                · Strong potential for increased earnings, particularly when new to the job
                  market,
                · A borrower’s readily transferable skills and abilities,
                · Corporate relocation of the primary earner with strong potential of earnings
                  by the co-borrower (frequently called “trailing co-borrower”),
                · Additional income sources that are not included in the qualifying income
                  due to the recency of the income.

                                                                            Continued on next page




July 2004                                                           Final Review of Credit Files – 6
Credit Policy                                                          Chase Correspondent Division



Compensating Factors, Continued


Examples of     Capacity - Debt Usage
Compensating    Borrowers who show judicious use of credit and do not have a “propensity to
Factors         consume” can reflect qualities that can serve as compensating factors. Some
(continued)     examples are:

                · A history of dedicating, and managing, a larger portion of income to
                  housing,
                · A history of little, or no, revolving or installment debt use,
                · A history of minimal total credit use,
                · Disciplined management of credit use coupled with savings patterns.

                Capital
                Borrowers who have a savings pattern build a solid asset foundation that can
                be used as a compensating factor. Some examples include:

                · A large down payment that produces a strong equity position,
                · A history of savings with significant post-closing assets,
                · A large tangible net worth (although, by itself, net worth is not a strong
                  compensating factor).

                Credit History
                “Good credit” is not included as a compensating factor. It is a requisite to
                obtaining financing. However, since credit risk scores are used as a tool to
                help determine the level of review needed on a credit report, credit risk scores
                that exceed 720 may provide sufficient merit to be used as compensating
                factors on manually underwritten loans. There may be cases in which, based
                on the reasons, prior derogatory credit may be offset by a credit risk score
                and/or some of the compensating factors listed above.

                                                                              Continued on next page




July 2004                                                             Final Review of Credit Files – 7
Credit Policy                                                           Chase Correspondent Division



Compensating Factors, Continued


Compensating    There are circumstances where a borrower’s financial-profile compensating
Limitations     factors do not offset some risks associated with the specifics of the loan
                request. In these situations it is important to carefully review the loan request
                to ensure these changes will not place an undue hardship on the borrower.
                Some examples to consider are:

                Apartment to Home Move
                · A borrower’s previous housing expense may be equal to or less than the
                  proposed new housing expense, and may have been satisfactorily paid for
                  12 to 24 months. The borrower’s history of responsibly handling this debt
                  load could be considered a compensating factor. However any increased
                  expenses the borrower will incur in the move from the previous to the
                  proposed dwelling must be considered.
                · There may be a dramatic change in utility expense in moving from a small
                  rented apartment unit to a house,
                · Appliances, furnishings, and other equipment may need to be purchased,
                · These additional expenses may increase the borrower’s debt position and
                  “negate” the compensating factor.

                Transportation Costs
                A borrower who relies on public transportation, but will no longer have it
                available at the new home, may be subject to higher transportation costs.

                · The borrower may have to purchase, lease, or rent an auto.


Balancing       Each borrower’s financial profile weakness can be seen as adding a layer of
Compensating    risk to the transaction. To consider a loan for approval, each borrower’s
Factors         financial-profile risk should be countered and balanced by a corresponding
                compensating factor (borrower financial-profile strength).

                · All factors, strengths and weaknesses, need to be assessed by the
                  underwriter on the approval document when the borrower’s request deviates
                  from standard underwriting guidelines, and
                · The borrower’s credit file should exhibit sufficient evidence that justifies
                  the departure.




July 2004                                                             Final Review of Credit Files – 8
Credit Policy                                                        Chase Correspondent Division



The Final Decision


Overview        Chase is committed to providing mortgage loans to all qualified borrowers
                and is constantly looking for opportunities to meet a borrower’s needs
                through our flexible underwriting guidelines and our innovative product
                array.

                The underwriter should make the final decision to approve the loan only after:

                ·   Evaluating all components of the credit file,
                ·   A thorough assessment of the five Cs of Credit,
                ·   Contrasting the request with the product parameters, and
                ·   Uncovering and evaluating borrower compensating factors.




July 2004                                                           Final Review of Credit Files – 9
Credit Policy                                                              Chase Correspondent Division



                  Low to Moderate Income (LMI) Borrowers
Overview


Introduction       · Chase developed the DreaMaker loan products and programs to meet the
                     unique financing needs of borrowers in low to moderate (LMI) ranges.
                   · These programs also provide financing on properties located in cities
                     federally designated as “central cities,” and on properties that are located in
                     specific census tracts whose residents include borrowers who meet certain
                     income limits, or minority population limits.
                   · The underwriting guidelines for these programs are designed to
                     accommodate the down payment, qualifying and closing-cost assistance
                     needs of these borrowers.
                   · Those borrowers who meet the eligibility guidelines are afforded the
                     opportunity to become successful homeowners.


Underwriting       The basic objective in underwriting LMI income loans remains the same as it
Philosophy         is in underwriting any mortgage - to determine the borrower’s ability and
                   willingness to repay the loan, and to assess the property’s (collateral’s) ability
                   to secure the loan. However, the LMI underwriting guidelines were
                   developed to make qualifying for a mortgage loan more achievable for these
                   borrowers. The “spirit” of the LMI loan programs is to assist a borrower with
                   limited income and resources purchase his/her first home. It should be
                   emphasized that loans that do not meet the “spirit” of these programs should
                   not be forced to “fit” into the programs for the sake of qualifying. Such an
                   action can do a disservice to the borrower as well as to the Firm.

                   NOTE: Specific LMI product or program verification requirements may
                   differ. Please refer to the LMI product and program guidelines for
                   specific products.


In this Chapter    Included in this chapter are the following topics:

                                               Topic                                     See Page
                   Key Concepts - Low to Moderate Income (LMI)                               2
                   Capacity - Low to Moderate Income (LMI)                                   5
                   Capital - Low to Moderate Income (LMI)                                    7
                   Character/Credit History - Low to Moderate Income (LMI)                  13
                   Underwriting and Qualifying the Borrower - Low to Moderate               16
                   Income (LMI)




July 2004                                                    Low to Moderate Income (LMI) Borrowers– 1
Credit Policy                                                             Chase Correspondent Division



Key Concepts - Low to Moderate Income (LMI)


Introduction    The following concepts are instrumental in LMI lending.


Central City    A “Central City” is a city that has been designated by the U.S. Office of
                Management and Budget (OMB) as one that has:

                · Required median family income limits, and
                · Required minority population percentages.


Designated      A “designated census tract” is a census tract that has:
Census Tract
                · A minority (Non-white and Hispanic) population of at least 50%, or
                · A median family income at or below 80% of the median family income for
                  the MSA (Metropolitan Statistical Area), or
                  · If the property is not in an MSA, a median family income at or below 80%
                    of the median family income for the non-metropolitan county.
                  · Chase Underwriting can help you identify these targeted census tracts
                    with special census tract maps and zip code maps.


Home Buyer      The goal in LMI lending is to make successful homeowners of those
Education       borrowers desiring and deserving home ownership. The following are some
                facts and/or requirements for homeowner counseling. In addition refer to the
                applicable Product Guide to determine the specific homebuyer counseling
                requirements:

                · The borrower should be encouraged to participate in the home buying
                  course early in the home buying process, ideally, before the borrower has
                  found a property.
                · Home buying education after loan application has little value, because, by
                  then, the borrower has already made the emotional commitment to buy.
                · After the loan application, the borrower often perceives home-buying
                  education as more of a hurdle rather than a help.
                · The Homebuyer education courses are offered and monitored by non-profit
                  agencies, public agencies, or mortgage insurers.

                                                                                Continued on next page




July 2004                                                Low to Moderate Income (LMI) Borrowers– 2
Credit Policy                                                        Chase Correspondent Division



Key Concepts - Low to Moderate Income (LMI), Continued


Home Buyer      · In the home buying course, the borrower can learn:
Education         · What to look for in his/her “dream home” search,
(continued)
                  · Mortgage terminology,
                  · How to complete a budget,
                  · How to qualify for the mortgage,
                  · About the mortgage process,
                  · How to manage the debt after the loan closes, and
                  · Some very key home maintenance hints.
                · The counseling is required on all LMI products. However some products
                  allow the counseling to be waived. Refer to the Product Guide to determine
                  if the counseling can be waived. Where waiver is eligible the borrower
                  must:
                  · Have previously owned a home, and
                  · Have two months’ mortgage payments in cash reserves, and
                  · Make the full 5% down payment from his/her own funds, (no gifts, grants,
                    or loans).
                · It is recommended that all LMI borrowers participate in homebuyer
                  education.

                NOTE: The Correspondent is responsible for providing the "Guide to
                Home Ownership" or "Becoming a Landlord" to the borrower. The
                Correspondent may obtain these guides directly from Chase, or the
                Mortgage Insurer. Do not request direct delivery of a Guide to the
                borrower.


Median Family   The Department of Housing and Urban Development (HUD) has established
Income Limit    median family income limits for LMI loan programs and products based upon
                HUD definitions and statistical analysis. The median family income level is,
                basically, the family income level exactly in the middle of a range of family
                income levels.

                Product Variation
                The median family income limits also vary by product. Use caution in your
                review of the product description for each product to ensure that you are
                following the income limitations applicable to the product.

                                                                           Continued on next page




July 2004                                              Low to Moderate Income (LMI) Borrowers– 3
Credit Policy                                                          Chase Correspondent Division



Key Concepts - Low to Moderate Income (LMI), Continued


Median Family   Median Family Income Limit Standards
Income Limit    In most cases, the median income limits range from 100-to-115% of the
(continued)     median family income limit for the area established by HUD.

                NOTE: Some areas are designated as “high-cost” areas and have higher
                median family income limits. Refer to the Product Guide for a
                description of the specific details on those high- cost limits and areas.

                Non-Applicable Median Family Income Limits
                The median family income limits do not apply (for some LMI products)
                when:

                · The LMI borrower makes the full 5% or 3% (as applicable) down payment
                  from his/her own sources, and
                · The LMI borrower does not opt for the “2/3” or “3/2” down payment
                  options (these options are also called “split” down payment options, and
                · If the prior conditions are met, the following additional conditions must be
                  met to be exempt from the median family income limits: The borrower must
                  be buying:
                  · In a Central City,
                  · In a designated census tract, or
                  · In an area targeted for revitalization by a HFS (Housing Finance Agency)


Ownership of    Most LMI products do not allow the borrower to have owned real estate
Other Real      within the last one-to-two years. The product description will advise if
Estate          ownership of other real estate makes the request ineligible for a particular
                LMI product.




July 2004                                                Low to Moderate Income (LMI) Borrowers– 4
Credit Policy                                                        Chase Correspondent Division



Capacity - Low to Moderate Income (LMI)


Income          The key element in verifying “stable” employment in LMI lending is the
Stability       continuity of the income stream. Continuity of the income stream generally
Standards       signifies stability of employment in LMI lending.

                · All borrowers need to evidence at least a two-year history of a continuous
                  income stream.
                · In some cases, borrowers may exhibit frequent changes in employers and
                  jobs; however, it is critical in the review of the file to consider if the
                  borrower managed those changes:
                  · Without interruption to his/her income stream,
                  · With little impact on their lifestyle, and
                  · While maintaining his/her credit record under the agreed upon terms.
                · The underwriter should consider the following factors in analyzing the LMI
                  borrower’s employment stability:
                  · The length of unemployment between jobs (borrowers with short gaps are
                    more likely to have a continuous income stream and not face difficulty
                    making loan payments),
                  · The reasons for the job changes (were they voluntary to increase income
                    or opportunity, or involuntary due to plant closing, layoff, or poor
                    performance),
                  · The degree to which a borrower’s job skills are transferable (will the
                    borrower’s skills be in demand and employment easier to find).

                                                                           Continued on next page




July 2004                                              Low to Moderate Income (LMI) Borrowers– 5
Credit Policy                                                           Chase Correspondent Division



Capacity - Low to Moderate Income (LMI), Continued


Additional       The following lists additional income sources that borrowers may have.
Income
Sources/         · Alimony, Child Support and Separate Maintenance Payments.
Verifications
                 · Foster Care Income
                 · Public Assistance (Welfare benefits, including food stamps)
                 · Unemployment Compensation
                 · Special Income Verification Situations that are not listed in this section
                 · Non-taxable income (distinguished from non-reported income).
                   · Non-taxable income sources are exempt from income taxation. Some
                     examples of non-taxable income are child support, municipal bond
                     interest, foster care income and public assistance and some civil service
                     annuities.
                   · As these income sources are not taxed, the “value” to the borrower is
                     greater than taxable income.
                   · Non-taxable income sources can be grossed-up by a factor of 1.25.
                 · On a case-by-case basis, contact Chase Underwriting for approval of
                   additional alternative means of income verification for LMI borrowers.


Additional       There are other sources of income (such as “boarder” income, or stable short
Income           term income from a variety of sources) that cannot be included as a
Considerations   qualifying income source. These additional sources of income can sometimes
                 be used as a compensating factor to a high payment or high debt-to-income
                 ratio.

                 IMPORTANT: Non-reported income (a/k/a, “under-the-table” income)
                 CANNOT be used as a qualifying income source for the following
                 reasons:
                 · Such income stems from activities or employment that the Internal
                   Revenue Service (IRS) requires to be reported.
                 · As the borrower is not reporting the income, nor are deductions being
                   made by the employer on the borrower’s behalf for social security or
                   other taxes, the borrower is not in compliance with IRS regulations
                   regarding federal income taxation and may be subject to fine or
                   imprisonment.




July 2004                                                 Low to Moderate Income (LMI) Borrowers– 6
Credit Policy                                                         Chase Correspondent Division



Capital - Low to Moderate Income (LMI)

Down Payment     Chase offers many products and programs to borrowers in LMI ranges and/or
Considerations   where the property, itself, is in a federally designated census tract. The
                 following are explanations on down payment options.

                 Full Down Payment
                 Depending on the product or program, the borrower’s down payment
                 requirement ranges from 3-5%. This down payment option requires the funds
                 to be verified from the borrowers own assets.

                 Split Down Payment
                 The down payment must generally come from the borrower’s own sources, in
                 most cases, or “2/3” or “3/2,”etc. - “Split” Down Payment Option. If the LMI
                 borrower elects a “split” down payment option available with certain LMI
                 products, the following conditions apply:
                 · The first portion of the down payment must come from the borrower’s own
                   assets, and
                 · The second portion (dictated by the product) may come from the following
                   sources:
                   · Gift from a relative, non-profit, or public agency,
                   · Secured or unsecured grant from a non-profit or public agency (grants
                     must be approved by Chase),
                   · An unsecured loan from a non-profit or public agency or other eligible
                     source where the product allows for unsecured loans (refer to the
                     applicable Product Guide).
                   · A secured grant from a public agency, or
                     Please refer to the “Closing Fund Sources” for additional secured
                     grant information.
                   · From the lender through:
                     · Over-par pricing (on some products), or
                     · An unsecured loan (on some products). The interest rate of which must
                       not exceed the first mortgage interest rate.

                                                                            Continued on next page




July 2004                                               Low to Moderate Income (LMI) Borrowers– 7
Credit Policy                                                             Chase Correspondent Division



Capital - Low to Moderate Income (LMI), Continued


Non-Allowed     The following sources are not allowed for down payment or closing fund
Closing Fund    requirements for LMI programs/products unless the Product or Program
Sources         Guide specifically identify them as being eligible:

                ·   Cash advances against credit cards.
                ·   Cash advances against an overdraft protection on checking accounts.
                ·   Sweat Equity is generally not eligible.
                ·   Cash on hand is generally not an eligible source for the down payment,
                    closing costs, prepaid item, or reserves. However, there are many
                    borrowers who do not use the services of depository or financed institutions
                    and who manage their finances on a cash basis as opposed to incurring
                    credit card or other forms of consumer debt. Instead, they prefer to transact
                    their personal business by managing savings, purchase, and payment
                    obligations in methods that best accommodate their needs, such as
                    accumulating cash at home, pooling accumulated cash in family or ethnic
                    savings plans, and paying obligations with money orders or in cash on a
                    direct basis. Where it can be established that the borrower is the one who
                    manages his/her finances on a cash basis, cash-on-hand may be acceptable
                    or an exception basis under these parameters:
                    · Borrower must have a profile that indicates that cash spending is his/her
                      preferred method of transacting business, such as: limited or no
                      past/present credit transactions from traditional sources; limited or no
                      current or past banking history, etc. There can be no derogatory credit
                      references on the credit report, if any credit is reported, or through direct
                      verification of traditional or non-traditional sources.
                    · The cash-on-hand funds must be deposited with a depository institution
                      prior to closing or must be verified as received by the closing agent.
                    · Borrower must certify that the funds were not borrowed from any source
                      through an unsecured loan and also certify the source of the cash-on-hand,
                      such as: sale of an asset, accumulated savings, etc. The “Declarations”
                      section of the Residential Loan Application Fannie Mae form
                      1003/Freddie Mac form 65) must confirm that no funds were borrowed
                      (other than those determined as eligible borrowed funds).
                    · If the cash-on-hand is from accumulated savings, the Residual Income
                      and Savings Analysis form must be completed, and the calculations
                      supportable according to the form’s instructions.

                                                                                Continued on next page




July 2004                                                   Low to Moderate Income (LMI) Borrowers– 8
Credit Policy                                                          Chase Correspondent Division



Capital - Low to Moderate Income (LMI), Continued


Non-Allowed      · If the cash-on-hand is from the sale of an asset (other than real estate), the
Closing Fund       borrower must provide proof of sale, such as: bill of sale and title transfer
Sources            on vehicle, letter confirming sale, and appraisal of value, etc.
(continued)
                 · If the cash-on-hand is from a loan secured by an owned asset, the
                   borrower must provide evidence of the note identifying the security.
                 · An in-file credit report must be obtained and reviewed and analyzed by
                   the underwriter prior to closing (within two weeks) to verify that no new
                   accounts have been opened or were undisclosed at application.
                 · The borrower’s income history should evidence a continuous income
                   stream, per Chase Credit Policy and the ability to manage finances
                   independent of outside services, as evidenced by verification through non-
                   traditional sources of credit.


Closing Fund    In addition to the sources listed under the “split” down payment option, the
Sources         borrower’s required closing funds can come from the sources listed in the
                chart below.

                      Source                                 Guideline
                Contributions        Frequently these are referred to as “Seller Contributions,”
                                     although contributions are not limited to the seller. They
                                     may be from other interested parties who may or may not
                                     have an interest in the property sale transaction. When a
                                     party who has an interest in the transaction provides the
                                     contributions, a limitation is placed on the amount that can
                                     be applied and where those funds can be used. Contributions
                                     are verified by reviewing the contract of sale/purchase
                                     agreement and escrow or closing instructions.

                                                                             Continued on next page




July 2004                                                Low to Moderate Income (LMI) Borrowers– 9
Credit Policy                                                           Chase Correspondent Division



Capital - Low to Moderate Income (LMI), Continued


Closing Fund Sources (continued)

                          Source                             Guideline
                  Gifts            Funds donated by eligible donors may be used to apply to
                                   closing costs and prepaid items. The following requirements
                                   apply to gift funds:

                                   · If the product requires a down payment, the required down
                                     payment must come from the borrower’s own sources.
                                   · If the gift is 20% or more of the value (lesser of sales price
                                     or appraised value), the borrower’s mandatory portion is
                                     not required.
                                     · Gifts must be from a relative, (where gifts are eligible
                                       according to the Product Guide).
                                   · The borrower may use certain gift funds as the down
                                     payment under the following conditions:
                                     · Gift funds must come from a resident relative of the
                                       borrower.
                                     · The relative must have resided with the borrower for the
                                       past 12 months.
                                     · The relative will continue to reside in the new home.
                                     · Gift documentation must support the donor’s residency
                                       with the borrower and future residency intentions.
                                   · For all gifts, the gift funds must be verified in the donor’s
                                     account, and, evidence of the funds to the borrower, must
                                     be provided.
                  Grants           Secured Grants must be approved by Chase. If a
                                   Correspondent needs a secured grant program reviewed by
                                   Chase, the following documentation should be submitted to
                                   Chase Underwriting:

                                   · Copy of Grant documents
                                   · Sample Note
                                   · Sample Mortgage

                                                                              Continued on next page




July 2004                                              Low to Moderate Income (LMI) Borrowers– 10
Credit Policy                                                              Chase Correspondent Division



Capital - Low to Moderate Income (LMI), Continued


Closing Fund Sources (continued)

                     Source                                    Guideline
                  Pooled/Su Su     Some borrowers use a group savings plan to accumulate assets,
                  Accounts         where each member contributes a fixed amount of money
                                   periodically. The accumulated funds are held by a group member
                                   (Treasurer), who manages the funds on behalf of the group. The
                                   funds each member contributes are distributed on a rotational basis,
                                   according to the pre-determined plan established by the group.
                                   Funds are contributed by the borrower and may be withdrawn, but
                                   generally, not borrowed from the pooled fund.

                                   Chase will accept funds withdrawn from Su Su savings plans, where
                                   the property is an owner-occupied primary residence and where
                                   permitted by the product/program guide.

                                   Verification Requirements
                                   Pooled/Su Su funds must be traced and verified as outlined below:

                                   · Verification of the borrower’s contribution from the treasurer
                                   · A list of program participants
                                   · A copy of the ledger, or other acceptable form of evidence,
                                     showing the date the borrower received the “pooled” funds.
                  G’Mach           Description
                                   G’Mach funds are non-interest paying funds that are contributed by
                                   members of a non-profit “organization.” The G’Mach allows the
                                   depositors or other members of the organization (who may not be
                                   depositors) to withdraw funds that they have deposited or borrow
                                   funds on an interest free, short-term basis. The leadership of the
                                   organization determines who may borrow based on the member’s
                                   need. Only a member may withdraw the funds. For additional
                                   information on G’Mach, refer to the Capital Chapter of this guide.

                                                                                  Continued on next page




July 2004                                                  Low to Moderate Income (LMI) Borrowers– 11
Credit Policy                                                        Chase Correspondent Division



Capital - Low to Moderate Income (LMI), Continued


Cash Reserve    · Usually, cash reserve minimums are not required for LMI programs.
Requirements      · Borrower’s financing/borrowing for a 2-4 unit property may require cash
                    reserve minimums.
                  · However, Cash reserves minimums may be required for other LMI
                    programs and products.
                · Nevertheless, verified reserves after closing are often excellent
                  compensating factors to offset marginal aspects of a borrower profile, and
                  the borrower should be encouraged to disclose his/her assets.

                NOTE: Specific LMI product or program standards cash reserve
                requirements and verification standards may differ. Please review the
                LMI product and program guidelines for specific products.


Cash Reserve    Chase’s standard cash reserve and closing fund requirements are found in
Verification    chapter entitled “Capital” of this guide.
Documentation
                · Alternative methods of verifying closing fund requirements to meet the
                  needs of LMI borrowers may be acceptable on a case-by-case basis with the
                  approval of Chase.




July 2004                                             Low to Moderate Income (LMI) Borrowers– 12
Credit Policy                                                            Chase Correspondent Division



Character/Credit History - Low to Moderate Income (LMI)


Introduction     Chase’s standard history, and credit record documentation requirements are
                 found in the chapter entitled “Credit History” in this guide. To meet the
                 needs of LMI borrowers who frequently may not meet the standard criteria,
                 the lender may need to use alternative methods to develop the borrower’s
                 credit history. This section of the guide details alternative approaches to
                 develop credit histories for LMI borrowers who do not meet the standard
                 requirements.

                 NOTE: Specific LMI product or program credit report and credit
                 history standards and verification requirements may differ. Please
                 review the LMI product and program guidelines for specific products.


Non-             Chase requires a credit report from a credit-reporting agency on all loans.
Traditional/     However, there are many borrowers who have not used the advantages
Alternative      afforded by creditors who offer credit arrangements. As such they have no
Credit History   credit accounts that are visible to the major credit repositories. In those cases,
Sources - LMI    it is necessary to develop a credit history from sources other than those who
Borrowers
                 normally report credit activity to the repositories. This is called a non-
                 traditional credit history. The non-traditional report is developed by the credit
                 reporting agency, using references that the borrower provides during the
                 application process, or shortly afterwards. A Residential Mortgage Credit
                 Report (RMCR) is required, in addition to the NMCR, to verify public
                 records and that no credit history exists.

                 There are many sources of non-traditional credit suppliers. To help develop
                 the history, begin the process using the following obligations, in tier order. If
                 the borrower does not have accounts with the first tier sources, you will need
                 to go to the next tier, and so on. Be sure to check with the underwriter if your
                 borrower has other sources that are not listed here. The chart below will
                 provide the sources and order in which you must make your verification
                 attempts.

                                                                               Continued on next page




July 2004                                                Low to Moderate Income (LMI) Borrowers– 13
Credit Policy                                                                Chase Correspondent Division



Character/Credit History - Low to Moderate Income (LMI),
Continued



Non-Traditional/ Alternative Credit History Sources - LMI Borrowers (continued)

                     Tier                                      Creditor
                      1        ·   Housing (landlord or mortgagee is a mandatory reference)
                               ·   Utility company (lights, water, gas)
                               ·   Telephone company
                               ·   Cable company
                               ·   Auto debt
                       2       ·   Auto insurance
                               ·   Rental insurance
                               ·   Life insurance
                               ·   Health/dental/accident insurance that is paid directly (not payroll
                                   deductions)
                       3       ·   Day care
                               ·   Church tithe
                               ·   Local grocer
                               ·   Furniture rental
                               ·   Appliance store


Credit Bureau    Chase accepts three types of credit reports for LMI borrowers as listed below.
Reports
                 · Residential Mortgage Credit Report (RMCR),
                 · Non-Traditional Residential Mortgage Credit Report (NMCR), a/k/a Non-
                   Traditional Residential Mortgage Report (NTMR),
                 · Merged In-file Reports

                 On some LMI products and programs, a three-file merged credit report is
                 acceptable.

                 REFERENCE: For additional information on RMCR, NMCR, and
                 Merged In-file Reports, refer to chapter “Credit History” in this guide.

                                                                                    Continued on next page




July 2004                                                    Low to Moderate Income (LMI) Borrowers– 14
Credit Policy                                                             Chase Correspondent Division



Character/Credit History - Low to Moderate Income (LMI),
Continued



Reviewing          All borrowers must evidence the ability to repay their debts in a timely
Credit History -   manner and their willingness to do so. For borrowers who have established
LMI                credit files, as evidenced by a credit bureau report, Chase’s standard
                   guidelines apply. The credit report is the source document to determine a
                   borrower’s credit worthiness. It, also, provides public records information.

                   Chase uses the non-traditional credit report or direct verifications, where
                   necessary, in the same manner. A non-traditional credit report provides a
                   history, generally no more than 12 months, of the borrower’s payment
                   activities. The payments made to these alternative sources must be
                   satisfactory, with no late payments over the 12 months. Non-traditional
                   histories are used to develop credit histories and are not used to offset
                   derogatory credit from other sources.




July 2004                                                 Low to Moderate Income (LMI) Borrowers– 15
Credit Policy                                                          Chase Correspondent Division



Underwriting and Qualifying the Borrower - Low to Moderate
Income (LMI)


Underwriting    The underwriting standards and qualifying criteria for Chase’s LMI products
Standards       and programs are designed to offer flexible qualifying criteria to the
                borrowers who select these products and programs. As in any underwriting
                process each loan must be reviewed individually using the criteria designed
                for the selected product and/or program, using each positive and negative
                aspect of the profile. In the analysis, if a certain aspect borrower or property
                profile exceeds the product or program criteria, that aspect becomes a layer of
                risk. These risk layers, when combined, must be offsetting or compensating
                factors to bring the profiles back into alignment with the product criteria.


Risk Layering   Product and program guidelines provide the Correspondent with specific
                employment, income, asset, credit, payment, and debt-to-income ratio criteria.
                Risk layers occur when something in the profile goes outside the boundaries
                of the guidelines. The following are some of the most common layers of risk
                found in lending:

                · Limited cash into the transaction.
                · Little or no cash reserves.
                · High housing and debt-to-income ratios.
                · A “spotty” credit history reflecting difficulty in meeting obligations on
                  time.
                · Excessive use of credit.
                · A borrower moving from an “all-utilities-paid” apartment to a single family
                  residence will incur additional monthly debts - not included in the debt-to
                  income calculation and adding another layer of risk.

                                                                             Continued on next page




July 2004                                               Low to Moderate Income (LMI) Borrowers– 16
Credit Policy                                                           Chase Correspondent Division



Underwriting and Qualifying the Borrower - Low to Moderate
Income (LMI), Continued


Compensating     The underwriter should carefully consider and apply the use of compensating
Factors          factors to offset, what may appear to be, excessive layering of risks.
                 Frequently, it is possible and practical to exceed the recommended payment
                 and debt to income ratios on some borrowers. The use of compensating
                 factors must be well warranted, identified, and documented. Some examples
                 of compensating factors and application:

                 · A high debt-to-income ratio for a borrower may be offset if it can be
                   evidenced that he/she has managed that level of debt payment, for an
                   extended period of time, generally 12 months, successfully.
                 · A “spotty” credit history caused by verified extenuating circumstances can
                   be compensated for by evidence that the borrower has overcome the
                   circumstances that created the problem.
                 · A borrower who has a high debt-to-income ratio with a relatively high post-
                   closing cash reserve position.


Balancing Risk   The layering of risks and the use of compensating factors differs from
                 borrower to borrower. In underwriting the LMI borrower, the underwriter
                 should look to the layering of risks and the use of compensating factors as a
                 balancing scale. As one adds weight (a layer of risk) to one side of the scale,
                 one must add weight (a compensating factor) to the other side of the scale.




July 2004                                                Low to Moderate Income (LMI) Borrowers– 17
Credit Policy                                                         Chase Correspondent Division



                                     FHA and VA
Overview


Introduction    · The Federal Housing Administration (FHA) was created by the National
                  Housing Act in 1934 to encourage improvement in housing standards, to
                  provide an adequate home financing system for low to moderate income
                  families by insurance of mortgages and credit, and to exert a stabilizing
                  influence on the mortgage market. FHA does not make loans or build
                  housing but operates insurance programs which provide against loss on
                  home and housing project mortgages made by private lending institutions.
                · The Department Of Veterans Affairs (referred to as the VA) was enacted by
                  the GI Bill of Rights on June 22, 1944. Under this law, eligible veterans
                  would receive loans to be guaranteed by the United States Government for
                  the purchase or refinance of new or existing homes having one to four
                  living units. VA loans are made by approved lending institutions with a
                  portion of the loan being guaranteed by the VA. The VA does not set loan
                  limits, only the percentage of guaranty. Loan limits are set in the secondary
                  market by investors and are based on the percentage of risk exposure
                  investors are willing to accept.
                · Chase accepts closed FHA and VA loans from its approved Correspondent
                  channel lenders as long as the correspondent lender will be able to provide
                  evidence of HUD’s Mortgage Insurance Certificate or VA Loan Guaranty.
                · FHA, VA, and Chase expect the Correspondent’s underwriters to be
                  responsible to:
                  · Ensure that required documents have been properly executed;
                  · Compare the verified information to the application and typed
                     application/addendum;
                  · Determine that the applicant’s income, credit, and assets meet agency and
                     company guidelines or requirements;
                  · Determine that the property meets agency and company requirements;
                  · Determine that the applicant has the ability and willingness to repay the
                     mortgage debt;
                  · Provide a written explanation on the respective HUD/VA worksheet
                     whenever an exception to guideline occurs; and,
                  · Apply common sense.

                                                                            Continued on next page




July 2004                                                                         FHA and VA – 1
Credit Policy                                                          Chase Correspondent Division



Overview, Continued


Introduction      · Although Chase generally follows FHA and VA guidelines/requirements,
(continued)         there are instances where Chase’s requirement or policy may differ due to
                    secondary market requirements or credit risk management concerns. It must
                    also be understood that due to the space constraints within Chase’s policy
                    and procedure handbook, there are many instances where the reader may
                    need to refer to the HUD or VA Handbooks for further reference.


In this Chapter   Included in this chapter are the following topics:

                                             Topic                                   See Page
                  FHA Mortgage Programs                                                  3
                  FHA Borrower Eligibility                                               5
                  FHA Maximum Mortgage Amount Calculations                               8
                  FHA Maximum Mortgage Amount Calculations for Purchases                 9
                  FHA Maximum Mortgage Amount Calculations for No Cash-                 15
                  Out Refinances
                  FHA Maximum Mortgage Amount Calculations for Cash-Out                  17
                  Refinances
                  FHA Maximum Mortgage Amount Calculations for                           18
                  Streamline Refinances
                  FHA Mortgage Insurance Premiums (a/k/a MIP)                            22
                  FHA Qualifying Ratios                                                  24
                  VA Mortgage Programs                                                   27
                  VA Maximum Mortgage Calculations                                       36
                  VA Underwriting Guidelines                                             38
                  Reviewing Credit History (FHA and VA)                                  42
                  Assets (FHA and VA)                                                    48
                  Liabilities (FHA and VA)                                               55
                  Employment and Income Verification (FHA and VA)                        59
                  Collateral (FHA and VA)                                                73
                  Appraisals                                                             74
                  Escrow Holdback                                                        78
                  Eligible Properties                                                    79
                  Property Guidelines                                                    82




July 2004                                                                          FHA and VA – 2
Credit Policy                                                          Chase Correspondent Division



FHA Mortgage Programs


Section 203(b)   Section 203(b) is the standard FHA program. All appraisals except those
                 involving condos are ordered under this section. The purpose of this program
                 is to finance the acquisition of proposed, under construction, or existing
                 properties, or to refinance an existing indebtedness on such property.

                 · Loan term may not exceed 30 years
                 · Temporary buydowns can be used. The applicant is qualified at the
                   buydown start rate. The applicant should demonstrate a history of income
                   increases which would accommodate the buydown increases
                 · Eligible Properties include:
                   · 1, 2, 3, or 4 family new or existing properties (for condos, see section
                     234C)
                   · FHA or VA approved PUDs.
                   · Manufactured homes which meet FHA criteria
                   · HUD Owned Properties (also known as PD Sales)


Section 203(K)   Section 203(K) is for the purchase or refinance of a property in conjunction
                 with rehabilitation. At the present time, CMMC will not purchase 203(K)
                 loans until all rehabilitation work is completed and a final inspection is
                 obtained.


Section 234(c)   Condominium Housing Program is a subsection of the 203b program and
                 provides mortgage insurance for the purchase or refinance of individual units
                 in FHA or VA approved condominium projects or individual units of an
                 existing condominium project approved for the FHA program by Chase (a/k/a
                 Spot Condo) (ML96-41). The features are the same as 203(B), except that no
                 up-front mortgage insurance premium is required. In addition, mortgages
                 insured under section 234(c) condominium units must be received by the
                 appropriate HOC within standard delivery timeframes.

                 NOTE: Case binders submitted for endorsement processing more than
                 60 days after the closing date must comply with the late request
                 endorsement requirements.


Section 245      Graduated Mortgage Payment Program. (Chase does not currently accept
                 applications under this program).

                                                                             Continued on next page




July 2004                                                                          FHA and VA – 3
Credit Policy                                                        Chase Correspondent Division



FHA Mortgage Programs, Continued


Section 251     The Adjustable Rate Mortgage Program (ARM) is another subsection of the
                203b program that provides mortgage insurance for the purchase or refinance
                of 1, 2, 3, or 4 family dwellings or units in FHA or VA approved
                condominiums. The difference between this and other FHA programs is that
                the applicants will have a mortgage payment, which may adjust annually.
                The various features of this program are:

                              Feature                                Definition
                 Loan Term                        30 Years only
                 Margin                           Negotiable
                 Index                            One Year Treasury Security weekly average
                 First Adjustment                 · Based on GNMA Pool and occurs between
                                                    the 12th and 18th month after the first
                                                    payment.
                                                  · Refer to Daily Pricing Sheet.
                 Subsequent Adjustment            Annually thereafter
                 Annual Interest Rate Cap         1%
                 Life of Loan Interest Rate Cap   5%
                 Negative Amortization            Not Allowed
                 Qualifying Rate                  1% above Note rate (ML 98-01)
                 ARM Disclosure                   Must be executed by borrower.

                NOTES:
                · The Temporary Buydown feature cannot be used with the adjustable
                  rate mortgage program. (ML98-01)
                · CMMC may temporarily suspend purchase.


Assumptions     Assumptors of FHA mortgages endorsed on or after December 15, 1989 must
                be found creditworthy in order to be approved for the assumption.
                Assumptions of FHA mortgages endorsed before December 15, 1989 may be
                taken “subject to” and do not require a formal creditworthiness approval.




July 2004                                                                        FHA and VA – 4
Credit Policy                                                          Chase Correspondent Division



FHA Borrower Eligibility


Eligible FHA    Anyone taking title to the property, regardless of whether that party is an
Applicants      applicant, must sign the security instruments (mortgage, deed of trust, or
                security deed). Applicants are not required to be U.S. citizens or permanent
                alien residents, but must have a permanent Social Security number (Note-
                work visas are not permanent Social Security numbers) and the property
                being purchased must be their permanent residence. They must be found
                creditworthy based on verifications of their income/employment, credit, and
                assets.


Eligible FHA    Anyone taking title to the property, regardless of whether that party is an
Co-Applicants   applicant, must sign the security instruments (mortgage, deed of trust, or
                security deed).


Types of Co-    While not inclusive, there are four types of co-applicants:
Applicants
                · Occupying co-applicant,
                · No-occupant co-applicant,
                · Non-purchasing spouse, and
                · Military personnel


Occupying Co-   All applicants must have/or take title to the property and obligate them on the
Applicant       mortgage note. Their income, assets, liabilities, and credit history are
                included in the determination of credit-worthiness and qualifying
                consideration.

                                                                              Continued on next page




July 2004                                                                          FHA and VA – 5
Credit Policy                                                            Chase Correspondent Division



FHA Borrower Eligibility, Continued


Non-Occupant    · All applicants must have/or take title to the property and obligate them on
Co-Applicant      the mortgage note.
                · Non-occupant co-applicants assisting their child, who is a college student,
                  to purchase a single family home near campus (and therefore, the primary
                  applicant generally does not have any verifiable income), are acceptable.
                · All applicants’ income, assets, liabilities, and credit history are included in
                  the determination of credit-worthiness and qualifying consideration.
                · Maximum financing may not be available unless the applicant and non-
                  occupant co-applicants are related, such as parent-child, child-parent,
                  siblings, aunt-uncle, etc.
                · Unrelated individuals, that can document evidence of a family type, long-
                  standing and substantial relationship not arising out of the subject loan
                  transaction, may also be eligible for maximum financing. If this
                  relationship cannot be substantiated the loan to value is limited to 75%.
                · A non-occupant co-applicant may not be a party that has an interest in the
                  transaction, such as seller, builder, real estate agent, etc. (Exceptions may
                  be granted if the seller, who is also the co-applicant, is a family member of
                  the occupant applicant.).
                · The non-occupant co-applicant must have a principal residence in the
                  United States, unless otherwise exempted.
                · In all 2, 3, or 4 unit applications, the maximum LTV is limited to 75%
                  regardless of relationship.


Non-            · If required by state law to perfect a valid and enforceable first lien, the non-
purchasing        purchasing spouse may be required to either sign the security instrument or
Spouses           documentation evidencing that he or she is relinquishing all rights to the
                  property.
                · If the non-purchasing spouse executes the security instrument for such
                  reasons, he or she is not considered an applicant for HUD purposes and
                  need not sign the loan application.
                · If the applicant resides in a community property state or the property to be
                  insured is located in a community property state, the debts of the non-
                  purchasing spouse must be considered in the qualifying ratios, unless those
                  obligations are specifically excluded by state law.
                · Although the non-purchasing spouse’s credit history is not to be considered
                  a reason for credit denial, a Residential Mortgage Credit Report must be
                  obtained.

                                                                               Continued on next page




July 2004                                                                            FHA and VA – 6
Credit Policy                                                           Chase Correspondent Division



FHA Borrower Eligibility, Continued


Military        · Military personnel are considered occupant owners and are eligible for
Personnel         maximum financing if a member of the immediate family (defined as:
                  spouse, sibling, parent, or child) will occupy the property as a principal
                  residence even if the service person is stationed elsewhere.

                NOTE: The immediate family member must also be a co-owner of the
                property and have been found creditworthy and therefore also sign the
                mortgage and Note.




July 2004                                                                           FHA and VA – 7
Credit Policy                                                            Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations


Allowable       One of the components of FHA’s mortgage calculations (purchase or
Closing Costs   refinance) is the “allowable closing costs” which are standard costs that FHA
                permits. These costs may vary from area to area, and therefore, a list of a
                local FHA Office’s allowable closing costs should be obtained from that
                respective office. FHA requires that all closing costs used in the calculation
                of the maximum loan amount be highlighted on the Good Faith Estimate
                (GFE). If the actual closing costs tabulated on the HUD-1 at closing differ by
                $250 or more from those used to calculate the mortgage amount, then the
                mortgage amount must be recalculated before settlement. The allowable
                closing costs include:

                · lender’s origination fee,
                  NOTE: Discount points are not eligible.
                · the appraisal fee (established by HUD)
                · the actual cost of the credit report(s)
                · any home inspection service fees (up to $200)
                · the cost of the title examination and title insurance
                · any property survey fee
                · any attorney’s fees/escrow closing fees
                · the recording fees
                · any test and certification fees (such as water tests, etc.)
                · Flood Certification
                · other fee(s) approved by local FHA.


Acquisition     The HUD maximum mortgage is based on a series of calculations. One of
Cost (a/k/a     these involves what HUD refers to as the “acquisition cost,” also known as
Mortgage        the “mortgage basis.” For purchase transactions, this amount includes the
Basis)          allowable closing costs plus the lower of the sale price or property value. For
                refinance transactions, this term usually refers to the sum of the existing
                indebtedness plus allowable financed costs minus the MIP refund

                Base and gross mortgage amounts can be in $1 increments. However, Chase
                and FHA do not permit mortgage amounts to include cents. The Up-front
                Mortgage Insurance Premium (UFMIP) is determined by multiplying the
                applicable factor by the base mortgage amount. If the Up-front MIP is being
                financed, it may then be added to the base mortgage amount to produce the
                gross mortgage amount.




July 2004                                                                            FHA and VA – 8
Credit Policy                                                             Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Purchases


Calculating the   Use the following chart to determine how to calculate the maximum mortgage
Maximum           amount calculation for a purchase money transaction:
Mortgage
Amount

                               If…                  Then the maximum mortgage amount is…
                  the acquisition cost is       the least of:
                  $50,000 or lower,
                                                · 97% of the acquisition cost, or
                                                · 98.75% of the appraised value.
                  the acquisition cost is       the least of:
                  $50,001 or greater,
                                                · 97% of the first $25,000, plus 95% of the amount
                                                  between $25,001 and $125,000, plus 90% of that
                                                  portion that exceeds $125,000, or
                                                · 97.75% of the appraised value, or
                                                · HUD area limit.

                                                NOTE: An easier method of calculating step 1
                                                above is to multiply the acquisition cost by 95%
                                                and add $500. For acquisition costs $125,000 or
                                                greater, the acquisition cost is multiplied by 90%
                                                and $6,750 is added to that sub-total.
                  The property is owned by      · Considered to be the amount listed on the FHA
                  FHA and is being sold under     contract.
                  the Property Disposition      · The maximum amount of seller contributions is
                  Sales Program (PD),             also considered to be the amount listed on the
                                                  FHA contract.
                                                · HUD may pay a “closing bonus” for certain
                                                  properties that close within a specified time, this
                                                  contribution is considered acceptable and no
                                                  adjustment should be made to the mortgage
                                                  amount.


Factors that      Certain factors can affect the maximum mortgage amount in a purchase
Affect the        transaction. Several examples are cited below:
Maximum
Mortgage
Amount

                                                                                 Continued on next page




July 2004                                                                             FHA and VA – 9
Credit Policy                                                           Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Purchases,
Continued



Example 1:       An applicant who wishes to install weatherization items such as thermostats,
Weatherization   insulation, storm windows or doors, weather stripping and caulking, etc., may
                 have these items added to the sales price and appraised value, up to the
                 amounts shown below, before determining the maximum mortgage amount:

                 · $2,000 without a separate value determination;
                 · $3,500 if supported by a value determination and an on-site inspection
                   made by a HUD-approved appraiser or DE underwriter;
                 · More than $3500 if supported by a value determination and an on-site
                   inspector or DE staff appraiser. A contractor’s statement of cost of work
                   completed or buyer’s estimate of the cost of materials must also be
                   submitted.


Example 2:       Sales concessions are items paid by the seller that is normally paid for by the
Sales            applicant. The value of the sales concessions are subtracted dollar-for-dollar
Concessions      from the sales price prior to computing the mortgage amount. Sales
                 concessions include non-allowable closing costs, personnel property items,
                 excess rent credit, and seller payment of applicant’s sales commission on
                 present home.


Example 3:       Financing concessions are items such as allowable closing costs, prepaids,
Financing        discount points, interest rate buydowns and other payment supplements,
Concessions      payments of mortgage interest (not principal or escrow payments), and
                 UFMIP and are limited to 6% of the contract sales price before a dollar-for-
                 dollar reduction is required for each dollar above 6%.

                 NOTE: Replacement of existing equipment or other realty items by the
                 seller before closing, such as carpeting or air conditioners, does not
                 require a value adjustment provided no cash allowance is given to the
                 applicant.

                                                                              Continued on next page




July 2004                                                                         FHA and VA – 10
Credit Policy                                                          Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Purchases,
Continued



Example 4:      Subject to the 6% limitation, builders and sellers may pay the HOA dues or
Advance         taxes that come due during the first year of the mortgage, provided the
Payments of     borrower’s PITI qualifies using the actual month’s costs and the borrower’s
Taxes and       cash investment is not reduced as a result of these advance payments. Funds
Homeowners      are held in escrow and must be in compliance with all RESPA requirements.
Association
                If the property is sold or prepaid, the escrow funds may not revert to the
Dues
                provider. (ML97-26) Chase policy currently prohibits the use of this type of
                concession.


Example 5:      Identity of Interest transactions are defined as transactions between family
Identity of     members, business partners or other business affiliates and are limited to 85%
Interest        of acquisition cost. However, maximum financing is permissible under any
Transactions    of the following circumstances:
                  ·
                · A family member purchasing another family member’s principal residence.
                · An employee of a builder purchasing one of the builder’s new homes or
                  models as a principal residence.
                · A current tenant purchasing the property that he or she has rented for at
                  least six months pre-dating the sales contract. A lease or other written
                  evidence must be submitted verifying occupancy.
                · Sales by corporations that transfer employees out of an area, purchase the
                  transferred employee’s home and then resell to another employee.
                · If a property being sold from one family member to another is the seller’s
                  investment property, the maximum mortgage is the lesser of either:
                  · 85% of the sum of the appraised value plus the allowable percentage of
                    closing costs; or,
                  · 97/95/90% of the sales price plus or minus required adjustments including
                    the allowable percentage of closing costs.


Example 6:      · When there are two or more applicants, but one or more will not occupy the
Non-Occupant      property as a principal residence (hereafter referred to as Non-Occupant Co-
Co-Applicants     applicants), the maximum mortgage is usually limited to 75% LTV.
                · However, maximum financing is available (single family properties only)
                  for applicants related by blood (parent-child, siblings, aunts-uncles/nieces-
                  nephews, etc.), or for unrelated individuals that can document evidence of a
                  family-type, long-standing and substantial relationship not arising out of the
                  loan transaction.

                                                                             Continued on next page



July 2004                                                                        FHA and VA – 11
Credit Policy                                                             Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Purchases,
Continued



Example 7:        When the mortgaged property contains three or four units, the projected rents
Three or Four     from all units, including the unit to be occupied by the applicant, must be
Unit Properties   equal to or greater than the monthly mortgage payment. The maximum
                  mortgage is limited so that the ratio of the monthly mortgage payment divided
                  by the monthly net rental income does not exceed 100%.

                  · The monthly payment is defined as principal, interest, taxes, hazard, flood
                    and mortgage insurance, insurance, (PITI), and any homeowners’
                    association dues, computed at the note rate (no consideration for buy downs
                    may be given).
                  · Net rental income is the appraiser’s estimate of fair market rent from all
                    units (including the unit chosen by the applicant for occupancy) less the
                    HUD Homeownership Center’s allowance for vacancies and maintenance.
                  · The above calculation is used only to determine the maximum loan amount.
                    Applicants must still qualify for the mortgage based on income, credit, cash
                    to close, and the projected rents received from the remaining units.
                  · The applicant must have a reserve of three months’ mortgage payments
                    (PITI) after closing. Gifts are not considered acceptable reserves. (CHASE
                    POLICY)
                  · A fully executed HUD-Form 92561 (hotel and transient use) must be
                    obtained.

                  NOTE: This form is also required for 2 unit properties.


Example 8:        If the applicant is acting as a general contractor or is having a house built on
Applicant         land already owned or being acquired separately, maximum financing is
Acting as         available if the applicant receives no cash from the settlement. (The
General           underwriter must condition the approval to assure cash is not received at
Contractor        closing). The appropriate loan-to-value limits are applied to the lesser of:

                  · The appraised value plus the allowable percentage of closing costs; or
                  · The documented acquisition cost of the property, which includes:
                    · The builder’s price, or the sum of all subcontractors’ bids, materials, etc.
                    · Cost of the land. (If the land has been owned more than six months, or
                      was received as an acceptable gift, the value of the land may be used
                      instead of its cost.)

                                                                                Continued on next page




July 2004                                                                           FHA and VA – 12
Credit Policy                                                            Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Purchases,
Continued



Example 8:        · Interest and other costs associated with any construction loan obtained by
Applicant           the applicant to fund construction of the property.
Acting as         · The allowable percentage of closing cost.
General
                  · Reasonable discount points
Contractor
(continued)     · Equity in the land (value or cost, as appropriate, minus the amount owed)
                  may be used for the applicant’s entire cash investment. However, if the
                  applicant receives cash at closing (exceeding $250), the loan is limited to
                  85% of the sum of the appraised value and allowable percentage of closing
                  costs. (Replenishment of the applicant’s own cash expended during
                  construction is not considered as “cash back” provided the applicant can
                  substantiate with canceled checks and paid receipts all out-of-pocket funds
                  used for construction.)


Example 9:      If the applicant will use the new mortgage to complete payment on a land
Land Contract   contract, installment agreement, contract for deed, or other similar type
                financing arrangement where the applicant does not have title to the property,
                the loan is to be processed as a purchase transaction with maximum insured
                financing if the applicant receives no cash at closing. If all loan proceeds are
                used to pay the outstanding balance on the land contract and eligible repairs,
                renovations, etc., the appropriate loan-to-value ratio is applied to the lesser of:

                · The appraised value plus the allowable percentage of closing costs, or
                · The total cost to acquire the property (the original purchase price, plus any
                  documented costs the purchaser incurs for rehabilitation, repairs,
                  renovation, or weatherization), plus the allowable percentage of closing
                  costs. Equity in the property (original sales price minus the amount owed)
                  may be used for the applicant’s entire cash investment. However, if the
                  applicant receives cash at closing (exceeding $250), the loan is limited to 85
                  percent of the sum of the appraised value and allowable percentage of
                  closing costs. (Replenishment of the applicant’s own cash expended for
                  repairs, improvements, renovation, etc., is not considered as “cash back”
                  provided the applicant can substantiate with canceled checks and paid
                  receipts all out-of-pocket funds spent for these purposes.)

                                                                               Continued on next page




July 2004                                                                          FHA and VA – 13
Credit Policy                                                           Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Purchases,
Continued



Example 10:      If a property is classified as “proposed construction,” “under construction,” or
Properties       “completed but has not been occupied,” the maximum mortgage is usually
Considered       limited to 90% LTV. However, maximum financing is available if the
“Proposed        property meets one of the criteria described:
Construction,”
“Under
Construction,”   · Construction was completed more than one year (as evidenced by a
or “Completed      certificate of occupancy or other similar documentation from the local
but not yet        jurisdiction) preceding the applicant’s signature on the Addendum to
Occupied”          Uniform Residential Loan Application (existing construction) or,
                 · The dwelling’s site, plans and materials were approved by the Veterans
                   Administration or an eligible DE underwriter before construction began, or
                   the site is covered by an “early start” letter (see HUD Handbook 4145.1) or,
                 · The dwelling is covered by a ten-year insured warranty plan acceptable to
                   the HUD office having jurisdiction where the property is located, or
                 · The dwelling is being moved to a new location and has been approved for
                   mortgage insurance at the new location before beginning construction.




July 2004                                                                         FHA and VA – 14
Credit Policy                                                            Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for No Cash-
Out Refinances


Calculating the   The maximum mortgage is based on the lowest of the following three
Maximum           calculations:
Mortgage
Amount            · 97.75% of the appraised value of the property (98.75% if the property value
                    is less than $50,000) or,
                  · 97% of the first $25,000, plus 95% of the amount between $25,001 and
                    $125,000 plus 90% of any amount is excess of $125,000 of the acquisition
                    cost (i.e., appraised value plus allowable HUD closing costs) or,
                  · The sum of the existing principal indebtedness (excluding interest) any
                    subordinate financing seasoned at least one year, all closing costs associated
                    with the transaction (excluding prepaid items), reasonable discount points,
                    and cost of repairs/improvements required by the appraiser. This sum is
                    reduced by the amount of any refund of the MIP if originally financed in the
                    mortgage taken from the MIP netting authorization form.
                  · FHA Area Limit

                  NOTE: If the property was acquired less than one year prior to the loan
                  application, the maximum loan-to-value ratio must be calculated on the
                  lesser of the original purchase price and allowable closing costs or
                  current appraised value plus allowable closing costs. Documented
                  repairs and rehabilitation’s incurred after the purchase may be added to
                  the original purchase price.


Refinancing to  If the refinance proceeds will be used to pay off an existing mortgage and to
Buy-Out an Ex- buy out an ex-spouse’s equity in the subject property, the ex-spouse’s equity
Spouse’s Equity is considered “property related indebtedness” and is eligible for inclusion in
                  calculating the new loan amount. The divorce decree and property settlement
                  agreement must be provided to document the amount of equity awarded to the
                  ex-spouse.

                                                                               Continued on next page




July 2004                                                                          FHA and VA – 15
Credit Policy                                                           Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for No Cash-
Out Refinances, Continued


Subordinate     · If the subordinate lien is for a home equity line of credit, a one year
Liens             seasoning must be applied to the most recent draw (no minimum amount).
                · If draws have occurred in the previous 12-month period, and were for
                  purposes other than repairs or rehabilitation of the property, it will not be
                  eligible as a 12-month seasoned loan.
                · If the applicant provides conclusive evidence that all proceeds were used for
                  repair or rehabilitation of the property, the loan is eligible regardless of the
                  age of the lien.
                · If the existing subordinate lien is less than 12 months seasoned, it can be
                  subordinated and still be considered a “no cash-out” refinance provided the
                  combined loan amount does not exceed 97.75% (98.75% for values of
                  $50,000 or less) of the appraised value.
                · If the applicant chooses to satisfy subordinate financing less than 12 months
                  old, he/she must use his/her own funds for that purpose (source of funds
                  must be documented in accordance with standard documentation
                  requirements).




July 2004                                                                         FHA and VA – 16
Credit Policy                                                          Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Cash-Out
Refinances


Cash-Out        · A cash-out refinance is a loan in which the proceeds are used:
Refinance         · to pay off the existing lien(s) on the property (including secondary
                     financing which does not meet the 12-month seasoning requirement),
                  · closing costs incurred in the transaction, and
                  · may provide cash back to the applicant.
                · Properties owned free and clear are considered cash-out refinances. The
                  maximum loan amount is the sum of the appraised value plus allowable
                  closing costs multiplied by 85% or area limit.
                · If the property was purchased less than one year prior to the loan
                  application, the maximum loan amount is 85% of the sum of the closing
                  costs and lesser of the original purchase price, current appraised value or
                  area limit.




July 2004                                                                        FHA and VA – 17
Credit Policy                                                         Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Streamline
Refinances


Streamline      Streamline Refinances are designed to lower the monthly principal and
Refinances      interest payments on a current HUD insured mortgage and/or provide the
                applicant better financing (i.e., adjustable rate to a fixed rate) through a
                reduced documentation process. All streamline refinance transactions must
                adhere to the following requirements:

                · Cash back is not permitted
                · Chase currently accepts loan terms of 10-30 years, although this odd term
                  delivery method may be restricted at any time.
                · There must be a reduced P&I payment, except:
                  · when the loan is being refinanced from a 30-year term to a 15-year term
                    (however, the maximum increase is limited to $50 on a primary residence,
                    $0 on an investment property), or
                  · when a loan is being refinanced from an ARM to a fixed rate (however,
                    the interest rate on the new fixed-rate mortgage cannot exceed the current
                    ARM rate by more than 2%).
                · Subordinate financing may remain in place without regard to the total
                  indebtedness provided the lien will be clearly subordinate to the new HUD
                  insured loan.
                · Qualifying ratios (i.e., credit underwriting) will not be calculated.
                · The maximum term is the lesser of 30 years, or the unexpired term of
                  mortgage plus 12 years.
                · No repairs are required. However, if an appraisal is used, repairs required
                  by the appraiser may be required to be completed prior to closing only if
                  they present a health or safety issue.
                · Termite, roof, well, and septic inspections will not be required unless
                  appraisal (if used) comments imply possible damage.
                · The mortgage must be current.
                · “No-cost” refinances, in which Chase charges a premium interest rate to
                  defray the applicant’s closing costs and/or prepaid items, are permitted.
                · ARM to ARM refinance mortgages require that the Note Rate of the new
                  loan be equal to or less than the existing ARM Note Rate. (ML96-18)

                                                                            Continued on next page




July 2004                                                                       FHA and VA – 18
Credit Policy                                                             Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Streamline
Refinances, Continued


Streamline        · Chase requires that the applicant for an FHA ARM to fixed loan has a
Refinances          satisfactory 12-month mortgage payment history. This can be verified by
(continued)         an in-file credit report or a direct verification from the mortgage servicer.
                  · Additionally, Chase requires that the applicant must certify they are not
                    involved in any bankruptcy proceedings.

                  NOTE: Credit qualifying requirements consist of an acceptable credit
                  report, income/employment verification, and computation of ratios.


Holding Period    An applicant who assumed title to a HUD insured mortgage without benefit
Before Eligible   of a credit review must have owned the property for at least six months before
                  becoming eligible for the Streamline refinance program.


Adding or         · New individuals may be added to title on a streamline refinance without
Deleting            creditworthiness review.
Individuals to    · Deleting individuals from title on a streamline refinance is generally not
Title
                    acceptable. (Individuals can be deleted from title if their interests were
                    previously transferred by devise or descent, or in other circumstances where
                    the transfer cannot legally lead to exercise of the due-on-sale clause, such as
                    a divorce in which the party remaining on title retains occupancy.)
                  · In any case, where the streamline refinance will delete an applicant on the
                    current note, the remaining applicant(s) must provide evidence they have
                    made the mortgage payments themselves for the past six months to be
                    eligible for a streamline refinance.


Section 245       Section 245 Graduated Payment Mortgage may be refinanced to a fixed-rate
Graduated         mortgage. The new mortgage payment may not exceed the current mortgage
Payment           payment.
Mortgage

                                                                                Continued on next page




July 2004                                                                           FHA and VA – 19
Credit Policy                                                              Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Streamline
Refinances, Continued

Processed With    If processed with an appraisal, the maximum base mortgage amount is the
an Appraisal      lesser of:

                  · The current unpaid FHA first mortgage principal balance (excluding late
                    fees and escrow shortages)
                    · Plus FHA allowable closing costs and reasonable discount
                    · Plus interest charges to the end of the month, per diem charge, and
                      escrow prepaids on the new mortgage
                    · Minus the lesser of the up-front MIP refund or the new up-front MIP,
                      OR
                  · The amount calculated in the table below.

                                                                                       Multiply the
                  If the appraised value is…     And the property is located in…       value by…
                  <$50,000,                                                             98.75%,
                  >$50,000 up to $125,000,     a low closing cost state,                97.65%
                  >$125,000,                   a low closing cost state,                97.15%
                  <$50,000,                                                             98.75%,
                  <$50,000,                                                             98.75%,
                  >$50,000 up to $125,000,     a low closing cost state,                97.65%
                  >$125,000,                   a low closing cost state,                97.15%


Processed         If processed without an appraisal and the property will be non-owner-
Without an        occupied, the maximum mortgage is the lesser of:
Appraisal and
the Property is   · Sum of the unpaid principal balance of the existing FHA first mortgage
Non-owner -
                    (excluding interest, late fees and escrow shortages) minus the lesser of the
occupied
                    up-front MIP refund or the new up-front MIP plus the new UFMIP, if it is
                    to be financed, or
                  · FHA area limit.

                  NOTE: To avoid funding delays, the original sales price and appraised
                  value, specified in FHA Connection, must be written in the “Remarks”
                  section of the Mortgage Credit Analysis Worksheet (MCAW). Should
                  line 4I not contain the required information, “original price/value not
                  available” must be indicated in the “Remarks” section of the MCAW.

                                                                                 Continued on next page




July 2004                                                                            FHA and VA – 20
Credit Policy                                                             Chase Correspondent Division



FHA Maximum Mortgage Amount Calculations for Streamline
Refinances, Continued


Processed         If processed without an appraisal and the property will be owner-occupied,
Without an        the maximum mortgage is the lesser of:
Appraisal and
the Property is   · The current unpaid FHA first mortgage principal balance (excluding late
Owner-
                    fees and escrow shortages).
occupied
                  · Plus FHA allowable closing costs and reasonable discount.
                  · Plus interest charges to the end of the month, per diem charge, and escrow
                    prepaids on the new mortgage.
                  · Minus the lesser of the up-front MIP refund or the new up-front MIP, or
                  · The original principal balance of the existing loan (which includes the
                    original financed UFMIP), or
                  · FHA area limit.

                  NOTE: To avoid funding delays, the original sales price and appraised
                  value, specified in FHA Connection, must be written in the “Remarks”
                  section of the Mortgage Credit Analysis Worksheet (MCAW). Should
                  line 4I not contain the required information, “original price/value not
                  available” must be indicated in the “Remarks” section of the MCAW.


Calculations for Prepaids and escrows for FHA streamline refinances are calculated as noted
Prepaids and     below:
Escrows

                    Step                                   Action
                     1      Number of months required to be paid when next tax bill is due and
                            payable.
                     2      MINUS the number of months of tax escrow being credited by present
                            lender.
                     3      Sub Total
                     4      MINUS the number of payments applicant will make before tax bill is
                            due/payable.
                     5      PLUS the number of months of tax cushion (maximum 2).
                     6      EQUALS TOTAL months of taxes, which can be financed into the new
                            mortgage.




July 2004                                                                           FHA and VA – 21
Credit Policy                                                          Chase Correspondent Division



FHA Mortgage Insurance Premiums (a/k/a MIP)


Up-Front MIP    With the exceptions of 203K, 221D2, 222E, 234C, and 238C files, all other
                HUD-insured mortgages require an up-front MIP that must be remitted to
                HUD within fifteen (15) days of closing. The applicant can finance all of the
                up-front MIP or pay all of it in cash at closing. The up-front MIP may not be
                partially financed (ML97-26). The premium amount is calculated on the base
                loan amount and loan term.

                NOTE: Condominiums do not require up-front MIP.


Annual MIP      · In addition to the up-front MIP, an annual premium is collected and added
                  to the monthly payment. The percentage of the annual payment and number
                  of years collected depends on the loan-to-value, which is calculated by
                  dividing the loan amount, excluding MIP, by the appraised value.
                · Annual mortgage insurance premiums (MIP) will be automatically canceled
                  once the unpaid principal balance, excluding up-front MIP, reaches a loan to
                  value ratio (LTV) of 78% or less. Additionally, the LTV ratio used in this
                  calculation will be based on the lower of the original sales price or
                  appraised value. (Refer to MI Premium Terms for specific requirements.)

                NOTE: The LTV ratio used in this calculation will be based on the
                lower of the original sales price or appraised value.


MI Premium      The following table illustrates the mortgage insurance premium amounts:
Amounts

                                     Up-Front
                    Term             Premium                LTV             Annual Premium
                30-Year                1.5%          89.99 and under             .50%
                                       1.5%          90 - 95                     .50%
                                       1.5%          95.01 and over              .50%
                15-Year                1.5%          89.99 and under            None
                                       1.5%          90 - 95                     .25%
                                       1.5%          95.01 and over              .25%

                · The annual premium is based on the average 12 months outstanding
                  declining principal balance.
                · Refer to Mortgagee Letters 00-38 and 00-46, for a copy of the most recent
                  UFMIP Refund Schedule.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 22
Credit Policy                                                           Chase Correspondent Division



FHA Mortgage Insurance Premiums (a/k/a MIP), Continued


Condos           Condominium mortgage premiums are similar to annual mortgage insurance
                 premiums except that the premium is .50% annually for the life of the
                 mortgage.


Streamline       · Streamline refinances on loans closed prior to July 1, 1991 will remain
Refinances         exempt from the annual premium and will be charged an up-front premium
                   of only 1.50%.
                 · If the original mortgage was made after July 1, 1991, the up-front and
                   annual MIP are charged as noted for regular FHA loans.
                 · If it is a streamline refinance without a FHA appraisal, the renewal premium
                   will be based on a loan-to-value ratio computed using the original property
                   value as displayed in FHA Connection. However, if this value is not
                   available, then the default value of 89.99% may be used.
                 NOTE: The original sale price/value is now located on line 4I in the
                 refinance authorization block located on the Case Number Assignment
                 page within FHA Connection.


MIP Premium      · For loans with terms greater than 15 years, the MIP must be paid for a
Term               minimum of five years and until the loan has been paid down to a 78%
                   LTV.
                 · For loans with terms 15 years or less, the loan must be paid down to 78%
                   with no minimum repayment term.
                 · If the LTV at closing is 89.99% or less, then monthly mortgage insurance
                   premium is not required.


Early Pay-Offs   If a FHA loan originated with an up-front MIP is paid in full within the first
                 84 months of the loan term, the applicant is eligible for a refund of the unused
                 MIP from HUD. This is done by the applicant requesting the funds from
                 HUD after the mortgage holder has informed HUD of the loan payoff.


FHA to FHA       If an applicant refinances his/her existing FHA loan to a new FHA loan, the
Refinances       lesser of the new up-front MIP or Pro-Rata is subtracted from the existing
                 principal balance to calculate the new base loan amount before calculating the
                 new up-front MIP. If the MIP refund exceeds the new up-front MIP required
                 on the new loan, then the balance of the up-front MIP amount is then
                 refunded to the applicants directly from HUD.




July 2004                                                                         FHA and VA – 23
Credit Policy                                                         Chase Correspondent Division



FHA Qualifying Ratios


Monthly         · This ratio is calculated by dividing the monthly PITI by the gross monthly
Housing           income and is used to determine whether a mortgage obligation will be
Expense Ratio     within the applicant’s financial ability to pay.
                · FHA considers 29% to be an acceptable guideline, but this amount may be
                  exceeded if there are acceptable compensating factors.


Total Fixed     · This ratio is calculated by dividing the monthly PITI and all monthly debts
Payment Ratio     having 10 or more months remaining payments by the gross monthly
                  income.
                · FHA considers 41% to be an acceptable guideline, but this amount may be
                  exceeded if there are acceptable compensating factors.
                · Certain debts, which will be paid in full within 10 months, may also pose a
                  significant burden to the applicant during the early months of the mortgage.
                  The underwriter must consider the effects of those debt payments during the
                  early months of the mortgage payments. Discounting payments due solely
                  to the remaining term should not be automatic. For example, the applicant
                  may have two auto loans totaling $750 monthly with 9 payments still due.
                  If the $750 is included in the fixed payment ratio, it could easily produce a
                  ratio in excess of 41%.

                NOTE: Buydown and ARM applications, which exceed a total fixed
                payment ratio of 41%, should generally not be considered acceptable
                (because the applicant is being underwritten at a rate than is lower than
                the note rate and the monthly principal and interest may increase).
                Therefore, if the ratio exceeds 41%, the application should be scrutinized
                to determine whether compensating factors apply.

                                                                            Continued on next page




July 2004                                                                       FHA and VA – 24
Credit Policy                                                          Chase Correspondent Division



FHA Qualifying Ratios, Continued


Compensating    · Valid compensating factors should represent strengths rather than
Factors           satisfaction of basic program requirements. Compensating factors must be
                  relevant to the marginality or weakness, and must be listed in the remark
                  section of the Mortgage Credit Analysis Worksheet (92900-WS).
                · Compensating factors which may be considered are:
                  · The applicant has successfully demonstrated the ability to pay housing
                    expenses equal to or greater than the proposed monthly housing expense
                    for the new mortgage. If the applicant over the past twelve to twenty-four
                    months has met his or her housing obligation as well as other debts, there
                    should be little reason to doubt the applicant’s ability to continue to do so
                    despite having ratios in excess of those prescribed;
                  · The applicant makes a large down payment from his/her own funds
                    toward the purchase of the property;
                  · The applicant has demonstrated a conservative attitude toward the use of
                    credit and an ability to accumulate savings;
                  · Previous credit history shows that the applicant has the ability to devote a
                    greater portion of income to housing expenses;
                  · The applicant receives compensation or income that cannot be included as
                    gross monthly income but directly affects the applicant’s ability to pay the
                    mortgage. Examples would include income received by an applicant for
                    which continuity or regularity of receipt cannot be established;
                  · There is only a minimal increase in the applicant’s housing expense;
                  · The applicant has substantial cash reserves saved from their own funds
                    after closing;
                  · The applicant has potential for increased earnings, as indicated by job
                    training or education in the applicant’s field of employment;
                  · The home is being purchased as a result of relocation of the primary
                    wage-earner and the secondary wage-earner has an established history of
                    employment, is expected to return to work, and there are reasonable
                    prospects for securing employment in a similar occupation in the new
                    area. The underwriter must address the availability of such possible
                    employment.

                                                                             Continued on next page




July 2004                                                                         FHA and VA – 25
Credit Policy                                                        Chase Correspondent Division



FHA Qualifying Ratios, Continued


Buydowns        For applications involving the use of a temporary buydown to help reduce the
                payment during the early years of the mortgage, the qualifying may be done
                at the bought down rate if the following criteria is met:

                · Maximum reduction in interest is two percent (2%) below note rate;
                · Maximum increase of one percent (1%) per year;
                · Evidence at underwriting that payment increases will not adversely affect
                  applicant’s ability to meet the increased payment. This evidence can be in
                  the form of verified raises/advancement potentials or the ability to manage
                  finances by a greater portion of income being devoted to housing expense;
                  and,
                · Substantial assets available to cushion the effects of the increase;
                · Loan is a fixed rate program. ARM loans are ineligible; (ML98-01)
                · Loan is a purchase transaction - (Chase Policy prohibits the use of
                  temporary buydowns on any refinance).




July 2004                                                                      FHA and VA – 26
Credit Policy                                                          Chase Correspondent Division



VA Mortgage Programs


Overview        VA’s mortgage programs are not as varied as FHA and may only be used to
                finance the acquisition of proposed, under construction, or existing one to
                four family housing, or to refinance existing indebtedness on such properties.


VA ARM          The VA Adjustable Rate Mortgage Program (ARM) is unavailable.


Refinance       · A VA regular refinance loan (called “cash-out” by the VA) must be secured
                  by a property with an existing first lien (can be conventional, FHA, VA, or
                  any other lien of record) that is in the veteran’s name. Properties that are
                  owned free and clear are not eligible for a VA refinance. The dwelling must
                  be owned and occupied by the Veteran as a primary residence. If the
                  funding fee is financed, the loan amount may exceed the 90% limitation or
                  the CRV amount (whichever is applicable) by the funding fee amount only.
                · The maximum entitlement available for a cash-out refinance is $36,000.
                  · Exception - Loans to refinance construction loans, installment land sale
                    contracts, and loans which were assumed by veterans and bear interest at a
                    higher rate than the proposed VA refinancing loan may exceed the 90%
                    LTV. The maximum is the lesser of the CRV or the sum of outstanding
                    loan balance plus allowable closing costs, subject to the veteran’s
                    maximum entitlement.


IRRRL           Interests Rate Reduction Refinance Loan (a/k/a “streamline refi”) is a
Requirements    mortgage on the proceeds of which are used to pay off an existing VA loan.
                The new mortgage is at a lower interest rate than the existing mortgage and
                the entitlement, which is presently outstanding for the property, is transferred
                to the new mortgage. In any event, VA will automatically provide a 25%
                guaranty. This type of mortgage is subject to the following requirements:

                · The maximum mortgage amount is limited to the lesser of the maximum
                  loan amount for conforming loans for single unit properties in the
                  contiguous United States (including financed funding fee) or the sum of the
                  outstanding loan balance plus allowable closing costs, discount fees, and
                  financed funding fee;
                · The veteran’s entitlement must have been used on the mortgage which is
                  being refinanced;

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 27
Credit Policy                                                        Chase Correspondent Division



VA Mortgage Programs, Continued


IRRRL           · Cash back is not permitted;
Requirements    · The loan proceeds may not be used to pay off secondary liens or other
(continued)       debts;
                · Second liens may be subordinated without regard to combined loan-to-
                  value;
                · The new mortgage must be secured by the same property as the existing
                  mortgage;
                · The new mortgage may not exceed the original term plus 10 years;
                · If the veteran is refinancing an ARM to a fixed rate mortgage, the interest
                  rate may be higher than the existing interest rate.
                · Principal and Interest payments must be lower than the monthly payments
                  on the existing loan. There are only four exceptions to this rule:
                  · Existing ARM is being refinanced to a fixed rate mortgage
                  · Energy efficient improvements are financed into the mortgage amount
                  · The term of the new loan is shorter than the term of the existing loan
                  · To prevent imminent foreclosure, the VA, on a case-by-case basis,
                    approves the application.(Must initially have an underwriter’s concurrence
                    prior to sending to the VA)
                · If the existing loan was assumed by a veteran who substituted his/her
                  entitlement, the veteran transferee may refinance the loan under this
                  program
                · If the PITI on the new loan is 20% or more above the PITI on the existing
                  loan, the lender must certify that they have determined that the veteran
                  qualifies for the higher payment. This certification must be accompanied by
                  paystubs, W-2s, and a credit report evidencing stable and reliable income
                  and total monthly obligations being in line. To calculate the increase in
                  PITI as a percentage, subtract the old PITI from the new PITI and divide the
                  difference by the old PITI;
                · The veteran must acknowledge, in writing, the rate, term, and PITI
                  differences between the existing mortgage and the refinance mortgage;
                · The VA funding fee is .5% of the loan amount, and can be paid in cash or
                  financed; fee subject to change.
                · The existing IRRRL must be current. Current is defined by VA to mean
                  that the payment due by the 1st day of the closing month must have been
                  received by the servicer no later than the 16th of the month.

                                                                           Continued on next page




July 2004                                                                      FHA and VA – 28
Credit Policy                                                             Chase Correspondent Division



VA Mortgage Programs, Continued


IRRRL Requirements (continued)

                     If the new
                  IRRRL loan is      but regular PITI
                  to be funded…         payment…                          Then…
                 on or before 15th   hasn’t been paid, new IRRRL loan can include the interest
                 of the month.                         from the 1st of the previous month until
                                                       funding date.
                 after the 16th of   hasn’t been paid, · current Chase customers can be permitted
                 the month,                              to make the payment with certified funds
                                                         at the closing.
                                                       · non-Chase customers must provide proof
                                                         that the current servicer has received the
                                                         payment prior to loan closing.
                                                       · in either even, the maximum interest
                                                         financed cannot exceed 15 days.

                · Either customer may elect to include the due payment in the new IRRRL
                  loan. In that case, the application file must contain verification of
                  employment, credit report and be reviewed by a Chase underwriter. If
                  found acceptable, the loan must be submitted to the VA for prior approval
                  since VA will consider this a “delinquent” payment.
                · The occupancy requirement for an IRRRL is different from the occupancy
                  requirement for other VA loans. The veteran, including the active-duty
                  service member who may be stationed elsewhere, is able to satisfy the
                  occupancy requirement by certifying to prior occupancy.
                · When closing documents are drawn based upon the original payoff quote
                  and the final payoff reflects a lower balance, it is acceptable for the closing
                  agent to reflect the difference as a principal reduction on the HUD-1. Under
                  these circumstances, a new Note and Mortgage/Deed of Trust or
                  Modification is not required, providing the loan amount does not exceed the
                  maximum conforming loan amount.

                                                                                Continued on next page




July 2004                                                                           FHA and VA – 29
Credit Policy                                                          Chase Correspondent Division



VA Mortgage Programs, Continued


Maximum VA      GNMA limits VA loan amounts to the maximum loan amount for
Loan Amount     conventional loans. Therefore, VA loans originated in excess of this amount
                must be paid down and the documents must be modified accordingly.
                Acceptable modification methods include:

                · Execute a new Note and Mortgage/Deed of Trust, which reflects the
                  reduced mortgage amount and/or the reduced P&I, or
                · Execute a Modification Agreement reflecting an original loan amount equal
                  to or less than the conforming loan amount and a P&I payment based on
                  this amount.

                NOTE: In addition to executing a new Note/Mortgage/Deed of Trust or a
                Modification Agreement, prior to funding, The HUD-1 must reflect the
                amount of principal reduction.


Buydowns        Temporary Buydowns are only permitted on purchase transactions. (Chase
                Policy prohibits the use of temporary buydowns on any refinance.) The
                loan is qualified at the note rate.


Energy          In any VA application where the mortgage amount is increased due to the
Efficient       inclusion of energy efficient improvements, the addition of the funding fee,
Improvements    etc., the total loan amount may never exceed the maximum conforming loan
                amount.


Assumptions     Assumptions of VA mortgages created on and after March 1, 1988 require
                prior approval by the loan holder and the VA. Unless the assumptor is a
                veteran and wishes to substitute his/her entitlement, the existing veteran is not
                released from the VA guaranty obligation.

                                                                             Continued on next page




July 2004                                                                         FHA and VA – 30
Credit Policy                                                          Chase Correspondent Division



VA Mortgage Programs, Continued


Eligible VA     · A Veteran is a person who served in the active military, naval, or air
Applicants        service, and who, except for a service member on active duty, was
                  discharged or released from active duty under conditions other than
                  dishonorable. The minimum service required is as follows:

                      Era                   Dates                     Length of Service
                WW II            09/16/40 - 07/25/47         90 days
                Peacetime        07/26/47 - 06/26/50         181 continuous days
                Korean           06/27/50 - 01/31/55         90 days
                Post Korean      02/01/55 - 08/04/64         181 continuous days
                Vietnam          08/05/64 - 05/07/75         90 days
                Post Vietnam     05/08/75 - 09/07/80         181 continuous days
                Enlisted         09/08/80 - 08/01/90         2 years
                Officers         10/17/81 - 08/01/90         2 years
                Persian Gulf     80/02/90 - undetermined     2 years or period called to active
                                                             duty not less than 90 days

                · Exceptions to the 2-year length of service requirement after 9/7/80 are
                  individuals who where released from active duty due to a reduction-in-force
                  by the government or for certain medical reasons.
                · An active duty service member is eligible only while on active duty and
                  after having served on continuous active duty for at least 181 days (90 days
                  during the Persian Gulf War) unless discharged or separated from a
                  previous qualifying period of active duty service.
                · Members of the Reserves or National Guard who are not otherwise eligible
                  for loan guaranty benefits are eligible upon completion of six years service
                  in the Selected Reserve, unless discharged prior to the full term because of a
                  service connected disability. An individual must have been honorably
                  released from such service unless he or she continues serving in the
                  Selected Reserve. The Selected Reserve includes the reserve components of
                  the Armed Forces, the Army National Guard, and the Air National Guard.
                  Eligibility for these individuals will expire on October 18, 1999.
                · An unremarried surviving spouse of an eligible person who died as a result
                  of service or service-connected injuries may also be eligible for a VA-
                  guaranteed loan.
                · The spouse of an active duty service member who is missing in action or
                  who is a prisoner of war may be eligible.

                                                                             Continued on next page




July 2004                                                                         FHA and VA – 31
Credit Policy                                                             Chase Correspondent Division



VA Mortgage Programs, Continued


Certificate of   Listed below are the codes, which will appear on each Certificate of
Eligibility      Eligibility upon issuance.
Codes

                  Entitlement
                     Code                               Determining Factor
                       01       World War II Service (active duty served September 16, 1940
                                through July 25, 1947). Minimum time requirement: 90 days,
                                Active Duty.
                       02       Korean Conflict Service (active duty served June 27, 1950 through
                                January 31, 1955). Minimum time requirement: 90 days, Active
                                Duty.
                       03       Post-Korean Conflict Service (active duty served February 1, 1955
                                through August 4, 1964). Minimum time requirement: 181 days,
                                Active Duty.
                       04       Vietnam Era Service (active duty served during the period August
                                5, 1964 through May 7, 1975). Minimum time requirement: 90
                                days, Active Duty.
                       05       Restoration of Entitlement Previously Used. Must show case
                                number if not notifying them.
                       06       Unremarried Surviving Spouse (veteran’s death must be
                                established as service-connected).
                       07       Spouse of POW/MIA (Prisoner-Of-War/Missing In Action).
                       08       Peace-Time Service (active duty served only during the period July
                                25, 1947 through June 26, 1950). Minimum time requirement:
                                181 days, Active Duty.
                       09       Post-Vietnam Era Service (service after May 7, 1975 except as
                                established during the Persian Gulf Conflict). Minimum time
                                requirement: 24 months, Active Duty.
                       10       Persian Gulf Conflict Service (Reservists called to active duty from
                                August 2, 1990 until terminated by Executive Order). Minimum
                                time requirement: 90 days, Active Duty.
                       11       Reservists and National Guard Personnel (See Loan Guaranty
                                Bulletin 92-25, Veterans Home Loan Program Amendments of
                                1992). Minimum time requirement: 6 years, Selected Reserve.
                                (This benefit expires on October 28, 1999.)

                                                                                Continued on next page




July 2004                                                                           FHA and VA – 32
Credit Policy                                                           Chase Correspondent Division



VA Mortgage Programs, Continued


VA Guaranty     · Mortgage loans made to veterans by approved private lending institutions
                  are guaranteed by the VA.
                · The guaranty protects lenders from financial loss in the event the veteran, or
                  a subsequent owner who assumes the mortgage, fails to repay the loan.
                · The amount of guaranty depends on the loan amount and the veteran’s
                  remaining entitlement.
                · Presently, the amount of guaranty on VA loans with full entitlement is as
                  follows:

                             If the loan amount is…                   Then the guaranty is…
                $45,000 or less,                                  50% of loan amount.
                $45,001 - $56,250,                                $22,500.
                $56,251 - $143,999,                               lesser of $36,000 or 40%.
                $144,000 - Maximum conforming loan amount,        lesser of $60,000 or 25%.

                NOTE: The $60,000 is not available to veterans applying for a cash-out
                refinance. Instead, the guaranty is limited to $36,000.


Entitlement     The amount of entitlement available to the veteran is shown on the Certificate
                of Eligibility (a form issued by the VA which “certifies” that the veteran is
                eligible to receive VA benefits for a purchase or refinance of a home).

                     Service Eligibility                      Amount of Entitlement
                December 27, 2001 to present      The maximum amount of entitlement is based
                                                  on the loan amount as indicated in the chart
                                                  below.

                                                                                   Then the
                                                                                  maximum
                                                     If the loan amount is…    entitlement is…
                                                    < $144,000,               $36,000.
                                                    ³ $144,000,               $60,000.

                February 1, 1998 to December     $36,000
                26, 2001
                October 1, 1980 to January 31,   $27,500
                1998
                October 1, 1978 to September 30, $25,000
                1980

                                                                              Continued on next page




July 2004                                                                          FHA and VA – 33
Credit Policy                                                             Chase Correspondent Division



VA Mortgage Programs, Continued


Entitlement (continued)

                                 Service Eligibility                  Amount of Entitlement
                   December 31, 1974 to September 30, 1978                 $17,500
                   May 7, 1968 to December 1974                            $12,500
                   September 1, 1951 to May 6, 1974                        $ 7,500
                   Prior to September 1, 1951                              $ 4,000

                   · All veterans will have maximum entitlement if they have not previously
                     used their entitlement.
                   · The various entitlement amounts noted above can be extended to $60,000
                     for purchase transactions with a sales price equal to or over $144,000.
                   · However, the entitlement may not exceed $36,000 if the application is for a
                     cash-out refinance.
                   · Co-signers are ineligible
                   · Applications involving a veteran and non-veteran (excluding husband/wife)
                     or two unmarried veterans are acceptable to Chase. The maximum
                     mortgage amounts differ from the standard calculations and can be found
                     below.


VA Funding         The law requires that veterans pay the Department of Veterans Affairs a
Fee                funding fee for guarantying the loan. Please refer to the table below for the
                   applicable VA funding fee percentage:

                                   VA FUNDING FEE CRITERIA
                                                                          Down Payment
 Transaction      Borrower Is         Entitlement    Mandatory     0-4.99% 5-9.99%     >=10%
Purchase        Veteran            1ST Time Use                     2.20%    1.50%     1.25%
                Veteran            Subsequent Use                   3.30%    1.50%     1.25%
                Reservist/NG       1st Time Use                     2.40%    1.75%     1.50%
                Reservist/NG       Subsequent Use                   3.30%    1.75%     1.50%
Cash-Out        Veteran            1st Time Use        2.20%
Refinance:      Veteran            Subsequent Use      3.30%
Regardless of   Reservist/NG       1st Time Use        2.40%
LTV             Reservist/NG       Subsequent Use      3.30%
IRRRL           Vet/Reservist/NG   Any Use              .50%

                   NOTE: There is no change to the funding fee percentages collected for
                   VA Interest Rate Reduction Rollover Loans (IRRL) and Assumptions.

                                                                                Continued on next page




July 2004                                                                           FHA and VA – 34
Credit Policy                                                           Chase Correspondent Division



VA Mortgage Programs, Continued


Exemptions       Veterans, Reservists, and National Guards with service-related disability are
                 exempt from the Funding Fee.


Restoration of   · A veteran is eligible for an entitlement amount of up to $60,000. Once the
Entitlement        entitlement is used, however, the VA will restore the amount only under the
                   following conditions:
                   · The previous VA loan has been paid in full and the property is no longer
                     owned by the veteran.
                   · The property has been destroyed by fire or other natural hazard, and the
                     VA has been repaid in full for any loss suffered on the loan.
                   · Substitution of entitlement cases involves assumptions where the new
                     veteran assuming the loan has sufficient available entitlement to substitute
                     for the entitlement originally used by the original veteran buyer.
                 · Veterans who used all of their entitlement when it was set at a lower figure
                   are eligible to receive the difference between the entitlement used and the
                   present entitlement even if the veteran still owns the property originally
                   purchased. It is not necessary for the property to be sold in order to use
                   remaining entitlement.
                 · A veteran’s prior use of entitlement may be excluded if the prior loan is
                   being paid in full with a rate and term refinance loan to be secured by the
                   same property. If the veteran has repaid the prior VA loan in full, but has
                   not disposed of the property securing that loan, he may restore his
                   entitlement once. This restoration of the initial use of entitlement is one
                   time only and the Certificates of Eligibility will denote this “one-time
                   restoration” use.
                 · Partial entitlement occurs when a portion of the veteran’s entitlement has
                   already been used and there is only a portion remaining available shown on
                   the Certificate of Eligibility.




July 2004                                                                         FHA and VA – 35
Credit Policy                                                         Chase Correspondent Division



VA Maximum Mortgage Calculations


Purchase        The maximum mortgage amount for a purchase transaction is the least of:

                · The maximum conforming loan amount; or,
                · The lesser of the sale price or appraised value; or,
                · The sum of the veteran’s remaining entitlement plus 75% of the lesser of
                  the appraised value or sale price.

                NOTE: Chase will accept VA loans up to the maximum conforming loan
                amount, provided that, in accordance with GNMA requirements, the
                veteran’s entitlement plus cash down payment is equal to at least 25% of
                the mortgage amount AND no part of the down payment is made up of a
                second mortgage.


Veteran and     The maximum mortgage amount for a purchase transaction involving a
Non-veteran     veteran and a non-veteran is the least of:

                · The maximum conforming loan amount; or,
                · The lesser of the sale price or appraised value; or,
                · 75% of the lesser of the appraised value or sale price. To that amount, add
                  the prospective VA guaranty, which will be based on one half of the lesser
                  of the sales price or value.

                Use the chart below to determine the VA guaranty amount based on the “sale
                price divided by 2” calculation.

                        If the calculation is…                Then VA guarantees…
                 up to $45,000,                      50% of the calculated amount.
                 between $45,001 and $56,250,        $22,500.
                 between $56,251 and $144,000,       40% of the calculated amount.
                 between $144,001 and the maximum    25% of the calculated amount.
                 conforming loan amount,

                NOTE: Certain applications (i.e., those involving a veteran and a non-
                veteran applicant, or those involving two veterans) require greater
                scrutiny because the entitlement amounts may be calculated differently.
                Therefore, be sure to obtain further review and approval by VA prior to
                closing to ensure the loan is properly closed in accordance with VA
                guidelines.

                                                                            Continued on next page




July 2004                                                                       FHA and VA – 36
Credit Policy                                                         Chase Correspondent Division



VA Maximum Mortgage Calculations, Continued


Price Exceeds   · In any purchase transaction, the veteran may pay a purchase price that
Value             exceeds the appraised value, but must pay in cash the amount that exceeds
                  the appraised value. Borrowed funds or secondary financing are not
                  acceptable to be used for this down payment requirement.


Improvements    · The maximum calculated mortgage may be increased by as much as $3,000-
                  $6,000 (but the total mortgage amount may never exceed the maximum
                  conforming loan amount) to include the following: thermostats, water
                  heaters, heating/cooling systems, attic floor and foundation wall insulation,
                  weather-stripping/caulking, storm windows/doors.
                · The cost of the improvements are escrowed, since the work is done after the
                  close of escrow. Unlike other escrows, the VA does not require lenders to
                  hold 150% of the estimated cost; instead, the lender is only required to hold
                  the actual cost.




July 2004                                                                       FHA and VA – 37
Credit Policy                                                             Chase Correspondent Division



VA Underwriting Guidelines


Seller          · Seller Concessions are defined as anything of value added to the transaction
Concessions       by the builder/seller for which the buyer pays nothing additional and which
                  the seller is not customarily expected or required to pay or provide.
                · Such concessions include payment by the builder/seller of the buyer’s
                  funding fee, prepaids, giveaways, and payoff of credit balances on behalf of
                  the buyer. (This list is not all inclusive.)
                · Any concession or combination of concessions, which exceed 4% of the
                  CRV or LAPP value, is considered excessive for VA purposes.
                · Normal discount points and payment of the buyer’s closing costs will not be
                  considered a concession.
                · Items left for seller’s convenience (i.e., drapes, light fixtures, curtains, etc.)
                  will not be considered a concession.
                · Items of value (i.e. microwave ovens, TV’s, lawn mowers, etc.) will be
                  considered a concession and is therefore limited to the 4% limit.


VA Qualifying   · A veteran’s total fixed payment includes the PITI, all revolving credit
Ratio             accounts, installment loans (which include any account of less than 10
                  months duration which require payments so large as to cause a severe
                  impact on the family’s resources for any period of time), child care
                  expenses, child support, alimony, and separate maintenance obligations,
                  commute expense, etc. The total fixed payment is divided by the gross
                  monthly income.
                · If the combined total does not exceed 41% of gross monthly income, the
                  case may be acceptable unless the family has demonstrated an inability to
                  manage affairs as evidenced by an unacceptable credit report.
                · A ratio in excess of 41% may be approved if acceptable compensating
                  factors are present
                · In addition to the total fixed payment ratio, if the ratio is greater than 41%
                  (or the ratio is 41% or less, but the residual does not meet the residual
                  income standard) Correspondents must provide a statement justifying the
                  reasons for approval, signed by the underwriter’s supervisor.
                · If the ratio is greater than 41% and the residual income exceeds the
                  guidelines by at least 20%, the second level review and statement of
                  justification are required. The statement must not be perfunctory, but
                  should list the compensating factors justifying the approval of the individual
                  loan. The ratio should be rounded to the nearest two digits; i.e., 35.6%
                  would be rounded to 36%.

                                                                                Continued on next page




July 2004                                                                           FHA and VA – 38
Credit Policy                                                         Chase Correspondent Division



VA Underwriting Guidelines, Continued


VA Qualifying   · Balance For Family Support (Residual Income) is based on data supplied in
Residuals         the Consumer Expenditure Survey (CES), published by the Department of
                  Labor’s Bureau of Labor Statistics.
                · The VA has developed regional minimum balances for family support
                  (residual income) for loan amounts up to $79,999 and for loan amounts of
                  $80,000 and above.
                · The USDL reports provide data on family expenditures for standard items
                  such as food, health care, apparel, and gasoline.
                · Data for shelter expense, vehicle purchase and retirement contributions are
                  not used because these are shown as separate items when figuring an
                  applicant’s residual income.
                · Expenses such as group hospitalization insurance and union dues are not
                  shown as separate items because they are already accounted for in the
                  minimum residual income figures.
                · The VA uses net income (gross monthly income less taxes and Social
                  Security) less total fixed payment and a figure for maintenance and utilities
                  to arrive at residual income.
                · These residual income figures are derived figures, and therefore are to be
                  used as a guideline rather than an absolute minimum requirement.
                · The VA recognizes that the purchase price of the property may affect family
                  expenditure levels in individual cases and says this factor may be
                  considered in the final loan analysis. For example, a family purchasing a
                  property in a higher-priced neighborhood may feel a need to incur higher-
                  than-average expenses to support a lifestyle comparable to their
                  environment, whereas a substantially lower-priced home purchase may not
                  compel such expenditures.
                · It should also be clearly understood from this information that no single
                  factor is a final determinant in any applicant’s qualification for a VA-
                  guaranteed loan.

                                                                            Continued on next page




July 2004                                                                       FHA and VA – 39
Credit Policy                                                         Chase Correspondent Division



VA Underwriting Guidelines, Continued


Residual        · Use the following chart to determine residual income guidelines for loan
Incomes by        amounts of $79,999 and below.
Region

                 Family Size*       Northeast        Midwest          South             West
                      1               390             382              382               425
                      2               654             641              641               713
                      3               788             772              772               859
                      4               888             868              868               967
                      5               921             902              902              1,004

                NOTE: For families with more than five members, add $75 for each
                additional member up to a family of seven. “Family’’ includes all
                members of the household.

                · Use the following chart to determine residual income guidelines for loan
                  amounts of $80,000 or greater.


                  Family Size*       Northeast       Midwest          South             West
                       1                450            441             441               491
                       2                755            739             738               823
                       3                909            889             889               990
                       4               1,025          1,003           1,003             1,117
                       5               1,062          1,039           1,039             1,158

                NOTE: For families with more than five members, add $80 for each
                additional member up to a family of seven. “Family” includes all
                members of the household.


Residual        For applications in which the applicant or the spouse is an active-duty service
Income for      person or a retired military person near a base or installation, the residual
Active-Duty     income figures may be reduced by a minimum of 5% if there is a clear
                indication that the applicant or spouse will continue to receive the benefits
                resulting from the use of facilities on a nearby military base. (This reduction
                applies to both of the above tables.)

                                                                              Continued on next page




July 2004                                                                         FHA and VA – 40
Credit Policy                                                         Chase Correspondent Division



VA Underwriting Guidelines, Continued


Geographic      The geographic regions for the residual income charts are defined below.
Regions

                                              Geographic Regions
                Northeast     CT, ME, MA, NH, NJ, NY, PA, RI AND VT
                Midwest       IL, IN, IA, KS, MI, MN, MO, NB, ND, OH, SD AND WI
                South         AL, AR, DE, DC, FL, GA, KY, LA, MD, MS, NC, OK, PR, SC,
                              TN, TX, VA & WV
                West          AK, AZ, CA, CO, HI, ID, MT, NV, NM, OR, UT, WA & WY


Compensating    Compensating factors (representing strengths rather than satisfaction of basic
Factors         program requirements) must be relevant to the marginality or weakness of an
                application and may include any of the reasons cited below. However, using
                one of these as a sole basis for approving an otherwise marginal or weak
                application, is not a prudent or proper method of underwriting.

                · Excellent long-term credit
                · Conservative use of consumer credit
                · Minimal consumer debt
                · Long-term employment
                · Significant liquid assets
                · Down payment or the existence of equity in refinancing loans
                · Little or no increase in shelter expense
                · Military benefits
                · Satisfactory home ownership experience
                · High residual income
                · Low debt-to-income
                · Participation by a veteran in a home ownership counseling program whom
                  had good prior credit. (VA Change 27)




July 2004                                                                       FHA and VA – 41
Credit Policy                                                          Chase Correspondent Division



Reviewing Credit History (FHA and VA)


Credit Report   · FHA and VA rely heavily on credit reports, so these reports must be reliable
Requirements      and adequate. They must cover at least two years of credit information and
                  contain sufficient information to provide an accurate picture of the
                  applicant’s financial stability and credit worthiness. Obviously, not all
                  applicants will have two years of credit history. For those applicants who
                  choose not to use credit or have not yet established credit, a credit history
                  can be developed either from a non-traditional credit report or by rent
                  verifications, utility payment records, or other means. However, neither the
                  presence of an extensive credit history nor the lack of credit history of an
                  applicant may be used as a basis for rejection.
                · A credit report must be obtained for each applicant including co-applicants
                  and non-purchasing spouses in a community property state.
                  Creditworthiness must be established for anyone who will be responsible
                  for the repayment of the mortgage debt. This includes a credit check in the
                  spouse’s previous name for applicants married less than 12 months.
                · As an alternative to obtaining a verification of mortgage, the Correspondent
                  may use:
                  · 12 months of canceled checks from applicant showing a satisfactory
                    payment history, or
                  · Year-end mortgage statement plus additional canceled checks to cover
                    most recent 12 months, or
                  · Information on the Residential Mortgage Credit Report if it covers a 12-
                    month period.


RMCR            · Residential Mortgage Credit Reports must meet these FHA and VA
                  guidelines:
                  · Provide credit scores from each accessed repository, and follow Chase
                    guidelines. It is important to understand that credit scores must be used to
                    supplement, not replace an informed decision. Chase does not require a
                    minimum credit score; however, applications with scores of 620 or lower
                    should be viewed as strong indication that the borrower’s credit reputation
                    may not be acceptable. The underwriter should review the score factors
                    and there must be compensating factors and/or extenuating circumstances
                    present with scores in this range to offset this weakness. Examples of
                    compensating factors are: large down payment, evidence of applicant’s
                    satisfactory housing payment during the past 12 to 24 months at an equal
                    or higher payment than the PITI, etc. Additionally, FHA and VA do not
                    require credit scores, nor do they rely heavily on credit score factors.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 42
Credit Policy                                                        Chase Correspondent Division



Reviewing Credit History (FHA and VA), Continued


RMCR             · Be accessed by at least two repositories (Equifax, Transunion, TRW)
(continued)      · The credit report must identify the applicant’s name and social security
                   number.
                 · Twenty-four-month employment and residency history must be verified.
                 · All inquiries made within the past 90 days must be indicated on the credit
                   report and explained in writing by the applicant. New unsecured loans
                   may be construed as a borrowed down payment unless clarified
                   satisfactorily and supported/explained by the applicant.
                 · The credit report must include all credit and legal information that is not
                   considered obsolete under the Fair Credit Reporting Act, such as
                   bankruptcies, lawsuits, judgments, foreclosures, and tax liens that have
                   occurred within the past seven years.
                 · All accounts must reflect the date opened, highest credit, current status,
                   required payment, unpaid balance, and payment history of each account.
                 · The payment history must be described in the “number of times past due”
                   format.
                 · If the credit report does not contain a reference for each open debt on the
                   initial application, Chase must obtain a separate written verification for
                   the unreported debt.
                 · Accounts listed as “will rate by mail only” or “need written authorization”
                   require separate verifications.


Past Credit     Past credit performance serves as the most useful guide in determining the
Performance     attitude toward credit obligations that will govern the applicant’s future
                actions. An applicant who has made payments on previous or current
                obligations in a timely manner represents reduced risk. Conversely, if the
                credit history, despite adequate income to support obligations, reflects
                continuous slow payments, judgments, and delinquent accounts, strong
                offsetting factors will be necessary to approve the loan.

                                                                           Continued on next page




July 2004                                                                      FHA and VA – 43
Credit Policy                                                           Chase Correspondent Division



Reviewing Credit History (FHA and VA), Continued


Credit Report    · When analyzing the applicant’s credit record, it is the general pattern of
Analysis           credit behavior that must be examined rather than isolated occurrences of
                   unsatisfactory or slow payments. A period of financial difficulty in the past
                   does not necessarily make the risk unacceptable if a good payment record
                   has been maintained since. When delinquent accounts are revealed, the
                   reviewer must determine whether the late payments were due to a disregard
                   for, or an inability to manage financial obligations, or factors beyond the
                   control of the applicant. This determination is made by reviewing the
                   applicant’s letter of explanation and supporting documents provided by the
                   applicant. While minor derogatory information occurring two or more years
                   in the past does not require explanation, significant indications of
                   derogatory credit problems require sufficient explanation and supporting
                   documents from the applicant.
                 · FHA and VA require a satisfactory rental history.


In-File Credit   · Minimum report required by FHA and VA is a “three repository merged”
Reports            and must include all credit and legal information not considered obsolete
                   under the Fair Credit Reporting Act. All inquiries within the last 90 days
                   must also be included. An RMCR must be ordered if:
                   · The applicants disputes accounts on the in-file as not theirs; or
                   · The applicants claim that collections, judgments, or liens reflected as open
                     have been paid but cannot provide separate documentation; or
                   · The applicants claim certain debts shown have different balance balances
                     and/or payments but cannot provide current statements; or
                   · The lender’s underwriter determines that it would be prudent to utilize a
                     RMCR in lieu of an in-file.


Collections      FHA and VA usually require payment of collections and a letter of
                 explanation along with any supporting documentation.

                 NOTE: Applicants should not be told to pay the collection accounts
                 prior to the underwriting of the file. Instead, they may submit a letter
                 advising of their intent to pay the account prior to closing and include
                 therein, their explanation of the source of money to be used to pay the
                 collection account(s). A disputed collection (and supporting documents)
                 on an otherwise excellent credit report may be acceptable.

                                                                              Continued on next page




July 2004                                                                         FHA and VA – 44
Credit Policy                                                           Chase Correspondent Division



Reviewing Credit History (FHA and VA), Continued


Judgments       FHA and VA usually require payment of all judgments and a letter of
                explanation and any supporting documentation. An exception may be made if
                the borrower has been making regular and timely payments on the judgment
                and the creditor is willing to subordinate to Chase.


Bankruptcies    · A Schedule of Debtors and Discharge of Bankruptcy along with a letter of
                  explanation are required. A minimum of two years must have passed since
                  the bankruptcy was discharged and the applicant must have re-established
                  good credit and demonstrated the ability to manage financial affairs. The
                  only exception to the two-year requirement is when the bankruptcy was
                  caused by extenuating circumstances beyond the applicant’s control, the
                  applicant has since exhibited an ability to manage financial affairs and,
                  his/her current situation is such that the events leading to the bankruptcy are
                  not likely to recur. Examples of extenuating circumstances are loss of
                  employment due to factory closings, death of wage earner and serious long-
                  term illness.
                · Additionally, the VA requires that a self-employed applicant who has been
                  adjudicated bankrupt and subsequently obtained a permanent employment
                  position may be found a satisfactory credit risk provided the applicant had
                  no derogatory credit prior to self-employment or after the bankruptcy, and
                  that the failure of the business was not due to misconduct. A bankruptcy
                  discharged more than five years ago may be disregarded; one discharged
                  between three and five years ago may be given some consideration
                  depending on the circumstances.
                · Chapter 13- FHA and VA requires the Chapter 13 payment plan be made in
                  a prompt manner for more than one year. A letter from the trustee must be
                  submitted stating that the court is aware of the applicant’s attempt to obtain
                  a mortgage and has given its approval.


Foreclosure     A previous foreclosure action or deed-in-lieu of foreclosure in the past three
                years can make the applicant ineligible for any insured or guaranteed
                mortgage unless the action was caused by certain circumstances beyond his or
                her control. These circumstances include loss of an industry or cutbacks in
                the community, accidents, severe medical expenses, and divorce. The lender
                must develop complete information as to the facts and circumstances of the
                foreclosure.

                                                                              Continued on next page




July 2004                                                                         FHA and VA – 45
Credit Policy                                                          Chase Correspondent Division



Reviewing Credit History (FHA and VA), Continued


Short Sales     Short Sales (where the borrower works out a mutually acceptable payoff
                agreement with their current lender) may be considered credit acceptable if:

                · The applicants credit history otherwise (including mortgage) was
                  satisfactory;
                · There were no foreclosure proceedings initiated.


Federal Debts   An applicant for a federally assisted loan will be considered an unsatisfactory
                credit risk for such loan if the applicant is currently delinquent or in default
                on any debt to the federal government, i.e., Small Business Administration
                loan, U.S. Guaranteed Student loan, Public Health Service, etc., or has a
                judgment lien against his or her property for a debt owed to the government.
                The applicant may not be approved for the loan until the delinquent account
                has been brought current or satisfactory arrangements have been made
                between the applicant and the federal agency owed, or the judgment is paid or
                otherwise satisfied. Of course, the applicant must also be able to otherwise
                qualify for the loan from an income and remaining credit standpoint.


Suspensions     Applicants suspended, debarred, or otherwise excluded from participation in
and             the FHA’s programs are not eligible for a FHA mortgage. HUD’s Limited
Debarments      Denial of Participation (LDP) List and the General Services Administration’s
                (GSA) List of Parties Excluded from Federal Procurement or Non-
                procurement Programs (available via MUFFIN) must be checked and if the
                name of any party to the transaction appears on either list, the application is
                not eligible for mortgage insurance.

                NOTE: An exception is made when a seller appears on the LDP list and
                the property being sold is the seller’s principal residence.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 46
Credit Policy                                                           Chase Correspondent Division



Reviewing Credit History (FHA and VA), Continued


CAIVRS          All FHA and VA applicants (except those applying for a streamline refinance
                mortgage) must be screened on the Credit Alert Interactive Voice Response
                System, also known as CAIVRS. This CAIVRS is in the ECHO/CLAS
                system or in FHA Connection. If CAIVRS indicates the applicant is
                presently delinquent or has had a claim paid within the previous three years
                on a loan insured by FHA, Veterans Administration, Department of Education
                or Small Business Administration on his or her behalf, the applicant is not
                eligible for an FHA or VA mortgage. Any letter other than “A” will mean a
                debt has been discovered. Exceptions to this may be granted under the
                following situations:

                · Assumptions - If the applicant sold the property, with or without a release of
                  liability, to a mortgagor who subsequently defaulted and it can be
                  established that the loan was not in default at the time of assumption, the
                  applicant is eligible. However, for VA purposes, the veteran must also have
                  proved that any deficiency has been paid to the VA.
                · Divorce - An applicant may be eligible if the divorce decree or legal
                  separation agreement awarded the property and responsibility for payment
                  to the former spouse. However, if a claim was paid on a mortgage in
                  default at the time of the divorce, the applicant is not eligible.
                · Bankruptcy - When the property was included in a bankruptcy that was
                  caused by circumstances beyond the applicant’s control (such as the death
                  of the principal wage earner, loss of employment due to factory closings,
                  reductions-in-force, etc., or serious long-term uninsured illness), the
                  applicant may be eligible.


LDP and GSA     FHA requires that applicants not be on HUD’s LDP (Limited Denial of
                Participation) list and that applicants, sellers, and real estate agents not be on
                the Government Services Administration Procurement/Non-Procurement lists.
                This information is obtained through the ECHO system or FHA Connection.
                The processor must print the screen pages that were used as the basis for the
                verification.




July 2004                                                                         FHA and VA – 47
Credit Policy                                                           Chase Correspondent Division



Assets (FHA and VA)


Investment in   The investment in the property must equal the difference between the cost to
Property        acquire the property (including closing costs, discount fees, and
                prepaids/escrows) and the base loan amount. (Most VA applications do not
                require an investment. Often, the only investment required is the amount of
                closing costs and prepaid expenses, or when the amount of eligibility is
                insufficient to produce a “no down payment” mortgage).


Liquid Asset    · Verification of any savings, checking, or other type of account can be made
Verification      by:
                  · Having the depository complete a Verification of Deposit (VOD) form
                    and having the applicant provide the most recent bank statements to
                    support the verification; or,
                  · Having the applicant provide three months original or certified true bank
                    statements. Accounts less than three months old or accounts with
                    balances considerably higher than those indicated as the previous average
                    balance will require a letter from the applicant indicating the source of
                    funds as well as documentation of same. If the average balance section of
                    the VOD is left blank, the two previous months’ bank statements will be
                    required. It may also be necessary to determine that the earnest money
                    deposit cleared prior to the verification of funds.
                  · These procedures do not, however, permit asset verification by the use of
                    automated teller machine (ATM) slips. While ATM slips may have some
                    limited use as “snapshots” of cash assets, they are insufficient in and of
                    themselves for verifying both assets and that improperly borrowed funds
                    are not being used for the cash investment. (ML97-26)
                · If the verification of deposit, bank statements, or a credit report disclose the
                  existence of an unsecured loan that is less than six months old, the applicant
                  must state the purpose of the loan (FHA does not allow the loan to be used
                  for closing costs and/or prepaids) and must furnish proof that the loan funds
                  were used for the stated purpose.

                                                                              Continued on next page




July 2004                                                                          FHA and VA – 48
Credit Policy                                                          Chase Correspondent Division



Assets (FHA and VA), Continued


Borrowed        · VA permits veterans to borrow funds for any part of the investment (except
Funds             a secondary lien when it is intended to cover any portion of the purchase
                  price that exceed the established value).
                · FHA permits applicants to use borrowed funds for the required investment
                  as long as satisfactory evidence is submitted that the funds are fully secured
                  by real marketable assets other than the property being purchased. The
                  borrowed funds must be provided by an independent third party. The seller,
                  real estate broker, marketing agent, or any other party directly or indirectly
                  involved in the transaction is prohibited from providing funds for the down
                  payment. Tools of a trade, household goods, and an automobile that is
                  required for employment are not acceptable. Unsecured financing (i.e.,
                  credit cards, signature loans) is not acceptable.


Family          If the borrowed funds are to be given or were given by a family member. The
Member Loans    family member’s loan plus the FHA first mortgage cannot exceed 100% of
                the sum of closing costs plus the lesser of the sale price or value. Periodic
                repayments are not required, but if they are, they must be considered
                recurring liability. The family member who is giving the loan may borrow
                those funds from any person or entity not having an identify-of-interest to the
                property being purchased by the mortgage applicant. An executed copy of
                the repayment agreement must be in the file.

                NOTE: If any of the borrowed funds from family members is to be used
                toward paying the borrower’s closing costs, those closing costs may still
                be included in calculating the acquisition cost. Family member defined
                includes child, parent, or grandparent. Per FHA Policy, no other relative
                may provide this type of financing. (ML96-58)

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 49
Credit Policy                                                         Chase Correspondent Division



Assets (FHA and VA), Continued


Family          However, if the money lent by the family member is secured against the
Member Loans    subject property, whether borrowed from an acceptable source or from the
(continued)     family member’s own savings, only the family member provider(s) may be
                the note holder. FHA will not approve any form of securitization of the note
                that results in any entity other than the family member being the note holder,
                whether at loan settlement or arranged to occur at any time during the
                mortgage life cycle. Further, if the funds that are lent by the family member
                are borrowed from an acceptable source, the homebuyer may not be a co-
                obligor on that note, i.e., the son and daughter-in-law may not be co-obligors
                on the note used to secure money borrowed by the parents that in turn was
                lent for the down payment. (ML97-27)


Cash on Hand    Cash saved at home must be verified, whether deposited in a financial
                institution or held by the escrow/closing agent. The applicant must provide a
                reasonable explanation of how the funds were accumulated and the length of
                time taken to do so. The underwriter must determine the credibility of the
                savings based on the applicant’s income, spending habits, and history of using
                financial institutions, as well as considering how long it took to accumulate
                the funds.


Cash            FHA and VA require proof of receipt of funds from cash settlements from
Settlement      lawsuits or inheritance.


Commissions     If an applicant derives income from commissions and wishes to use part or all
                of the commission income from a particular period of time, only that amount
                of commissions not included in the calculation of gross income may be used.


Earnest Money   For FHA only- If the amount of the earnest money deposit exceeds 2% of the
Deposit         sales price, or appears excessive based on the applicant’s history of
                accumulating savings, the deposit amount and the source of the deposit must
                be verified funds. Satisfactory documentation includes a copy of the
                applicant’s canceled check or a certification from the deposit holder
                acknowledging receipt of funds, and separate evidence of the source of funds.
                Evidence of source of funds includes a VOD or bank statement showing that
                the average balance at the time the deposit was made was sufficient to include
                the earnest money deposit.

                                                                            Continued on next page




July 2004                                                                       FHA and VA – 50
Credit Policy                                                            Chase Correspondent Division



Assets (FHA and VA), Continued


Gifts            The applicant can use funds obtained as a gift to satisfy all or part of the cash
                 requirements for closing. Eligible donors must be a relative of the applicant,
                 employer or labor union, a charitable organization, a governmental agency or
                 public assistance program, or a close friend with a clearly defined,
                 relationship to the applicant. A gift from any other source is considered an
                 inducement to purchase and requires a reduction to the sales price.
                 Documentation required to verify gift funds are:

                 · A gift letter providing the donor’s name, address, telephone number, and
                   relationship to the applicant, signed by the donor, and the applicant. It must
                   state the amount of the gift and that repayment is not required.
                 · Verification of the transfer of funds from the donor’s account to the
                   applicant’s account, via copies of the donor’s withdrawal slip or canceled
                   check and the applicant’s deposit slip or bank statement.

                 If the funds are not deposited to the applicant’s account prior to closing, the
                 closing agent must verify that he/she received certified funds from the donor
                 for the amount of the gift. (“cashier’s checks” may be acceptable if the check
                 denotes the name of the donor and the account number from which the funds
                 were withdrawn)


Life Insurance   If the applicant will use the cash value of a life insurance policy for down
                 payment and/or closing costs, obtain a letter from the insurance company.
                 The letter must state the policy’s cash value and the percentage of cash value
                 that can be withdrawn. FHA allows an applicant to borrow against cash
                 value, as this is a secured loan. No repayment is required provided the
                 amount of the loan does not exceed the cash value of the policy.


Real Estate      If the applicant’s commission (whole or in part) as a real estate agent is to be
Commission       used for the closing funds, any document specifying the amount of the
                 commission is acceptable. If the application is approved, it will be
                 conditioned for evidence that the applicant received the commission and
                 applied part/all of it against the required down payment, closing costs, or
                 prepaids/escrows.

                                                                               Continued on next page




July 2004                                                                          FHA and VA – 51
Credit Policy                                                         Chase Correspondent Division



Assets (FHA and VA), Continued


Rent with       Funds for down payment that are derived from a “rent with option to buy”
Option to       transaction may be used only if an “Option to Buy” clause is contained in the
Purchase        original lease. A statement of Fair Market Rent must be obtained on the
                property from the appraiser as only the amount by which the rent paid
                exceeds the Fair Market Rent may used. For example: If the applicant has
                been paying $800 per month rental and the fair Market Rent is $600, then
                $200 for each month’s rent that has been paid may be used as down payment.
                However, if the Fair Market Rent was $800, no amount of excess rental could
                be used.

                NOTE: Should the applicant have paid less than the Fair Market Rent,
                then that difference must be subtracted from the sale price prior to
                calculation of loan amount and LTV.

                In addition to the lease (which must be a minimum of 12 months duration)
                and the appraiser’s estimate of fair market rent, canceled checks must be
                obtained as evidence of payment for the previous 12 months.


Retirement      If the applicant will use funds from a retirement or profit-sharing account,
                obtain a VOD and the applicant’s last retirement statements and a letter from
                the employer affirming that the applicant may withdraw funds for down
                payment, closing costs, or prepaids while still employed and describing the
                percentage of funds available for withdrawal. In many cases, an employer
                does not allow withdrawal of any funds while the employee is still employed.
                Therefore, the copy of the applicant’s last retirement account statement alone
                is not sufficient.


Sale of         Where the down payment, in whole or in part, is to be derived from the sale
Property        of real estate, the underwriter should be able to calculate whether or not
                proceeds from the sale will be sufficient. A copy of the sales contract should
                be submitted so that the underwriter will be aware of what costs the applicant
                must pay in connection with the sale. The underwriter will subtract those
                costs and all liens/balances due against the item/property to be sold and the
                difference will be considered as an asset. At closing, a copy of the HUD-1
                settlement statement will be required as proof that sufficient funds were
                derived from the sale.

                                                                            Continued on next page




July 2004                                                                       FHA and VA – 52
Credit Policy                                                          Chase Correspondent Division



Assets (FHA and VA), Continued


Savings Bonds   If the applicant will redeem savings bonds for the down payment, closing
                costs, or prepaids the applicant should prepare a list of savings bond serial
                numbers, face amounts, and redemption values and make copies of the bonds.
                Should the applicant be unable to have the bonds copied, then the loan officer
                may certify that he/she saw the bonds and that the statement prepared by the
                applicant is correct. If the application is approved, the underwriter will
                condition for evidence (usually a Redemption Certificate) that the bonds were
                redeemed.


Stocks          If the applicant will sell stocks to use for down payment, closing costs, or
                prepaids obtain a statement from the applicant’s broker listing the type of
                stocks owned, the number of shares and the value of each share, along with a
                letter from the applicant as to how many shares will be sold. If the applicant
                does not have a broker, a copy of the stock certificate(s) along with proof of
                value of the share(s) is also acceptable. A copy of the stock’s listing in a
                recent issue of The Wall Street Journal is acceptable proof of value.


Sweat Equity    Sweat equity is labor the applicant will perform or materials the applicant will
                furnish prior to closing. It may be considered as the equivalent of a cash
                investment to the extent of the estimated cost of the work or the actual cost of
                the materials.

                · Only the repair or improvement items listed on the Conditional
                  Commitment or the Statement of Appraised Value are eligible for sweat
                  equity.
                · The applicant’s estimate of cost may be used, unless the cost of the work is
                  a vital factor in determining compliance with the required minimum
                  investment. In this event, the appraiser or underwriter may determine the
                  amount allowed.
                · Labor may be considered the equivalent of a cash investment if there is
                  reasonable assurance that the applicant has the ability to perform the work
                  satisfactorily and within a reasonable period of time.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 53
Credit Policy                                                        Chase Correspondent Division



Assets (FHA and VA), Continued


Sweat Equity      · Clean up, debris removal, and other general maintenance for proposed
(continued)         construction is not considered as sweat equity.
                  · Delayed work (on-site escrow) is not eligible under sweat equity.
                  · Compensation for work performed by the applicant on other properties must
                    be in the form of cash payment. This work cannot be considered sweat
                    equity.
                  · There can be no cash back to the applicant in these transactions.
                  · VA does not allow sweat equity.


Bridal Registry   Chase does not currently participate in this FHA program. (ML96-56
Accounts          and 97-20)




July 2004                                                                      FHA and VA – 54
Credit Policy                                                            Chase Correspondent Division



Liabilities (FHA and VA)


Definition       The applicant’s liabilities include all installment loans, revolving charge
                 accounts, real estate loans, alimony, child support, separate maintenance
                 obligations, and all other continuing obligations. In computing the debt-to-
                 income ratios, the processor must include, and the underwriter must consider,
                 the monthly housing expense and all other monthly debts which will last for
                 ten months or more or those debts considered significant even though there
                 are less than 10 remaining payments


Alimony/         Alimony, separate maintenance, or child support responsibilities may be
Child Support/   verified by a photocopy of the divorce decree or separation agreement. If the
Separate         divorce or separation is not finalized, these debt obligations can be verified by
Maintenance      the tentative property settlement drawn up by an attorney and signed by both
                 parties. If a tentative property settlement is not available, the applicant will
                 be credited with 50% of the assets and held responsible for 100% of the
                 liabilities. A satisfactory 12 months history (or actual number of months if
                 less than 12 months) of payment must be documented with canceled checks,
                 bank statements, or court records. FHA allows the monthly alimony
                 obligations to be used as a reduction from borrower’s gross income in
                 calculating qualifying ratios rather than as a monthly obligation.


Business Debts   If the applicant is self-employed and claims that a debt shown in personal
                 credit documentation is a business debt, the payment may be disregarded in
                 ratio calculations if it is evident from the tax returns and financial statement
                 that this debt was included as a business expense and is supported by 12
                 months of canceled checks showing evidence that the business is making
                 payments.

                                                                               Continued on next page




July 2004                                                                           FHA and VA – 55
Credit Policy                                                         Chase Correspondent Division



Liabilities (FHA and VA), Continued


Child Care      For VA Only. When there is a young child (age 12 or younger) in the family
Expenses        who cannot care for themselves, or when the parent/guardian cannot provide
                care on a temporary basis, i.e., due to employment hours, the application must
                include information regarding the cost of providing for childcare or,
                alternatively, an explanation as to why there is no cost. The cost of childcare
                must be included as a recurring charge in the fixed payment calculation. If a
                relative or friend watches the child at no cost, then that person, not the
                applicant, must supply a letter. If there is childcare involved then the
                verification of that cost must be supplied by the caretaker.

                NOTE: No letter is required if the spouse is listed as a homemaker,
                however, if the spouse is not an applicant on loan, then a child care letter
                must be provided.


Installment     The actual monthly payment noted on the credit report unless the applicant’s
Debts           last three monthly statements from the creditor disclose a lower required
                payment.


Loans from      The payment stipulated on the repayment agreement (can be a Note or other
Family          such document) is considered a recurring liability. However, if the repayment
Members         agreement does not specify a payment amount or discloses a balloon
                payment, then the debt is not considered a recurring liability.


Revolving       Unless a monthly payment is stated on the credit report or supported by an
Accounts        account statement, 5% of the outstanding balance or $10, whichever is
                greater, will be used as the monthly payment. For revolving credit accounts
                with zero balances, no monthly payment amount needs to be ascribed for
                qualifying/ratio calculation purposes. (VA Change 34)


Secured Loan    (a/k/a Pledged Account) This type of debt does not have to be counted as a
through Bank    liability for calculation of the debt to income expense because although the
Account         applicant is truly making a payment, the security (savings account) of the loan
                is used to pay off the debt in the event the applicant defaults.

                                                                            Continued on next page




July 2004                                                                       FHA and VA – 56
Credit Policy                                                             Chase Correspondent Division



Liabilities (FHA and VA), Continued


Student Loans   If a debt payment, such as a student loan, is scheduled to begin within 12
                months of the mortgage loan closing, it must be included.


Not Recurring   · Obligations not considered to be recurring debt include:
Debts             · federal, state, and local taxes,
                  · FICA or other retirement contributions, such as 401(k)s,
                  · union dues,
                  · automatic deductions to savings accounts and other voluntary deductions,
                  · 401(k) loans.


Contingent      Contingent liability exists when an individual would be held responsible for
Liabilities     payment of a debt should another jointly obligated party default on that
                payment. Unless the applicant can provide conclusive evidence that there is
                no possibility the debt holder will pursue debt collection against him or her
                should the other party default, the following rules regarding contingent
                liability apply:

                · If the applicant is a co-signer on a car loan, student loan, or any other
                  obligation, contingent liability applies except in one of the following
                  situations:
                  · Both parties written statements explain the applicant has not made
                    payments on the loan over the past 12 months nor is expected to make any
                    future payments, and the applicant furnishes evidence attesting to this fact
                    (usually canceled checks).
                  · There was a divorce and the applicant’s ex-spouse was given the
                    responsibility for payment of the obligation as part of a legal separation or
                    divorce settlement.
                · When an applicant is obligated on an outstanding FHA-insured, VA-
                  guaranteed, or conventional mortgage secured by a property which has been
                  sold or traded within the last five years without a release of liability, or is to
                  be sold on assumption without a release of liability being obtained,
                  contingent liability must be considered except in one of the following
                  situations:
                  · There was a divorce and the applicant’s ex-spouse was awarded both the
                    property and responsibility for payment of the mortgage as part of a legal
                    separation or divorce settlement.

                                                                                Continued on next page




July 2004                                                                           FHA and VA – 57
Credit Policy                                                      Chase Correspondent Division



Liabilities (FHA and VA), Continued


Contingent      · The applicant was transferred by his or her employer and is covered by a
Liabilities       home sale guarantee plan.
(continued)     · An appraisal or closing statement from the sale of the property supports a
                  value that results in a 75% LTV ratio; that is, the outstanding balance on
                  the mortgage loan (minus any up-front MIP, if applicable) cannot exceed
                  75% of the appraised value or sales price.
                · The property sold had a FHA-insured mortgage and was sold to an owner-
                  occupant. Proof that the property was sold to an owner-occupant must be
                  obtained.




July 2004                                                                    FHA and VA – 58
Credit Policy                                                          Chase Correspondent Division



Employment and Income Verification (FHA and VA)


Introduction    One of the issues to be considered when attempting to ascertain an applicant’s
                ability to repay the mortgage debt is by reviewing the history and stability of
                employment and income. The anticipated amount of income and likelihood
                of its continuance must be established. Income from any source that cannot
                be verified, is not stable, or will not continue may not be used in calculating
                the applicant’s income ratios. The application and supporting documents
                must demonstrate the applicant’s stability of income.


Employment      · Neither FHA nor VA impose an arbitrary minimum length of time an
Verification      applicant must have held a position to be eligible, but require that the lender
                  must verify the most recent two full years’ worth of employment.
                · When an applicant’s income is derived from employment, verification of
                  employment is required for the past two years (a minimum of 24 months
                  from the date of application).
                · In instances when an applicant does not have 24 months of employment, the
                  probability of continued employment must be analyzed by examining the
                  applicant’s past employment record, qualifications for the position, previous
                  training and education in his/her field, and the employer’s confirmation of
                  continued employment to determine whether the applicant has stability of
                  income.
                · An applicant who changes jobs frequently within the same line of work, but
                  continues to advance in income, may be considered favorably.
                · If an applicant’s employment history indicated he or she was in school or in
                  the military during any of this time, the applicant must provide evidence
                  supporting this (such as college transcripts or discharge papers).
                · The applicant must also explain any gaps in employment of one month or
                  more.
                · The salary of each applicant to be obligated for the mortgage debt must be
                  analyzed to determine whether it can be expected to continue through the
                  first three years of the mortgage loan.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 59
Credit Policy                                                         Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Contract        Unique employment such as contract employees must be treated as though the
Employees       applicant is self-employed. In addition to the verification of employment, the
                previous two years tax returns and current year profit and loss statements are
                required. If the applicant has recently begun work as a contract employee, the
                underwriter should consider the line of work in which the applicant has
                worked immediately prior to the current contract employer and determine
                whether there is a strong relationship of jobs as well as the duration of the
                contract employment. Additionally, the applicant should furnish a CPA’s
                pro-forma tax return for a one year period.


Employed by     When an applicant is employed by relatives, the applicant must submit the
Relative        previous two years tax returns in addition to the verification of employment.
                Clarification of the relationship should be obtained from the applicant and
                employer.


Union           When union applicants derive income from various employers over a period
Applicants      of time, the applicant’s income must be averaged for at least two years. The
                documents necessary to verify this income include:

                · a letter or verification of employment from the union that he or she is a
                  member in good standing,
                · a verification of employment from the applicant’s current employer,
                · signed tax returns (including all W-2s) for the past two years, and
                · copies of pay stubs showing year-to-date earnings for all jobs worked in the
                  current year.


In-Service      An in-service veteran (including reserves and National Guard members) 38
Veterans        CFR part 36, 10/17/97 - employment may be verified using the military
                Leave and Earnings Statement (LES) instead of an employment verification
                as long as the LES contains essentially all information provided on
                verification of employment. The LES must be an original or a lender-
                certified true copy. The LES or an officer’s orders will show the date of
                expiration of the service member’s current contract for active service. When
                that date is less than 12 months before the anticipated loan closing date, the
                loan package must include one of the following in order to be approved:

                                                                            Continued on next page




July 2004                                                                       FHA and VA – 60
Credit Policy                                                             Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


In-Service      NOTE: Only required if income will be used to qualify.
Veterans
(continued)     · Documentation of the service member’s re-enlistment or extension of his or
                  her period of active duty to a date beyond the 12-month period following
                  the projected closing of the loan; or,
                · Verification of a valid offer of local civilian employment following release
                  from active duty. All data pertinent to sound underwriting procedures (date
                  employment will begin, earnings, etc.) must be included;
                · A statement from the service member that he or she intends to re-enlist or
                  extend his or her period of active duty to a date beyond the 12-month period
                  following the projected loan closing date, and a statement from the service
                  member’s commanding officer confirming that the service member is
                  eligible to re-enlist or extend his or her active duty as indicated and that the
                  commanding officer has no reason to believe that such re-enlistment or
                  extension of active duty will not be granted; or,
                · Other unusually strong positive underwriting factors, such as:
                  · a down payment of at least 10%,
                  · significant cash reserves, and
                  · clear evidence of strong ties to the community coupled with a nonmilitary
                    spouse’s income so high that only minimal income from the active duty
                    service member is needed to qualify.


Recently        · Special attention must be given to VA loan applications from recently
Discharged/       discharged or retired veterans who have little or no employment experience
Retired           other than their military occupation. When determining whether veterans in
Veterans          these categories qualify from the income standpoint, it is important to fully
                  develop the facts in respect to the veteran’s present employment and
                  retirement income, and to consider each case on its individual merits. In
                  most cases, the veteran’s current income or current income plus retirement
                  income is sufficient. The problem lies in determining whether this income
                  level will continue for the foreseeable future. If the veteran’s employment
                  status is that of a trainee or apprentice, this will, of course, be a factor unless
                  probability of continued employment is favorable. For self-employed
                  veterans, the question is whether there is reasonable chance the business
                  will be successful and produce the required income.

                                                                                Continued on next page




July 2004                                                                            FHA and VA – 61
Credit Policy                                                          Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Recently        · If a recently discharged veteran has no prior employment history, and the
Discharged/       veteran’s verification of employment shows he or she has not been on the
Retired           job long enough to become established, consideration should be given to the
Veterans          duties the veteran performed in the military service. If these are similar or
(continued)
                  directly relate to the duties of the veteran’s present position, such duties
                  may be construed as adding weight to the applicant’s present employment
                  experience. The income from the veteran’s present employment thus may
                  be considered available for qualifying the loan, notwithstanding the fact that
                  the applicant has been on his or her present job only a short time.
                · This same principal can also be applied to veterans recently retired from the
                  service. In addition, when the veteran’s retirement income in relation to the
                  total of the estimated shelter expense, long-term debts and amount available
                  for family support is such that only minimal income from employment is
                  necessary to qualify from the income standpoint, it would be proper to
                  resolve the doubt in favor of the veteran. It would be erroneous, however,
                  to give consideration to a veteran’s income from employment for a short
                  duration in a job requiring skills for which the applicant has had no training
                  or experience.


Verification    · The Verification of Employment (VOE) must be completed in its entirety.
Income and        Any erasures, cross-overs, white-outs, etc., must be initialed by the person
Calculation       who signed and completed the verification form. Year-to-date earnings
                  along with previous year’s earnings must be analyzed carefully to determine
                  declining income or possible time away from the job. These situations
                  should be considered on a case-by-case basis.
                · Income is calculated as follows:

                 Income Payment
                       Type                                    Guideline
                Hourly               · The VOE must state the regular numbers of hours worked
                                       per week.
                                     · The hourly rate multiplied by the hours worked per week
                                       multiplied by 52 (weeks) divided by 12 (months) will
                                       determine the monthly income.
                Weekly               · Multiply the weekly figure by 52 (weeks) and divide the
                                       result by 12 (months) to determine monthly income.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 62
Credit Policy                                                             Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Verification Income and Calculation (continued)

                   Income Payment
                        Type                                       Guideline
                  Daily                · Some workers have a daily base pay (i.e., transportation
                                         workers such as railroad workers, truck drivers, etc.).
                                       · Unless the applicant is guaranteed a minimum number of
                                         days per week, this income is averaged over the past two
                                         years based on two years’ tax returns (including W-2s) and
                                         year-to-date pay stubs.
                                       · If the applicant is not reimbursed for expenses, net income
                                         must be used.
                  Bi-Weekly            · Multiply the bi-weekly figure by 26 (pay periods) and
                                         divide the result by 12 (months) to determine monthly
                                         income.
                  Semi-Monthly         · Multiply the semi-monthly figure by 2.
                  Salary               · Per annum income divided by 12 (months) will determine
                                         monthly income.

                  NOTES:
                  · Certain jobs require applicants to work less than 40 hours weekly (i.e.,
                    a registered nurse may only be required to work 30 hours, etc.). These
                    are considered regular full-time employment.
                  · Certain types of non-taxable income, such as social security, etc., must
                    be “grossed up” to 1.25%. (ML97-26 and 38 CFR part 36 10/17/97)
                    This can be increased further provided the Underwriter receives
                    evidence of how the amount was calculated (submit a copy of the
                    borrower’s personal tax returns and the current federal tax tables and
                    explain the calculation).

                                                                                Continued on next page




July 2004                                                                            FHA and VA – 63
Credit Policy                                                           Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Alternative     Alternate documentation may be used in lieu of a VOE, it consists of:
Employment
Verification    · verbal verification by telephone of the applicants’ employment. Credit
                  vendors may perform the telephone verification of current employment
                  when the alternate income documentation procedure is used (ML97-26). If
                  verification is declined by telephone, full documentation by a VOE must be
                  used; and,
                · an original paystub(s) covering the most recent 30-day period, showing the
                  applicant’s name, social security number and year-to-date earnings;
                · certified copies of the W-2s for the previous two years; and
                · signed IRS 4506 form.


Other Income    Other Income can be considered for ratio-qualifying purposes provided it is
                properly verified. In all cases where income is averaged, the income trend
                must be level to increasing. If the trend is declining, the latest year’s income
                will be used. Further information on the treatment of other income is
                discussed below.


Alimony,        This income may be considered as income when listed on the application.
Separate        Proof must be provided that payments have been received on a regular basis
Maintenance,    for the previous 12 months and are by written agreement or court decree. To
and/or Child    verify this income the applicant must furnish a copy of the divorce
Support         decree/settlement agreement, separation agreement, or court order, and copies
                of canceled checks, bank statements showing regular deposits or court records
                indicating regular deposits or court records indicating the amounts and dates
                received and paid. In addition, child support will be considered provided the
                income will continue for the first three years of the mortgage payments.
                (Periods less than 12 months may be acceptable provided the payer’s ability
                and willingness to make timely payments can be documented). Unless
                otherwise documented by the divorce decree/settlement agreement/separation
                agreement, child support will be determined to end when the dependent child
                reaches the age of 18.

                                                                              Continued on next page




July 2004                                                                         FHA and VA – 64
Credit Policy                                                           Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Annuity,          This is considered gross monthly income provided it can be documented by
Pension, and/or   IRS tax returns or furnishing a letter from the organization providing the
Retirement        income. Additionally, evidence that it will continue for a minimum of three
                  years is required.


Board             This may not be considered as gross monthly income since it usually is not
                  reported to IRS. Additionally, FHA and VA regulations specifically prohibit
                  the use of the mortgage premises as a hotel or boarding house or other similar
                  arrangement.


Bonus             Strong consideration should be given to the fact that bonuses are normally
                  paid per quarter or annually and are usually dependent on the financial
                  success of the company. Since economic conditions would affect the sources
                  and amount of the bonus, it is not a reliable source of income and must have a
                  verified pattern to be considered as gross monthly income. If bonuses are
                  guaranteed by the employer and a minimum amount is stipulated, this income
                  may be considered stable and be used to qualify.

                  NOTE: Bonuses used for funds to close cannot be used for qualifying.


Car Allowance     This may be used as income in the amount by which the applicant’s
                  automobile allowance and expense account payments exceed his/her
                  expenditures as determined from IRS 1040’s. The consistency of the
                  allowance payments must be documented. If the information provided in the
                  tax returns is inadequate to substantiate excess allowance, the “income” will
                  not be eligible for use in qualifying. If the applicant’s employer provides a
                  car allowance and treats it as income for tax purposes, the allowance may be
                  considered income for qualifying purposes.

                  NOTE: If the applicant has a car payment, it must be treated as a
                  continuing debt. It may not be offset by the car allowance.

                                                                              Continued on next page




July 2004                                                                         FHA and VA – 65
Credit Policy                                                          Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Commissions     A minimum of 24 months earned commissions in the same line of work must
                be verified. A 24-month average must be used to determine effective
                monthly income; however, if the income shows a decrease from one year to
                the next, there must be significant compensating factors.

                The year-to-date and past year’s income must be reflected on the VOE. The
                underwriter must be able to determine actual earnings and who is responsible
                for the payment of business expenses, and therefore the previous two years’
                tax returns are always required. If the applicant is reimbursed for any
                business expenses, the employer should state this either on the VOE or in a
                separate letter. If the applicant is responsible for the payment of expenses, a
                year-to-date profit and loss statement is also required covering the period
                through which earnings are verified will be required. Commissions earned
                but not paid may not be used as income.


Disability      This is considered gross monthly income provided it can be documented by
                furnishing a recent copy of the awards letter of benefits or allotment setting
                forth the terms of the income. The benefits must be ongoing for a minimum
                of three years.


Dividends       This may be considered as gross monthly income provided the assets that are
                generating the dividend income will not be used for the down payment or
                closing costs on the proposed loan. The applicant must provide tax returns
                for the previous two years along with verification of current assets via bank
                statements, verification of deposits, etc. This income will be averaged over
                two years or calculated at current market interest rates, whichever is less.


Employer Paid   This is a mortgage interest differential verified to be paid by the applicant’s
Interest        employer and may be considered gross monthly income if it is to continue for
Differential    at least three years. The amount and duration of the subsidy must be verified
                in writing by the employer. The subsidy may only be used as stable income
                for qualifying purposes; it may not be used as a direct reduction of the
                mortgage payment, regardless of the employer’s willingness to forward the
                differential payments to Chase.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 66
Credit Policy                                                          Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Military         This income is paid to an active duty veteran to help subsidize off-base
Quarters         housing costs. The Department of Defense’s policy is to utilize available on
Allowance        base housing whenever possible, and therefore, in order to consider this
                 income, the applicant must furnish DD Form 1747 which is a written
                 authorization for off-base housing. This form entitled “Status of Housing
                 Availability” must have item D checked specifying the off-base housing
                 status is permanent rather than temporary.

                 If the applicant’s income less quarters allowance is sufficient to meet the
                 ratio/residual requirements, there is no need for assurance that the applicant
                 has permission to occupy nonmilitary housing, provided it can be determined
                 that the occupancy requirements of the law will be met. Also, authorization
                 to obtain off-base housing is not required when certain duty assignments
                 would clearly qualify service personnel with families for quarter’s allowance.
                 For instance, off-base housing authorizations need not be obtained for service
                 personnel stationed overseas who are not accompanied by their families,
                 recruiters on detached duty, or military personnel stationed in areas where no
                 on-base housing exists.

                 Some VA field offices have researched the housing situation for bases in the
                 VA office’s jurisdiction and will issue a Loan Guaranty Letter advising that
                 the waiting lists for on-base housing are so long that the applicants won’t be
                 able to obtain on-base housing in the foreseeable future. In these areas, the
                 DD Form 1747 is not required.


Other Military   Certain military allowances, pro-pay, flight or hazard pay, and overseas or
Allowances       combat pay require periodic review and/or testing of the recipient to ascertain
                 whether eligibility for the pay will continue. Because the likely duration of
                 the pay cannot be determined, these allowances may be used only to offset
                 intermediate-term obligations. This pay may be considered as income only if
                 it can be shown that the pay has continued for a prolonged period and can be
                 expected to continue because of the nature of the recipient’s assigned duties.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 67
Credit Policy                                                            Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Mortgage         If a government entity subsidizes the mortgage payments, either through
Credit           direct payments or through tax rebates, these payments can be considered as
Certificate      acceptable income if verified in writing. Either type of subsidy may be added
                 to the gross income or may be used to directly offset the mortgage payment
                 before calculating the qualifying ratios. Chase may be obligated to perform
                 certain servicing or documentation requirements, therefore the MCC program
                 must be approved by Chase’s Underwriting Department for all channels.
                 Evidence of that approval must be included in the underwriting submission
                 package. VA limits the annual amount of a MCC to $2000/year or a
                 maximum $167/month credit against federal income tax deduction, (i.e., $600
                 monthly interest payment and a MCC providing a 20% credit). Applicant
                 would receive $120/month credit (.20 X $600).

                 NOTE: CMMC Underwriting approval of Mortgage Credit Certificates
                 is NOT required for loans underwritten and closed by Delegated
                 Correspondents.


National Guard   Must have been received for two years and expected to continue for three
Income           years. For VA applications, this type income may be used to offset
                 intermediate debts, (i.e., 6 to 24 months if the veteran has served for a period
                 of at least 12 months).


Note Receivable Payments received based on the terms of a Note (commonly referred to as a
                 Note Receivable) may be used as income if the payments are to continue for
                 at least three years from date of underwriting. A copy of the note will be
                 required along with evidence that the income has been received on a regular
                 basis in the previous 12-month period (i.e., tax returns, Schedule B, bank
                 statements, canceled checks, etc.).

                                                                               Continued on next page




July 2004                                                                          FHA and VA – 68
Credit Policy                                                           Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Overtime        Can be considered as gross monthly income provided it is ongoing and a
                pattern has been established. The VOE should indicate the overtime hours
                and rate, that overtime is received on a regular basis, and that it is expected to
                continue. If an employer’s policy does not permit the employer to confirm
                that overtime is expected to continue, Chase does not consider overtime as
                acceptable income unless the applicant can provide evidence of two years
                consistent receipt. The VOE should also indicate regular and overtime
                earnings for the previous year and year-to-date. A substantial increase or
                decrease in receipt of overtime could prohibit its use as effective income
                without an acceptable documented reason. Overtime income received less
                than two years is acceptable where the underwriter has determined that there
                are reasonable prospects of its continuance.


Part-Time       Part-time income derived from a second job is treated similar to overtime.
Income          “Second jobs” are defined as jobs taken in addition to the normal, regular
                employment so as to supplement the applicant’s income.

                 Seasonal part-time income such as that received by a person who works part-
                time at a department store during the Christmas shopping period can be
                considered as uninterrupted if the applicant has worked in the same job “in
                season” for the past two years and expects to be rehired for the next “season.”
                The one year history permitted for overtime and bonus income is not
                applicable to “seasonal” income.

                If the applicant’s regular employment is less than a typical 40-hour work
                week, the stability of that income should be evaluated as any other regular,
                ongoing primary employment. An example of this type of employment
                would be a registered nurse that has been working 24 hours per week for the
                last year. This is the applicant’s primary job even though less than 40 hours,
                and should be included as gross monthly income. This does not mean an
                applicant can pick up a second job to cover the 40 hours without an
                established history of same.

                                                                              Continued on next page




July 2004                                                                          FHA and VA – 69
Credit Policy                                                          Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Rental Income   · If income from other rental property will be used to qualify for the new
                  loan, the documentation (full tax returns, etc.) required of a self-employed
                  applicant should be obtained. As for any self-employed earnings,
                  depreciation claimed may be added back in as income. VA requires three
                  (3) months PITI on the rental property.
                · If the applicant will rent his/her existing home and there is no indication
                  that the property will be difficult to rent, then rental income may offset the
                  current mortgage payment. A signed rental agreement will be required.
                  FHA requires that the rental income be reduced by a vacancy factor (25%,
                  unless the local FHA office has issued a written policy stipulating a lower
                  percentage), whereas most VA offices consider 25% (38 CFR part 36
                  10/17/97) to be the normal vacancy factor. The rental income, less the
                  vacancy factor, is then subtracted by the proposed PITI. The net result can
                  be treated as gross monthly income if it is positive, but must be treated as a
                  recurring liability if it is negative.
                · The amount of rental income from the subject property to be used for
                  mortgage qualification purposes will be based on the prior rental history of
                  the units as verified by the seller’s financial records (prior years’ tax
                  returns) for existing structures or, for proposed construction, the appraiser’s
                  opinion of the property’s fair rental value. Adjustments will be made to
                  reduce estimated gross rental income by allowances for operating expenses
                  and vacancy losses. Additionally, VA requires evidence of cash reserves
                  equaling six months PITI on the rental property, whereas FHA requires cash
                  reserves of three months for three and four unit properties. In the case of a
                  veteran who has no experience as a landlord, it is unlikely that the income
                  from a multi-unit rental property may be used to qualify for the new loan.
                · In a single-family property to be occupied as the applicant’s primary
                  residence, boarder income is not acceptable.


Reservists      Activated reservists or those with actual orders for mobilization must be
                qualified based on active duty pay rather than civilian income. All deployed
                service members (whether active or reserve) are considered to be in a
                temporary duty status and able to provide a valid intent to occupy certification
                without regard to whether or not a spouse will be available to occupy prior to
                the Veteran’s return from deployment.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 70
Credit Policy                                                            Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Social Security   Social Security and/or Supplemental Security income is considered as income
                  provided it can be documented by furnishing a recent copy of the awards
                  letter of benefits or allotment setting forth the terms of the income. The
                  benefits must be ongoing for a minimum of three years. If Social Security
                  benefits are paid to the applicant on behalf of a minor, it may be included
                  provided it is ongoing for three years.


Trust Income      Income derived from a trust can be used provided the income can be verified
                  as ongoing for a minimum of three years. Receipt of trust is verified via
                  copies of the two years previous tax returns and a statement from the trustee
                  indicating the year-to-date disbursement, current value and remaining term.


VA Educational This type income is not considered to be gross monthly income since its
Benefits       purpose is to offset tuition expenses incurred by a veteran.


Government        Income received under a welfare program, unemployment income,
Assistance        workman’s compensation, payments for foster children, etc. is acceptable
Programs          subject to copies of tax returns and to documentation from the paying agency
                  provided the income is expected to continue at least three years. If not
                  expected to last three years, such income may be considered as a
                  compensating factor.


Self-Employed     · An applicant with a 25% or greater ownership interest in a business is
Borrowers           considered self-employed for mortgage loan underwriting purposes.
                    Income from self-employment is considered stable and effective if the
                    applicant has been self-employed for two or more years in the same
                    profession and in the same geographical location. The high incidence of
                    failure during the first few years of a new business require the following for
                    individuals employed less than two years:
                    · An applicant self-employed between one and two years must have at least
                      two years previous successful employment, or a combination of one year
                      of employment and one year of formal education or training in the same or
                      a related occupation. The income from applicants self-employed less than
                      one year may not be considered as gross monthly income.

                                                                               Continued on next page




July 2004                                                                          FHA and VA – 71
Credit Policy                                                          Chase Correspondent Division



Employment and Income Verification (FHA and VA), Continued


Self-Employed     · The applicant’s income earnings trend must be established over the
Borrowers           previous two years, but may be averaged over three years if all three years’
(continued)         tax returns are provided. The income shown on the year-to-date profit and
                    loss statement may be included in determining average income if consistent
                    with the previous years’ earnings.
                · The applicant’s business must be carefully analyzed for the source of its
                  income, and the general economic outlook for similar businesses in that area
                  to determine if the business can be expected to continue to generate
                  sufficient income for the applicant’s needs. Annual earnings that are stable
                  or increasing are acceptable. Conversely, an applicant whose business shows
                  a significant decline in income over the period analyzed may not be
                  acceptable, even if current income and debt ratios meet FHA guidelines.
                · The following documentation is required:
                  · Signed and dated individual federal income tax returns, including all
                    applicable schedules, for the previous two years,
                  · A current financial statement, including a year-to-date balance sheet and a
                    profit and loss statement signed and dated by the applicant.
                  · If the business is a corporation or partnership, copies of signed federal
                    business income tax returns for the last two years with all applicable
                    schedules attached,
                  · A business credit report in addition to the individual credit report is not
                    necessary for a business with modest capital and earning capacity, such as
                    a small grocery, filling station, beauty or barber shop, etc., but is required
                    for larger businesses.
                  · Signed IRS 4506 or equivalent, plus Chase’s “Lender’s Authorization to
                    date IRS 4506.”
                · There are four basic types of business structures (sole proprietorship,
                  corporations, “S” corporations, and partnerships), each of that will require
                  slightly different forms of analysis.




July 2004                                                                        FHA and VA – 72
Credit Policy                                                         Chase Correspondent Division



Collateral (FHA and VA)


Introduction    FHA and VA have specific guidelines for property eligibility and property
                appraisals. Refer to the following sections for more information:

                · FHA appraisals may only be performed by those appraisers listed on FHA’s
                  Roster of Approved Appraisers. A review appraisal will be necessary if the
                  appraiser is on Chase’s Review List. If it is determined that the appraiser’s
                  performance does not meet Chase’s criteria, the appraiser must be notified
                  that s/he may no longer be permitted to perform FHA appraisal on behalf of
                  Chase.
                  NOTE: On HUD REO appraisals when Chase does not order the
                  appraisal (and the appraisal is in the name of HUD) a check of the
                  appraiser is not required. However, if the appraisal is subsequently
                  ordered by Chase due to expiration, then a check of the appraiser will
                  be required.
                · VA appraisers are selected by the Department of Veteran Affairs and thus
                  are not subject to Chase’s appraiser policies.
                · Each FHA and VA office establishes a set payment for appraisals, as well as
                  additional charges for mileage, extra photos, etc.




July 2004                                                                       FHA and VA – 73
Credit Policy                                                          Chase Correspondent Division



Appraisals


Appraisal       The appraiser must include the following:
Documentation
                · Photos mounted on paper showing the rear and front views of subject along
                  with a street scene and a front view of all comparables. If the subject
                  property has a pool or any important problems, include photos of these as
                  well.
                · A diagram of the subject house with square foot calculations, room layout,
                  and doors indicated.
                · A comment sheet if additional space other than what is given on the URAR
                  is needed.
                · A location map for subject and comparables.
                · National Valuation Condition (VC) repair requirement sheet (if applicable)
                  ML97-22
                · Appraiser’s Certification and Statement of Limiting Conditions.
                · Any other documents pertaining to a particular type of construction.

                NOTE: The Department of Housing and Urban Development (HUD) will
                accept electronic signatures on appraisal reports and laser-printed
                photographs for appraisals. (ML95-50)


Property        · Termite damage, inoperative or inadequate plumbing, heating or electrical
Conditions        systems; broken or missing fixtures, rotten or worn out counter tops; any
Requiring         structural failure in framing members; leaking or worn out roofs; defective
Repair            paint surfaces; masonry and foundation damage; drainage problems; wood
                  floors worn through the finish; broken plaster or sheet rock; and
                  requirements to meet the code but only in certain HUD programs requiring
                  code compliance.
                · Any element that, while still operable or useful, will have reached the end of
                  its useful life within a period estimated not to exceed two years, should also
                  be replaced. With respect to such deferred maintenance items, good
                  judgment must be exercised.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 74
Credit Policy                                                           Chase Correspondent Division



Appraisals, Continued


Property         · No Replacement of an element simply because of its age and for no other
Conditions         reason, shall be made if the element is still functioning well. Where there is
Requiring          doubt because of age, but the element or system appears satisfactory, a
Repair             certification as to its condition may be required.
(continued)
                 · The appraiser must make such other requirements as are essential to the
                   health and safety of the occupants.


Property         Surface treatment, beautification, or adornment, which is not connected, to
Conditions Not   work required for the preservation of the property, its continued physical
Requiring        soundness or marketability, or the health and safety of its occupants.
Repair


Informing        · For FHA transactions, a statement of appraised value (HUD Form
Applicants of      92800.5B) must be given to the applicant.
Appraised        · For VA transactions, a Certificate of Reasonable Value will be issued by the
Value
                   VA directly to the applicant (and copy to the lender) or a Notification of
                   Value must be sent by Chase’s underwriter to the veteran for cases
                   appraised under the LAPP process.


FHA Cost and     · Cost approach must be used for all new construction and existing properties
Income             less than one year old.
Approach         · Income approach must be used on all three or four unit buildings. When the
                   subject is a two-unit building, the appraiser should give some consideration
                   to the income approach, but it need not be a controlling factor.
                 · If either approach must be used, the appraiser’s final estimate of value is not
                   restricted to a maximum 3% difference. (ML97-22)

                                                                              Continued on next page




July 2004                                                                         FHA and VA – 75
Credit Policy                                                           Chase Correspondent Division



Appraisals, Continued


Certifications   FHA and VA loans generally entail the need for certain certifications made by
                 representatives of trade organizations. This section lists the usual
                 certifications and Chase’s policy regarding the content and timing of these
                 certifications.

                 · Certifications will only be required on FHA or VA loans if the appraiser has
                   conditioned for the certifications. However, the underwriter may add or
                   delete any certifications for appraisals performed under FHA’s DE program
                   or VA’s LAPP program.
                 · All certifications are valid for 60 days (90 days for FHA Termite
                   certifications only.) ML95-33 from the issue date (i.e., the date signed by
                   the representative), and must have been signed after the contract date.
                 · Termite certifications must disclose that there is no damage to the structural
                   elements of the home and that there is no active infestation Income
                   approach- must be used on all three or four unit. If there is evidence of
                   structural damage to a home being FHA insured, an FHA Inspector must be
                   contacted to assess the damage and provide recommendations before any
                   corrective measures are taken. The forms required are the National Pest
                   Control Association’s Form NPCA - 99a, Subterranean Termite Soil
                   Treatment Builder’s Guarantee and Form NPCA-99b, New Construction
                   Subterranean Termite Soil Treatment Record. (ML97-40)
                 · If the appraiser requires that connection be made to public water or sewer,
                   the connection must be made. Requests for waivers will not be accepted
                   other than for inclement weather or if the municipality confirms connection
                   will occur at a later date.
                 · Water tests must follow the requirements of FHA Mortgagee Letter 95-34.
                 · Roofing certifications should only be made for those properties for which
                   the appraiser has required, part or all, of the roof to be repaired or
                   recovered. The roofing contractor must provide evidence that the
                   repair/recovering meets applicable building codes.
                 · When the property is under construction or proposed construction, a
                   certificate of occupancy must be provided at closing. In certain areas
                   (Staten Island, New York, for instance), a “temporary” certificate of
                   occupancy is permitted.

                                                                              Continued on next page




July 2004                                                                         FHA and VA – 76
Credit Policy                                                         Chase Correspondent Division



Appraisals, Continued


Certifications   · Although FHA no longer requires a Lead Based Paint Disclosure (the owner
(continued)        of the property is responsible to disclose notice), the previous lead-based
                   paint notice required by FHA served an additional purpose by alerting
                   homebuyers to the importance of obtaining a home inspection when
                   purchasing an existing home. (ML 96-29 & ML96-67) Correspondents
                   should use the revised form as attached to ML97-27.
                 · HUD/VA Addendum- Files submitted to underwriting must have either the
                   original handwritten or typed 92900A fully executed. If the handwritten
                   copy is incomplete or the Correspondent signed prior to the applicant, then
                   the loan must contain the fully executed typed version.




July 2004                                                                       FHA and VA – 77
Credit Policy                                                        Chase Correspondent Division



Escrow Holdback


FHA Escrow      · Escrows are permitted for any HUD owned properties which require repair
Holdbacks         (this is because HUD does not permit any repairs to be made to the property
                  until after the loan closing), and
                  · In the event of inclement weather, an underwriter may permit an FHA
                    escrow to be established.
                  · The Correspondent must provide the underwriter with the appraiser’s
                    inspection report on HUD 92051 whereon the appraiser has recommended
                    the escrow, at least two estimates of the repair costs, the HUD 92300
                    forms.
                · Typically, the duration of the escrow is limited to a reasonable time in
                  which the repairs could be completed, but will ultimately be the
                  underwriter’s decision. For instance, in Florida, it would be reasonable to
                  only permit a 30-day escrow if inclement weather (i.e., hurricane) for the
                  repair of a roof, whereas a 60- or a 90-day escrow may be required in New
                  Hampshire during the winter months.
                · The Correspondent has the obligation to verify that the work has been
                  completed before the end of the escrow period.

                NOTE: Minimum of cash to be held on a FHA case is $500 or 1-1/2 times
                the cost of the deferred item, whichever is greater. (4145.1, sec.5.2c)


VA Escrow       · VA repair escrows must be approved by the VA if the appraisal was ordered
Holdbacks         under the Certificate of Reasonable Value basis, but can be approved by the
                  underwriter if the appraisal was issued under the LAPP basis.
                · The Correspondent must provide the underwriter with the appraiser’s report
                  recommending the escrow, two estimates, and a VA 26-1847 form.
                · As in the case of FHA, the duration of the escrow is dependent on VA (for
                  CRVs) or the underwriter (for LAPP appraisals), and the Correspondent is
                  responsible for assuring the completion of the work.




July 2004                                                                      FHA and VA – 78
Credit Policy                                                        Chase Correspondent Division



Eligible Properties


Overview        Properties eligible for financing under FHA or VA programs include:

                · Detached or semi-detached dwellings
                · Row or end-row dwelling
                · 1, 2, 3, or 4 unit dwellings
                · Condos
                · PUDs


Condos/PUDs     Condominiums on HUD or VA approved list or those approved by the
                Correspondent under FHA’s Mortgagee Letter 96-41 Spot Condominium
                Approval Process

                PUDs on FHA’s Approved List. (VA does not require PUDs to be reviewed
                by VA).

                Condominium Requirements:
                · Condo must be complete, no ongoing or anticipated addition of any
                  common elements, units, and/or facilities
                · Turnover of HOA control for the common areas must have occurred one
                  year prior.
                · HOA must provide evidence project has appropriate hazard, liability, and
                  flood insurance.

                 REFERENCE: For additional information on loans for property
                 located in non-participating communities, refer to the topic “Property
                 Guidelines” in this chapter.

                · Individual units must be owned in fee simple or an eligible leasehold. Legal
                  documents must provide undivided ownership of common areas by unit
                  owners.
                · The project documents should not place any legal restrictions on
                  conveyance.
                · For FHA existing construction, at least 90% of the units in the project must
                  have been sold. For proposed/new construction, the ratio is reduced to
                  70%.
                · At least 51% of the units in the project must be owner-occupied.

                                                                           Continued on next page




July 2004                                                                      FHA and VA – 79
Credit Policy                                                          Chase Correspondent Division



Eligible Properties, Continued


Condos/PUDs     · No single entity (partnership, individual, etc.) may own more than 10% of
(continued)       the units in a project.
                · Condo projects having more than 30 units may have no more than 10% with
                  FHA financing. Projects having 30 units or less may have no more than
                  20% with FHA financing (i.e., minimum number of total units in project is
                  5).
                · The FHA Spot list questionnaire must be completed by a HOA
                  representative and countersigned by both the loan officer and underwriter,
                  who are each responsible for reviewing the information.
                · Utilities must be permanently installed and protected from freezing;
                · The appraiser must inspect the property for evidence of failure or structural
                  stress. If, in the opinion of the appraiser, the property is unsound and will
                  present a health or safety hazard as evidenced by conditions exhibited in the
                  property (such as excessive cracking of walls, ceilings, floors, or brick
                  veneer, uneven floors, etc.), which are attributable to excessive deflection of
                  the foundation or other, causes, the property will be rejected.


Semi-detached   A semi-detached, row or end-row dwelling must be separated from an
                adjoining dwelling by a party or lot line wall extending the full height of the
                building. A room or group of room’s auxiliary to a living unit, such as a
                garage or separate guest quarters, is not considered a separate living unit.


Acreage         Generally, the maximum size of the property may not exceed 10 acres and
                must be supported by valid comparables. If the size of the site is excessive
                when compared with other properties in the immediate area, the excess land
                may not be given any value.


Mixed-Use       Mixed-use properties. No more than 25% of the total floor area can be
Properties      devoted to non-residential use. No portion of the property may be designed
                for non-residential purposes that are inharmonious with the residential
                character of the property intended for family occupancy.

                NOTE: This type of property is ineligible in Illinois.

                                                                             Continued on next page




July 2004                                                                         FHA and VA – 80
Credit Policy                                                         Chase Correspondent Division



Eligible Properties, Continued


Manufactured    Manufactured homes are acceptable provided:
Housing
                · Minimum floor area must be 400 square feet;
                · Must have been constructed after 06/15/76 and bear a seal denoting that it
                  was constructed in conformance with the Federal Manufactured Home
                  Construction and Safety Standards;
                · The home must be classified and taxed as real estate;
                · The mortgage covers the manufactured unit and the site;
                · Must not have been installed or occupied previously at any other site or
                  location;
                · The finished grade elevation beneath the home (or, the lowest finished
                  exterior grade adjacent to the perimeter enclosure, in the case of a
                  basement) must be at or above the 100-year return frequency flood
                  elevation.
                · Must be permanently attached to the foundation by anchoring devices
                  adequate to resist ground movements, seismic shaking, potential shearing,
                  overturning, and uplift loads caused by wind, earthquake, etc.;
                · Must have a properly enclosed crawl space with a continuous permanent
                  foundation-type construction (similar to a conventionally built foundation,
                  i.e., using concrete, masonry, or treated wood).

                NOTE: If the manufactured home is proposed construction, the builder
                or architect must certify that the permanent foundation complies with
                HUD Handbook 4930.3, appendices A, B, and C.




July 2004                                                                       FHA and VA – 81
Credit Policy                                                          Chase Correspondent Division



Property Guidelines

Introduction    FHA and VA have specific guidelines relating to the property as outlined
                below.


Water/Sewer     · Properties having individual water supplies (wells) must be connected to a
                  public water system, if available. If hookup is not feasible, then the seller
                  must provide a statement from the local health authority that the water
                  quality meets the requirements of the state EPA or FHA (whichever is the
                  more stringent). (ML95-34)
                · Cisterns are generally not acceptable.
                · Properties having individual sewage disposal systems (septic system) must
                  be connected to a public sewage system, if available. If hookup is not
                  feasible, seller must provide a statement from the appropriate Health
                  Authority or approved licensed sanitarian that the permitted individual
                  sewage disposal system, with proper maintenance, can be expected to
                  function satisfactorily and is unlikely to create an unsanitary condition. The
                  statement does not constitute an assurance by the authority that the system
                  will continue to perform satisfactorily, only that if properly maintained, the
                  system can be expected to be adequate, based on the authority’s knowledge
                  of present site conditions; and show how many bedrooms the sewage
                  disposal system is designed for and whether there is or is not a garbage
                  disposal.
                · Community water systems and shared wells are acceptable but must meet
                  certain requirements. Refer to HUD Handbook 4150.1 for details.


Additional      · There must be vehicular access to the property in the form of an abutting
Property          public or private street. If the street is private, it must be protected by a
Guidelines        recorded permanent easement and a recorded maintenance agreement (these
                  can be combined on one document). The width and construction of the
                  street and provisions for its maintenance must be such that automobiles can
                  get to and from the property under all weather conditions.
                · Space heaters are generally unacceptable (check with your local HUD
                  office).
                · The property must be approved for year round use and have permanent
                  heating
                · No part of the structure can be less than 10 feet from the outer boundary of
                  the pipeline easement for high pressure gas and liquid petroleum
                  transmission lines.

                                                                             Continued on next page




July 2004                                                                        FHA and VA – 82
Credit Policy                                                              Chase Correspondent Division



Property Guidelines, Continued


Additional       · The location is unacceptable if the dwelling is located within 10 feet of the
Property           outer boundary of a high-voltage transmission line easement or closer than
Guidelines         the fall distance of the tower supporting the lines.
(continued)
                 · The property may be located closer than 300 feet from an active or planned
                   drilling site boundary (as opposed to a well location). The property may not
                   be built within 76 feet of an actual operating well unless mitigating safety
                   measures are taken.
                 · The property may be no closer than 10 feet of an abandoned well. Obtain a
                   letter from the responsible authority within the state government indicating
                   the well was safely and permanently abandoned.
                 · Existing properties located in a flood plain must show evidence of adequate
                   flood insurance. Proposed construction properties located in a flood plain
                   are not eligible for FHA financing unless a LOMA or LOMR is submitted
                   for with case for endorsement. (ML97-41)


Purchase         Refer to the table below to determine eligibility for purchases when the
Eligibility in   property is located in a non-participating community.
Non-
Participating
Communities

                  If the property is located in a non-
                    participating community and…                      Then CMMC will…
                 is not mapped,                          · buy the loan, and
                                                         · pre-purchase can continue to process the
                                                           loan.
                 is mapped in a flood zone,              not buy the loan.
                 is mapped in a non-flood zone,          · buy the loan, and
                                                         · pre-purchase can continue to process the
                                                           loan.


Flood            To purchase a property in a non-participating community, a loan locked under
Certification    a VA, FHA, the loan file must contain a Flood Certificate (FEMA Form 81-
Requirements     93) noting the following information:
in Non-
Participating
                 · Zone must be designated as “None.”
Communities
                 · Map entry field must be left blank.




July 2004                                                                             FHA and VA – 83
Credit Policy                                                          Chase Correspondent Division



                                Credit Administration
Overview


In this Chapter   Included in this chapter are the following topics:

                                                Topic                                See Page
                  Credit Approvals                                                       2
                  Automated Underwriting Systems                                         6
                  Special Underwriting Situations                                        9
                  Pre-Closing conditions                                                14
                  Loans to Foreign Borrowers                                            21
                  Escrow Holdbacks                                                      24
                  Corporate Relocations (Non-Agency)                                    28
                  Party Wall (Shared Wall) Agreement                                    31
                  Appraiser Quality Assurance and Annual Review                         32




July 2004                                                                  Credit Administration – 1
Credit Policy                                                           Chase Correspondent Division



Credit Approvals


Introduction    An approval document must be prepared for every approval loan application.
                The approval document, with appropriate signatures, will be the official
                document to reflect evidence of proper credit approval.


Completion of   The following chart outlines the guidelines for completing an approval
the Approval    document.
Document

                       Topic                                    Guideline
                Signature           · Whenever possible, all-approving, and concurring
                                      signatures should be on the same page.
                                    · The underwriter should ensure his or her signature is on the
                                      official approval document.
                                    · The signature should never be executed in pencil.
                Revisions           · Under no circumstances are “white out” or other methods
                                      of erasure to be used on the approval document with
                                      approval signatures.
                                    · All changes must be evidenced by a line out, accompanied
                                      by the initials or signature of the individual making the
                                      change.
                Errors or Omissions · At times, after an applicant has been issued a written
                                      commitment, or possibly after the loan closed and funded,
                                      an error or omission in the analysis is discovered which
                                      creates an exception that would possibly invalidate the
                                      original approval.
                                    · The approving individual must acknowledge the error by
                                      issuing a memo to the file acknowledging the error or
                                      omission and adding any construction commentary as may
                                      be appropriate.
                Comments or         · A comment is appropriate on the approval document or an
                Explanations          accompanying memorandum in the following situations:
                                      · Credit policy exception or waiver.
                                      · Analysis of the borrower’s use of proceeds or the
                                        transaction is not obvious.
                                      · Use of compensating factors.
                                      · File contains derogatory information.

                                                                              Continued on next page




July 2004                                                                   Credit Administration – 2
Credit Policy                                                       Chase Correspondent Division



Credit Approvals, Continued


Required        The following chart outlines the approval forms required by the Chase
Approval        Correspondent Division based on the method of underwriting:
Forms

                                       and the method of
                   If the file is…     Underwriting is…                 Then use…
                Fannie Mae,          Manual,                  1008 or correspondent- specific
                                                              approval form.
                Freddie Mac,         Manual or LP,            1008.
                FHA,                 Manual or LP,            MCAW.
                VA,                  Manual or LP,            VALA.
                Fannie Mae,          DU,                      Credit Analysis.
                Non-Agency,          Manual,                  1008 or correspondent- specific
                                                              approval form.

                                                                          Continued on next page




July 2004                                                               Credit Administration – 3
Credit Policy                                                            Chase Correspondent Division



Credit Approvals, Continued


Age of          · The approval expires as of the expiration date of the oldest credit document
Documentation     unless the Underwriter designates a shorter expiration date.
                · Use the following chart to determine the acceptable age of documentation:

                  Documentation                            Maximum Age
                All documents       Verifications in the applicant’s file must be current to
                                    ensure that the circumstances by which the loan was
                                    approved are unlikely to change.
                Verification of     The maximum age is based on whether the property exists
                Employment, Credit, or proposed construction.
                and Residence
                                          If the property is…       Prior to the date of Note…
                                        existing,                120 days.
                                        proposed construction,   180 days.

                In-file Credit Reports 120 days regardless of whether property exists or new
                                       construction.
                Verification of        · Can be no more than 45 days earlier than the date of the
                Assets                   application (90 days if quarterly statement).
                                       · The maximum age is based on whether the property exists
                                         or proposed construction.

                                          If the property is…     Prior to the date of the Note…
                                        existing,                120 days.
                                        proposed,                180 days.

                Appraisal             · 12 months
                                      · If over four months old on the date of closing, the
                                        appraiser must re-inspect the exterior and certify the value
                                        has not declined. A new appraisal must be prepared if the
                                        property has declined.
                                      · Any re-certification may not be older than four months of
                                        the date of the Note.

                                                                               Continued on next page




July 2004                                                                    Credit Administration – 4
Credit Policy                                                         Chase Correspondent Division



Credit Approvals, Continued


Long-Term       Any loan approved exceeding the standard commitment time-frames stated
Commitments     above are defined as a long-term commitment and must meet the following
                guidelines:

                · Subject to approval and applicable pricing by the Chase Registration
                  department.
                · At time of the initial approval, the Underwriter must have reviewed all
                  current financial statements, tax returns, credit report, and applicable
                  underwriting documentation for the specific product or program.
                · No long-term commitment should be approved without:
                  · convincing reason for the extended commitment,
                  · applicant notified via commitment letter that a review of all updated
                    documentation will be required prior to closing the loan. Such review
                    should show no material change.
                · In event of construction or renovation, borrowers must evidence an
                  additional 10% of the project cost in post-liquidity to accommodate
                  potential cost overruns and other adjustments.
                · Maximum term for a long-term commitment is 12 months.




July 2004                                                                 Credit Administration – 5
Credit Policy                                                        Chase Correspondent Division



Automated Underwriting Systems


Introduction    · Automated underwriting systems can make a loan recommendation
                  automatically based upon the assessment of the information sent to the
                  system.
                · Chase allows the use of the automated underwriting systems of: Fannie
                  Mae and Freddie Mac.
                · It should be noted that the automated underwriting systems do not make the
                  underwriting decision. The requested is either recommended for approval
                  or referred to an underwriter for further evaluation and a credit decision.


Desktop         Fannie Mae’s automated underwriting system is Desktop Underwriter (DU).
Underwriter
                · DU prepares an Underwriting Findings report detailing whether the loan
                  was approved or referred, the data used to evaluate the loan, and providing
                  messages that detail documentation and appraisal requirements. This report
                  should be retained in the loan file.
                · DU approved loans only need to follow the documentation and appraisal
                  requirements detailed in the DU findings report.


Loan            Freddie Mac’s automated underwriting system is Loan Prospector (LP).
Prospector
                · LP prepares a findings report that details whether the loan was approved or
                  referred, the data used to evaluate the loan, and provides messages that
                  detail documentation and appraisal requirements. This report should be
                  retained in the loan file.
                · LP approved loans only need to follow the documentation requirements and
                  appraisal requirements detailed in the LP findings report.

                                                                           Continued on next page




July 2004                                                                Credit Administration – 6
Credit Policy                                                            Chase Correspondent Division



Automated Underwriting Systems, Continued


Validation       Crucial to the risk assessment by the automated system is the accuracy,
Responsibility   integrity, and validity of the data. The responsibility for validating the data is
                 dependent upon the Correspondent’s underwriting authority. Use the
                 following chart to determine who is responsible for validating the loan:

                                                                      And
                      If the                              And        Credit
                 Correspondent                      recommendation Score Then the file may
                       is…         And…                    is…        is…    be validated by…
                 delegated,    submits the          Approve/Eligible  N/A · Correspondent
                               loan through         Accept/Eligible,          Underwriter,
                               DU or LP                                     · MI Contract
                               under their                                    Underwriter (see
                               own Seller/                                    note), or
                               Servicer                                     · Chase
                               number,                                        Underwriter.
                 delegated,    submits the          Approve,         <620 · MI Contract
                               loan through         Accept                    Underwriter (see
                               DU or LP                                       note), or
                               under their                                  · Chase
                               own Seller/                                    Underwriter.
                               Servicer
                               number,
                 delegated,    submits the          Refer,               >680    · MI Contract
                               loan through         Refer with                     Underwriter (see
                               DU or LP             Caution, or                    note), or
                               under their          Caution,                     · Chase
                               own Seller/                                         Underwriter.
                               Servicer
                               number,
                 delegated,    submits the          Refer,               <680    Chase Underwriter.
                               loan through         Refer with
                               DU or LP             Caution, or
                               under their          Caution,
                               own Seller/
                               Servicer
                               number,

                                                                                Continued on next page




July 2004                                                                     Credit Administration – 7
Credit Policy                                                         Chase Correspondent Division



Automated Underwriting Systems, Continued


Validation Responsibility (continued)

                                                                    And
                        If the                             And     Credit
                   Correspondent                    recommendation Score Then the file may
                         is…          And…                 is…      is…    be validated by…
                   delegated,     submits the       Out of Scope    N/A · Correspondent
                                  loan through      Incomplete              Underwriter,
                                  DU or LP                                · MI Contract
                                  under their                               Underwriter (see
                                  own Seller/                               note), or
                                  Servicer                                · Chase
                                  number,                                   Underwriter.
                   delegated or   submits the       Approve,        N/A MI Contract
                   non-delegated, loan through      Accept                Underwriter.
                                  the CHOICE
                                  AU program,
                   non-delegated, evaluates the     Refer,           >680    · MI Contract
                                  loan through      Refer with                 Underwriter,
                                  the LP or DU,     Caution, or              · Chase
                                                    Caution,                   Underwriter.
                   non-delegated,   evaluates the   Refer,           <680    Chase Underwriter.
                                    loan through    Refer with
                                    the LP or DU,   Caution, or
                                                    Caution,
                   non-delegated,   evaluates the   Approve,         >680    · MI Contract
                                    loan through    Accept                     Underwriter,
                                    the LP or DU,                            · Chase
                                                                               Underwriter.

                  *NOTE: Loans submitted through DU/LP under the Correspondent’s
                  own Seller/Servicer number may only be submitted to a MI Contract
                  Underwriter for validation when the Correspondent has an established
                  agreement with the MI Contract Underwriter that is separate from
                  Chase’s CHOICE program.




July 2004                                                                 Credit Administration – 8
Credit Policy                                                          Chase Correspondent Division



Special Underwriting Situations


Temporary D/I   NOTE: This applies to fully documented Non-agency loans only.
Ratios
                As cash flow lender, Chase relies on the debt-to-income ratio as the best
                indicator of our borrower’s normalized debt service requirements. However,
                borrowers can be financially active and, upon occasion, be involved in
                transactions, which cause debt service requirements to fluctuate. There are
                other examples, but some situations include carrying the cost of an existing
                residence pending sale or closing, or having a new home under construction
                prior to the disposition of the current residence.

                · Due to potential or probable shifts in assets, liabilities, and underwriting
                  ratios, the loan must be submitted only upon receipt of all required financial
                  information on the borrower, including tax returns, financial statements, and
                  a credit report.
                · The underwriter should, in all cases, evaluate and report the normalized and
                  the temporary debt structure. When there is a discrepancy between these
                  two ratios the underwriter should do the following:
                  · Assess and specifically quantify the likelihood and duration of this
                    temporary debt structure.
                  · The underwriter must obtain a copy of the listing agreement or sales
                    contract for the home being sold, if we are not including the mortgage
                    obligation(s) or PITI in the debt service. Additionally, the underwriter
                    must evaluate the likelihood and duration of the temporary dislocation as
                    detailed above.
                  · Examine and evaluate the borrower’s ability to service the temporary debt
                    structure by considering the borrower’s cash reserves, disposable income,
                    and ability to convert assets, and credit score.
                  · As evidenced by the file documentation, evaluate the borrower’s
                    motivation and willingness to keep the debt service on a truly temporary
                    basis.
                  · Document underlying assumptions through copies of contracts, relocation
                    agreements, and verification of earned, but not paid bonus income, lease
                    agreements, or other documentation.
                · With consideration given to the above, the underwriter may elect to use the
                  normalized debt-to-income ratio as the qualifying ratio and need not
                  consider the temporary D/I ratio an exception provided that:
                  · A best efforts analysis determines that this dislocation should not persist
                    beyond six months.

                                                                             Continued on next page




July 2004                                                                  Credit Administration – 9
Credit Policy                                                        Chase Correspondent Division



Special Underwriting Situations, Continued


Temporary D/I     · The borrower has a fully executed purchase contract of sale or sufficient
Ratios              post-closing cash reserves to accommodate all debt service for 12
(continued)         months.
                  · The credit memo clearly details the analysis.
                  · Both D/I ratios are shown on the approval document. The normalized
                    ratio should appear as the qualifying ratio. The “temporary D/I ratio”
                    must be shown in the “Comments” section of the approval document and
                    be addressed in the body of the credit memorandum.
                · Borrowers with a residence currently under construction may not be able to
                  comply with all of the documentary requirements due to an extended
                  construction period.


Non-Occupant    In certain situations, it may be necessary to consider the income of a non-
Co-Borrower     occupant co-borrower(s) when the stand alone debt-to-income ratio of the
                occupant co-borrower exceeds Chase normal qualifying guidelines. Use of
                income from a non-occupant co-borrower may be applied subject to the
                following:

                · The occupant borrower must evidence 5% of the down payment from
                  his/her own sources if the LTV is greater than 80%;
                · The occupant borrower must qualify at 35%/43%,
                · The combined incomes qualify at 28%/36% or 40-44% as applicable to
                  income level and LTV,
                · The sum of all borrower’s income and debt must qualify under the specific
                  product or program’s parameters.

                NOTE: Refer to the Products & Programs guide for specific product
                requirements.

                                                                           Continued on next page




July 2004                                                               Credit Administration – 10
Credit Policy                                                            Chase Correspondent Division



Special Underwriting Situations, Continued


Loans Declined    Chase Correspondent will not knowingly entertain a request for approval
by Other Chase    from any borrower who has been declined for the same (substantially) loan
Business Units    request by another Chase business unit or Division. The only exception to
or Divisions      this policy is if the borrower requests a loan at another Chase unit, for which
                  they do not have a product. Even when this occurs, the underwriter must
                  communicate directly with Chase Underwriting and verify that product was,
                  in fact, the reason for the decline. This discussion should be documented in
                  the file.


Loans to Chase,   · All loans to Chase, other Chase employees, and Regulation “O” Insiders
Chase               (Directors and Executive Officers of the bank, including the bank’s
Corporation         subsidiaries and certain affiliates of the bank as well as related interests
Employees, and      of such persons) must be evaluated and approved against the current
Regulation “O”
                    product standards and criteria used for non-employees. All documentation,
Insiders
                    structuring, and approval of employee and Insider loans are to be on a non-
                    preferential basis.
                  · On occasion, specific application of this policy may be ambiguous. In such
                    cases, the underwriter should consult with Chase Underwriting Manager.
                    As Insiders may or may not be employees of Chase, the latest Regulation
                    “O” list must be reviewed prior to every loan approval.

                  Loans to Insiders are strictly regulated by the Financial Institutions
                  Regulatory and Interest Rate Control Act (FIRA) and Chase policy.

                  The loan must be underwritten by the Chase Underwriting Manager prior to
                  funding.

                                                                               Continued on next page




July 2004                                                                   Credit Administration – 11
Credit Policy                                                          Chase Correspondent Division



Special Underwriting Situations, Continued


Chase           The following specifically applies to Chase employees only:
Employees
                · Any loan to a Chase employee should be processed in a location other than
                  the location of the subject’s employment.
                · Any loan to a Chase employee must be approved by the Chase
                  Underwriting Manager.
                · The Chase Underwriting Manager will maintain a file of all approved
                  employee loans.


Loans to        Loans to Employees of Independent Accounting Firms retained by Chase
External        to Audit Chase
Auditors        It is Chase’s policy to prohibit extensions of credit to independent
                accountants (as firms, and as partners, or employees of the firm) where
                arrangements could be construed as a potential conflict of interest. A conflict
                of interest could be construed to arise where Chase and its affiliates propose
                to extend credit to a firm that was regularly engaged to audit Chase and its
                affiliates’ financial statements. A conflict of interest could also be construed
                to arise where Chase and its affiliates propose to extend credit to the partners
                or employees individually, of a firm, which was regularly engaged to audit
                Chase and its affiliates’ financial statements. The extension of credit under
                these circumstances is strictly prohibited by policy.

                However, an extension of credit may be made to persons in the independent
                accounting firm provided the applicant meets all of the following criteria:

                · The borrower does not have a partnership interest in the firm,
                · The borrower does not perform an auditing function in any capacity,
                · Chase receives a letter the firm that meets the following specific
                  requirements.
                  · be specifically addressed to Chase and is contemporaneous with the
                    transactions,
                  · be signed by a senior manager of the accounting firm’s ethics, legal, or
                    human resources department,

                                                                             Continued on next page




July 2004                                                                 Credit Administration – 12
Credit Policy                                                          Chase Correspondent Division



Special Underwriting Situations, Continued


Loans to         · specifically state that the employee seeking application with Chase is not
External           engaged, and will not be engaged, in the future auditing of the financial
Auditors           statements of Chase and/or its affiliates. (Refer to the “Exhibit” section of
(continued)        this guide for a sample letter), and
                 · approval is obtained by a Senior Credit Officer or higher.

                NOTE: There is no exception to this policy. The Accounting Firm
                currently engaged by Chase is Price Waterhouse, Coopers, and LLP.

                Loans to Federal or State Regulators
                Chase policy prohibits the extension of credit to employees of Federal and
                State agencies who examine or have the authority to examine Chase. Federal
                agencies include the following: Officer of the Comptroller of the Currency,
                Federal Deposit Insurance Corporation, and the Federal Reserve Board (and
                any other federal agency identified by Legal). For details on state agencies,
                contact the Underwriting Department for assistance.

                NOTE: Contact the Underwriting Department for any additional
                information or questions about any borrower who may be affected by the
                loan to external auditor guidelines.

                An extension of credit may be made to an examiner of any federal or state
                bank regulatory authority providing that the applicant meets all of the
                following:

                · Chase receives a No Conflict Letter from the regulatory authority that
                  satisfies these specific requirements:
                  · The letter is specifically addressed to Chase and is contemporaneous with
                    the transactions,
                  · The letter is signed by an appropriate senior employee of the regulatory
                    authority, including, for example OCC-District Counsel for the District to
                    which the employee is attached and Federal Reserve - Ethics Attorney for
                    the District to which the employee is attached.
                · The letter specifically states that a loan to the employee seeking to make the
                  application with Chase is permissible because there is no possibility of a
                  conflict of interest.




July 2004                                                                 Credit Administration – 13
Credit Policy                                                              Chase Correspondent Division



Pre-Closing Conditions


Use of Power of Use of a Power of Attorney is discouraged. Unless acceptance is mandated
Attorney (POA) by state law, any use of the Power of Attorney requires review by the Title
                 Company. Risks and appropriate guidance are outlined in the following
                 chart:

                           Risk                                    Guideline
                  Fraud                 Do the reasons given for needing a POA make sense? As
                                        the great majority of customers want to be present at
                                        closing, the reasons should be substantial and correlate to
                                        what we know about the borrowers. It is extremely helpful
                                        if the office has met with all borrowers at least once in the
                                        course of origination and has ascertained at first hand the
                                        necessity for one to be absent.
                  Termination           Notwithstanding how a POA is drafted, it can be rescinded
                                        by the signer for a number of reasons and definitely ceases
                                        if the executor dies prior to the closing.
                  Improper Execution    A borrower (usually at a later date, such as a foreclosure)
                                        may contest the original POA as invalid under governing
                                        law. Generally, the more states involved, the more the
                                        potential conflict and the more we may be at risk. The most
                                        important state is the state where the subject property is
                                        located.

                 To mitigate these three primary risks, the underwriter should observe the
                 following:
                 · General POA are not acceptable; the power of attorney must be specific to
                   the transaction.
                 · The title insurer must approve the use of the POA and ensure Chase’s
                   security interest/deed of trust.
                 · The POA must be recorded with the mortgage/deed of trust
                 · A copy of an identification card must be obtained and retained in the loan
                   file for the applicant who will be closing a POA. Acceptable identification
                   cards are as follows:

                   ·   Drivers License
                   ·   Passport
                   ·   Green Card
                   ·   Alien Identification Card
                   ·   Other Government-issued document evidencing nationality or residence
                       and bearing a photograph or other similar safeguard

                                                                                 Continued on next page




July 2004                                                                     Credit Administration – 14
Credit Policy                                                               Chase Correspondent Division



Pre-Closing Conditions, Continued


Special POA        The following additional conditions apply:
Situations

                         Situation                                   Conditions
                   Americans Residing       · POA must be drafted in the state where the property is
                   Overseas                   to be financed.
                                            · POA must have a “choice of law” clause.
                                            · POA must be executed in a U.S. consulate and attested
                                              to by the counsel or his/her designee.
                                            · State where the property is financed must be the state
                                              where the loan is closed.
                   Foreigners Who Are       Foreigners who are resident aliens (green-card holders) or
                   Resident Aliens          who hold resident visas (E, L, or H) which are at least 3
                                            years in total duration (either elapsed or future), are
                                            considered residents of the State in which they reside or
                                            claim residence. Therefore, standard POA requirements
                                            apply.
                   All Other Foreigners     All other foreigners are technically subject to the
                                            sovereign law of the country of which they are citizens.
                                            We should not accept POAs for this group unless there is
                                            a referring Chase entity that will provide us with a POA
                                            approved by its attorneys and will guarantee that this is
                                            legitimate under a country of residence (i.e., will take
                                            documentary risk).


Title to Subject   Chase requires that title to the subject property be taken in the individual
Property           borrower(s) name(s). The borrower must be of legal age, as defined by the
                   state, to enter into a contract to purchase or refinance real property.

                   The only exception is to be titled in a:
                   · an inter vivos trust, or
                   · a land trust.

                                                                                  Continued on next page




July 2004                                                                      Credit Administration – 15
Credit Policy                                                         Chase Correspondent Division



Pre-Closing Conditions, Continued

Inter Vivos     Inter vivos trust does not require re-approval, if previously approved under
Trust           the name of the borrower(s), provided all conditions listed under “Exercise of
                Authority” and legal review requirements of the trust agreement are met. A
                loan approved in the name of an inter vivos trust does not require reapproval
                if the borrower(s) decide to proceed as individuals(s).

                · For any loan request involving a trust as a borrower or where title is vested
                  in the name of a trust, the trust agreement and any amendments thereto must
                  be forwarded to your attorney for review. Your attorney shall review the
                  trust agreement to determine the following:
                  · How the collateral is vested in the trust.
                  · How the loan agreement is to be signed and executed so as to protect our
                    ultimate recourse against the underlying borrower. The legal
                    recommendation may involve additional requirements for individual
                    guarantees or co-signatures.
                  · The trust complies with all state and local laws and regulations.
                · This legal requirement holds even in single-action states, where Chase may
                  be obliged to choose between the property or the borrower.
                · The Correspondent must ensure that all documentation (including loan
                  application, approval document, title policy, mortgage, or deed of trust, and
                  promissory note) is executed in an identical and consistent manner as
                  prescribed by your legal counsel.
                · Any requests where we cannot obtain sufficient legal protection as required
                  above should be submitted to Chase Underwriting for approval in addition
                  to the normal level of approval. If an existing borrower, for whom we have
                  previously approved and closed a loan in accordance with the above
                  submits a new loan request, Chase may forego a new legal review provided
                  the following requirements are met:
                  · The identity of the borrower(s) including the trust and individual(s) is
                    unchanged.
                  · The borrower resubmits the trust agreement along with a legally binding
                    statement attesting that there have been no amendments or material
                    changes to the agreement originally submitted to us and reviewed by your
                    legal counsel.
                · We do not finance properties that are titled to business entities such as
                  partnerships, limited liability companies, corporations, or S-corporations.”

                                                                            Continued on next page




July 2004                                                                Credit Administration – 16
Credit Policy                                                           Chase Correspondent Division



Pre-Closing Conditions, Continued


Inter Vivos     For loans closed with an inter vivos revocable trust, the Trust Agreement
Trust           must be reviewed by the Correspondent’s legal counsel, rendering an
(continued)     Attorneys Opinion stating that the trust is enforceable and is in compliance
                with state and local laws and regulations. The Correspondent will utilize the
                opinion to provide Chase with their Rep and Warrant of the Trust.


Assumptions     All assumptions will be handled by the Chase Servicing Department in
                Columbus, OH.


Subordinate     The CLTV will be used in determining the qualifying characteristics. For
Financing       those borrowers demonstrating higher income levels, the appropriate D/I ratio
                thresholds may be utilized.

                The documentation for subordinate (a/k/a secondary or junior lien) financing
                by a lender other than Chase must be reviewed by the underwriter to ensure
                Chase’s first lien priority and to ensure the eligibility of the loan for sale in
                the secondary or securities markets. As such, the recorded subordinate
                financing must meet specific repayment terms.

                Please refer to Product Guides for specific subordinate financing
                requirements by Product.



Re-             Requests for Chase to re-subordinate a loan in its servicing portfolio should
subordination   be referred to the Servicing Department in Columbus, Ohio.

                                                                              Continued on next page




July 2004                                                                  Credit Administration – 17
Credit Policy                                                          Chase Correspondent Division



Pre-Closing Conditions, Continued


Subject         · Requests for refinances in which the subject property is “for sale” present
Property For      financial uncertainties and vulnerability both for the borrower and Chase.
Sale/Was for      Due to these risks, Chase will decline these requests.
Sale
                · If the subject property was listed for sale within the last 12 months and is no
                  longer for sale, the following conditions apply:
                  · Not eligible for cash-out refinance.
                  · Copy of canceled listing agreement must be in file; appraiser to confirm
                    that the property is no longer on the market.
                  · Borrower must provide evidence that the property is no longer for sale
                    (i.e., copy of canceled agreement and copies of utility statements in the
                    borrowers name, if applicable, etc).


Questionable    An arms length transaction is a transaction negotiated by parties, each acting
Arm’s Length    in his/her own best interests. Loans must be carefully reviewed to ensure that
Transactions    an “arms length” position exists. Some examples of less-than-arms length
                transactions are:

                · Employees of builders or developers who are purchasing a home from their
                  employer.
                · Subcontractors of builders or developers who are purchasing a home from
                  them.
                · Employees of the lender who are the seller of the property, such as loan
                  officer, processor, or underwriter.
                · The builder/developer or spouse deeding a property to and from him/herself
                  or from the corporation/partnership to him/herself.
                · Builder homes designed as “model homes” purchased for the intent to lease
                  back to the builder/developer.

                                                                             Continued on next page




July 2004                                                                 Credit Administration – 18
Credit Policy                                                            Chase Correspondent Division



Pre-Closing Conditions, Continued


Questionable     · Any other transaction where there is a relationship that might affect the final
Arm’s Length       sales price however, the familial relationship between the buyer and seller,
Transactions       in most cases does not effect an arms length transaction if:
(continued)
                   · The parties are acting independently of each other and in good faith, and
                   · Both parties are knowledgeable and informed about the transaction they
                     negotiate voluntarily in their own self-interests with no reason for
                     collusion.
                   · Also, if the parents are providing a gift for down payment and the source
                     of the gift is from their equity in the sale, their gift of equity does not
                     make the transaction non-arm’s length.


Environmental/   Consumer Loans Secured By Residential Real Estate
Toxic Waste      Few precedents and little experience with environmental losses exist on
Concerns         residential real estate. This fact justifiably argues in favor of a credit policy
                 that carefully balances the cost and competitive factors with the likelihood of
                 occurrence and expected benefits such a policy will provide Chase. Chase
                 will address the issue of toxic and environmental risks in the following way:

                 · Loan Approvals
                   · Any commitment or offer to lend, where all or part of the security for our
                     loan is an interest in real property (including raw land) must be contingent
                     upon satisfaction of Chase’s requirements regarding environmental
                     matters.
                   · Local market awareness must be the first and best defense. Attention to
                     the collateral risks, and keeping abreast of the general market intelligence
                     available on developments, subdivisions and the communities that we
                     consider our primary marketing territory, is the responsibility of the
                     Correspondent. Due diligence should include, but not be limited to, local
                     newspaper articles, discussions with title companies and appraisers, and
                     review of documentation and publications available from the
                     local/regional EPA office. When available, offices should obtain
                     (purchase) the EPA’s CERCLIS list (“Comprehensive Environment
                     Response Compensation and Liability Information System”) that lists
                     properties in one of three categories:

                                                                               Continued on next page




July 2004                                                                   Credit Administration – 19
Credit Policy                                                            Chase Correspondent Division



Pre-Closing Conditions, Continued


Environmental/   · Loan Approvals (continued)
Toxic Waste        · Sites, which “may be potentially hazardous and require preliminary
Concerns             investigation.” Over one-half of all designated sites currently fall into this
(continued)
                     category.
                   · Sites where “no further remedial action is planned.” This group includes
                     sites that have been investigated and based on the investigation no further
                     investigation or remedial action is planned under the Federal Superfund
                     Program.
                   · Final and proposed National Priorities List (NPL) sites. These sites have
                     been investigated and the EPA has determined that the site may represent
                     a long-term threat to public health or the environment.
                 · The underwriter should utilize the CERCLIS and NPL to locate potentially
                   hazardous sites on a city map and examine their proximity to residential
                   areas where we are extending a mortgage facility. Additionally, attendance
                   at local seminars and interrogatories of developers of new home sites as to
                   what environmental studies were performed, is encouraged.
                   · The Correspondent must discuss our toxic and environmental concerns
                     with our approved appraisers and request notification on any appraisal
                     that is so affected.
                   · Any mention of toxic or environmental risks that is communicated (oral
                     or written) by an appraiser, title company, or other third party (including
                     buyer/seller/real estate agent) that would affect the collateral value must
                     be listed as an exception on the approval document, and approved
                     accordingly.

                 NOTE: Keep in mind that the collateral is valued in an efficient
                 supply/demand market and that any concern real or perceived can
                 drastically alter market demand.




July 2004                                                                   Credit Administration – 20
Credit Policy                                                           Chase Correspondent Division



Loans to Foreign Borrowers

Introduction    The following guidance should be observed when considering loan requests
                for non-U.S. Citizens. Co-borrowers who are not U.S. citizens are exempt
                from this policy as long as he/she does not materially contribute to qualifying
                income, cash reserves, or other credit aspects of the loan request.
                All Non-U.S. persons without a taxpayer identification number must provide
                one of the following:
                · Passport
                · Alien Identification Card
                · Other government-issued document evidencing nationality or residence and
                  bearing a photograph or similar safeguard.
                NOTE: Nothing in this section is intended to support the discrimination
                against borrowers of a particular national origin.


Categories of   The following chart provides guidelines for lending under Chase’s Non-
Non-U.S.        Agency products to Foreign Borrowers.
Citizens

                   Category                               Guidelines
                Resident Aliens · Holders of proof of permanent residency (Green Card)
                                · Loans to Resident Aliens may be analyzed and approved
                                  according to normal credit standards provided proof of
                                  permanent residency is verified and documented.

                                 NOTE: A passport stamped “processed for I-551,
                                 Temporary evidence of lawful admission for permanent
                                 residence. Valid until ____,” and validated by an INS Agent
                                 stating I 485 approved evidences that a borrower has been
                                 approved for a green card and can also be analyzed and
                                 approved according to normal credit standards.
                Type E-1         · Treaty Trader or Investor, a national from a country which has
                                   a trade treaty with the U.S.
                Type E-2         · Treaty Trader or Investor who is directing and developing a
                                   business in which one has invested a substantial amount of
                                   capital
                Type H-1B&L      · Intra-company transfer, a person coming to the U.S. to work
                                   for a parent company, branch, subsidiary, or affiliate to one’s
                                   foreign employer.
                                 · Must have been employed by the foreign company for at least
                                   one year immediately prior to transfer to this country.
                                 · Employment must have been as an executive, manager, or
                                   specialist and the job in the U.S. must be in one of those
                                   positions.

                                                                               Continued on next page



July 2004