During the recent “dark age” of the mortgage business FNMA put continuity of obligation rules in place to try to slow down the real estate crash.  Terms like buy and bail, declining markets, short sale, departure residence reserves, and many more became normal parts of conversations in countless mortgage shops across the nation.

Continuity of obligation is dead

Good news, another one of those terms is now going to retire and be moved the mortgage hall of fame.  FNMA SEL 2016-02 (https://www.fanniemae.com/content/announcement/sel1602.pdf)  published 02/23/2016 states the effective immediately continuity of obligation is no longer in effect.  Per the release FNMA stated that new guidelines and controls have been put in place.  FNMA stated “These actions collectively provide adequate controls to ensure borrower eligibility requirements and maximum LTV ratio limits are met. As a result, the continuity of obligation policy is no longer required.”

This rule was originally added to ensure that borrowers who recently purchased a new property without a recorded sale of the previous property were properly qualified.  You should note that Desktop Underwriter may continue to add continuity of obligation warnings for a period of time until DU is updated.

 Deal Stopper

The continuity rules were not giant “deal stoppers” but the most common issues I would see was the rule created a lot of friction between loan officers and borrowers when the mortgage was in one spouses name.  This would create conditions to document the required relationship, payment history, and title work when the other spouse wanted to put the mortgage in their name only.  Another sticking point that the rule created was divorce situations, again when moving the financing from one spouse to another.

The retirement of continuity of obligation is another step in making mortgage financing more available to the public!  Quick side note, the messaging for continuity will still show up until FNMA launches DU 10.0 this summer, so for now if your in underwriting just add your note about SEL 2016-02 and move on.