Monday, January 24, 2011

Mortgage Underwriting and Common Sense

When I started out in the mortgage business the interest rates were in the double digits. We did not have mortgage software like “desk top underwriting” (DU, Fannie Mae) or “Prospector” (FHA) so everything was handwritten or typed and with multiple copies.

A mortgage application file was a huge stack of papers. We could not e-mail the package/file to the lender. The file was mailed out with at least one original and two copies of the file. This was in the late 1980's and early 1990's. Not so long ago really.

Although I didn't like all the paperwork we did have the privilege of talking directly with the underwriter about the mortgage guidelines that were relevant to the homebuyers loan. We could work together on loans for the common good.

I would have denials at times but in general the underwriter was right because they were all well trained to know all the program guidelines backwards and forwards. Loans closed faster than they do now, ... even with all the additional paperwork. The serendipity of this is that loan originators learned from underwriters.

Modern technology came very quickly after that. The Internet and mortgage software (automated underwriting) changed everything. We could do loans in record time. I once originated and closed a FHA loan in 5 days.

During this time we had all the technology at our disposal. We had so many different loan programs, including sub-prime, that it was impossible to keep up with all of them.

Starting in 2000 we could no longer have a conversation with an underwriter. The best we could get was a conversation with their coordinator. That was sort of okay because we had an automated approval (computer print out) in hand, which clearly listed the items needed prior to closing. Loan packages/files went to the lender as quickly as you could download them. All was good. Or was it?

When the housing crisis surfaced in 2007 (earlier than that actually) the mortgage industry, as we knew it was gone. Lenders were losing millions daily so the first to go were expenses and thus went the good underwriters and processors. Most major lenders began out-sourcing the underwriting to other countries. Then Mortgage Brokers came under fire almost immediately, especially by the media.

The fire on mortgage brokers can only be understood if you know that you could almost always get a better interest rate and closing costs from an honest broker than a bank or large lender.

The reason is because the Broker knew which lenders had the best rates for you as well as which lenders would be more flexible when or if needed. Banks and large lenders provided no options. You could accept their rate and charges, …or walk. They don’t care and have never been concerned for your best interest. They knew that you didn’t know anything different. Their name was well branded and trusted and they did not need you. Yea, right!!

Underwriting came to a screeching halt. Foreign underwriters did not understand the guidelines and could not communicate with us so lenders/banks had maybe one or two US based people you could direct your questions to. They did not want to expose the fact that underwriting was being done outside the US.

Turn-around times went from 24-48 hours, … to several weeks. By the end of 2007, closing a loan in 30 days was nothing short of a miracle. Everyone Broker and Bank was scrambling to keep their doors open with the few closings they could get.

Automatic approvals didn't mean squat anymore. Even though the program guidelines stated something very specific we now had overlays or risk layers from the lender we had to live with. Basically it meant that whatever the underwriter decides, rules. The official guidelines lost precedence. The underwriter has total control based on their individual justification. Too bad and too sad for you!@!

Gone are the days of manual underwriting and even automated underwriting. Don't count on either when submitting a file. Keep in mind that the guidelines change often, so you must stay informed.

My suggestion is to find a lender you can communicate with and become familiar with their overlays/risk layers. Each lender’s guidelines will be different.

We have all been through the good times and the bad times. Just sit back, be patient and ride it out if you want to stay in the mortgage business. Keep this in mind: “those that hold the gold make the rules”.

Check out FHA Guidelines for the latest on FHA Underwriting.