The Myth of Manual Underwriting

Written By: Bonnie Wilt-Hild
Senior DE Underwriter & NAMP Instructor

I would like to take this week to mourn the death of an old friend. This friend was another casualty of what I would like to describe as the cancer of the mortgage industry, increased loan defaults and plain unscrupulous underwriting practices. This friend whom all true FHA DE underwriters adored, was manual underwriting and he will be sorely missed.

As one who loved to truly underwrite mortgages instead of simply validating findings, I have to say that I believe underwriting will never be the same. I have watched over the past few months as more and more investors have gone to minimum credit scores, dependency on AUS finding and other automated mechanism to insure overall loan quality where FHA mortgage applications are concerned, and as I watched, I observed the art of manual underwriting pass away. No longer do seasoned underwriters have the ability to assess credit quality, determine extenuating circumstances or reason income, this ability has become a thing of the past, replaced by the almighty credit score.

As we are now aware minimum credit scores are the norm for FHA insured mortgages in the secondary market regardless of FHA guidelines, pricing hits for credit scores are also the norm when in the past they were not. FHA has now become business sense instead of a vehicle by which low to moderate income borrowers as well as other underserved segments of the population could obtain homeownership. I used to feel that by being a DE underwriter I was able to assist worthy borrowers with their desire to purchase a home. Homeownership was not simply a method to build wealth but the means to raise a family and build memories. The size and scale of the properties varied as much as the borrower’s income did but it did not matter, if I could assist people who would not otherwise have had the ability to purchase a home, it pleased me. Manual underwriting was much a moral responsibility as it was a fiduciary responsibility.

But as with all else, things change. For as much I will miss the ability to truly work with potential homebuyers from an underwriting standpoint, I also understand that the changes to policy are necessary ones. Implementing credit standards and practices that are consistent with all other loan products regardless of the impact on minority and underserved segments of the population is the only way to close the window of opportunity on unscrupulous lenders. For as much as I hate to admit it, manual underwriting is a method, which can be easily abused. Less than scrupulous lenders have used it in the past and are using it again as a vehicle to put borrowers, who for all intensive purposes do not demonstrate the financial responsibility required for homeownership, into properties at excessive interest rates while charging excessive fees. It is a shame for those individuals that may have benefited from the traditional FHA loan and a shame for the FHA professionals who were truly passionate about the program.

Now instead of reviewing credit we will look at minimum credit score requirements of our investors and simply decide if we can sell the loan or not. We will no longer determine if the borrower is credit worthy or if the extenuating circumstance is acceptable, we will simply look at the AUS findings and the credit score and determine if it is approvable from a salability standpoint not so much prudent from an underwriting standpoint.

Agreed that there is still some circumstances under which the DE underwriter may still complete a manual underwrite, however, the window is so limited that I would consider the manual underwrite more a myth then action.

From an underwriting standpoint we are still limited to the invisible matrix that exists within the secondary market. The borrower who is refinancing out of a subprime mortgage and saving$300.00 monthly may not be able to complete this transaction if his credit score is less the 580 and he does not gain AUS approval. So from an underwriting standpoint, I can not consider that it is a rate/term refinance with a 60%LTV for a borrower who has made all of their mortgage payments on time for the most recent 24 months, who also has 10 years on his current job regardless of how much sense the case makes from an underwriting standpoint. I have simply need to say for as much as I think it’s an approvable loan, I can’t sell it so I can’t approve it.

I will admit that these new practices may produce the desired result in terms of overall portfolio performance. I will also say that it may eliminate the underwriters overall sense of responsibility where loan approval is concerned because the burden can now be placed on the AUS and the mere fact that the credit profile fit eligibility criteria. From a financial or investment standpoint it’s all good. So today we will say farewell to the traditions of the past and the sense of satisfaction that we as underwriters took in performing these tasks and embark on the tasks of tomorrow while we bid goodbye to our friend manual underwriting.

About the Writer. As an NAMP staff writer, Bonnie serves as a senior instructor for FHA Online University as well maintains a full-time job as Senior DE Underwriter for a major banking institution. If you would like to become a writer for NAMP, please email us at: blog@mortgageprocessor.org.