Manual Underwriting and FHA

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

Due to recent market conditions, we are living in a world of continuous changes in mortgage credit underwriting policy. Everyday our inboxes are filled with email from our Investors and MI companies tightening already restrictive credit policies. Forget creative financing programs or A- underwriting offerings received through DU or LP, MI companies won’t insure them. Fannie Mae and Freddie Mac are still offering some programs developed for the low to moderate income borrower however our investors won’t purchase them and the MI companies will not insure them. Minimum credit score requirements are rising for community homebuyer products to levels that would have traditionally received an Approve/Eligible under flexible mortgage products rendering them useless to the segment of the public for which they were developed.

Additionally, MI companies are no longer considering an Approve/Eligible alone acceptable, should a borrower’s credit score not meet a certain minimum. Considering this, it appears that FHA Manual Underwriting is the only alternative for lenders and brokers but even this option seems to have been challenged in the secondary market.

Very recently I have spoken to mortgage professionals who have said that many of their investors will only approve loans that have received favorable finding through FHA Total Scorecard and although they have not said that they would not accept cases that required manual underwriting, they have quietly chosen not to entertain them. Regardless of current market conditions this is very surprising considering FHA encourages lenders to analyze a borrower’s overall credit history and does not require a case to be evaluated by an AUS.
Manual underwriting has traditionally been the piece of FHA lending that has set it apart as a valuable tool for providing homeownership opportunities for the low to moderate-income borrower, which traditionally does not fit as an AUS modeled borrower. It also makes sense.

I agree that a favorable decision provided by an acceptable AUS provides a lender protection from repercussions from an underwriting standpoint should a case go into default, however it does not guaranty a loan will perform. This is evident in the current market move to not accept favorable AUS decisions under certain circumstances by both larger investors and MI companies. So why not manual underwriting, it provides the one thing that Automated Systems lack, common sense.

If the industry now agrees that we cannot singularly depend on the Automated Underwriting process to determine if a case is acceptable from a mortgage credit analysis standpoint then why not depend on the underwriter to make the decision. As an industry we have traditionally depended on the underwriter to, if nothing else, determine that all items not addressed by the AUS have been resolved and in the case of FHA, make the mortgage credit decision. It makes sense that the underwriter would have the ability to not only determine that the file is property documented but ascertain if the borrower has the ability to repay the debt. Additionally, without the benefit of the AUS in determining if the case is acceptable, the underwriter is responsible for making a quality credit decision that cannot be shrugged off in the event of a mortgage default as having been approved by an AUS. Manual underwriting not only gives a deserving borrower the opportunity to achieve homeownership, it also forces mortgage professionals to accept responsibility for the loans they approve and fund. Everyone wins.

As an underwriter, I have never been fully comfortable simply approving a loan because an AUS said it was acceptable. To be quite honest, I have denied loan applications that received an Approve/Eligible within DU. There is just something about a 80% cash out refinance on an investment property where the borrower has 2 mortgage late payments in the most recent 12 months and a 63% DTI which concerns me. I actually see quite of few of these type of approvals which seem to be based simply on the credit score which due to low revolving credit balances that were the result of a cash out refinance for debt consolidation purposes 4 months prior, were above 630 regardless of the late payments.

At the same time I have approved several cases, which have been referred by DU because after completely documented the cases made sense. To limit ourselves as an industry to accept cases based on credit score or automated approve alone is just simply unsound lending. A borrower’s credit score, LTV or an automated approval is simply a mathematical equation of sorts that does not demonstrate in itself or combined a borrower’s willingness or ability to repay debt, recent history has demonstrated this principal.
Mortgage approval requires manual underwriting in the traditional sense, where common sense prevails over mechanical processing in determining if a perspective borrower is deserving of a loan. Granted these items are fabulous tools and provide clear guidelines for underwriters, but they should not be the vehicle by which credit worthiness is determined. There are too many variables which credit scoring and automated underwriting do not take into consideration, which can directly affect the borrowers ability to repay the debt. Additionally, it eliminates the responsibility by the lender in making sound lending decisions and that is what manual underwriting is about, responsibility.

As an underwriter, I have always taken profound pleasure in providing financing for individuals who at first glace did not appear to be a solid credit risk. It is about pulling together the entire financial picture for a borrower and determining that they can in fact afford to purchase a home and that the mortgage, from an asset standpoint, will continue to perform for the lending institution which completed the transaction. Manual underwriting not only provides lenders the ability to meet the housing needs of our communities but also provides the lenders the ability to take ownership of that piece of the process through responsibility for the lending decision. Current market conditions as demonstrated by soaring default rates have concluded that we can not simply rely on credit scores and mechanical methods to determine loan quality, it requires no thought or responsibility. Manual underwriting methods do.

Accepting manual underwriting practices as an industry standard will improve loan quality as well as provide affordable lending options for the American homebuyer and this is what FHA is about.

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.