Streamline Refinance Concerns

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

Very recently I have been speaking to some friends who are employed in the mortgage industry, some of them with mortgage lenders others with banks. More often than not it seems that our conversations always turn to FHA streamline refinance transactions and what seems to be an unprecedented default rate which a lot of companies are experiencing as a result of these transactions.

The streamline refinance program was designed by HUD to put borrowers into a better financial position while depending heavily on the original underwriting of the case. The result is a streamline program where income, assets and sometimes overall credit history is not examined as it is assumed that the case was adequately underwritten the first time around and determined acceptable for HUD purposes.

In theory this makes sense when considering a reduction in the borrower’s monthly mortgage payment and overall improvement in financial position. Assuming that the borrower’s present mortgage has been paid in a satisfactory manner, there is no reason to assume that the borrower will not continue to pay the mortgage debt on time.

Traditionally, streamline refinance transactions have always been considered by lenders as a safe bet from a risk standpoint and in some instances have been over originated to offset full credit qualifying originations of loans that were associated with greater risk levels. This mentality was conceived as a method to manage what might result in an excessive compare ratio should the sub standard loans go into default. What this mentality does not take into consideration is the possible sub standard underwriting of the mortgages that are now being streamlined. In other words, what goes around, comes around.

As I said, I have had several people indicate to me that the default rate of the streamline refinances that have been originated over the past 8 months seem to be increasing steadily. In some case they have been identified as first payment defaults. One friend indicated that over 43% of all of the streamlines their company has originated in the most recent 12 months have gone into default which is an extremely high number. When considering this I have to say that I no longer feel comfortable depending heavily on how thoroughly the original case was underwritten.

Generally speaking, we verify very little where the streamlines are concerned but given the current economy as well as potential sub standard underwriting, I am beginning to think that it is not a bad idea to incorporate a little due diligence where the streamline program is concerned. Nothing major but possible a single merged credit report to get a general idea as to where the borrower is financially and to answer questions like did they pay there last two mortgage payments with their Visa card and possibly a verbal VOE to determine if they are at least employed with the means to make the payment. It seems like we all have a few things to think about. As always, happy 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.