Know the Guidelines

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

Over the past couple of weeks I have received phone calls from some lenders that are having problems with uninsurable loans. Yep, loans that FHA has reviewed and said “No, the case does not meet FHA requirements therefore it is uninsurable”. This becomes a much larger problem for the lenders out there who are using warehouse lines to fund their loans because once FHA states that they can not insure the loan, the investor who may have already funded the case then requests that the lender purchase the loans back.

What this means is that some poor lender is sitting with several loans on their warehouse lines which then can not sell because basically they are uninsured loans with LTV’s of 96.5% and if they do not have the ability to service them like a bank might, they have to reach into their pockets and pull out the funds to repurchase the cases and ultimately service them themselves.

Now this in itself does not seem like that big of problem unless you consider small to mid size lenders with a net worth of say a million or so who after buying/funding 4 or so loans off their warehouse lines to the tune of maybe 2 million finds that they no longer have any assets and go belly up. So what seems to be the problem?

After several conversations over the past couple of weeks, I think I have the answer and that answer would be poor or inexperienced underwriting. A lot of lenders have DE’d staff underwriters out of necessity recently in order to compete in the FHA market. As everyone is aware there were not many people who pursued their DE in the most recent 8 years so when FHA came back into vogue, there was quite a shortage of qualified underwriters. Even the underwriters out there that did have their DE had in a lot of cases, not used it in several years.

It seems that a lot of newer underwriters, particularly those who did a lot of conventional underwriting still hung really hard to the whole AUS checklist method of underwriting used on the conventional loans in the most recent 8 years without realizing that there are differences in guidelines where FHA and Conventional are concerned and these guidelines are not always transparent when using the AUS underwriting checklist method of underwriting. The bottom line is that FHA loans really need to be underwritten to determine not only that the borrower qualifies but also to determine that the case adheres to FHA and investor guidelines.

The biggest deficiency appears to be in appraisal review and overall lack of knowledge where FHA specific guidelines are concerned. A lot of these guidelines are simply not addressed by AUS systems including Total because the data input required would not jog flags that would require certain documentation. It is the underwriter’s responsibility to know if it conforms or it doesn’t.

Let’s use a spot approval on a condominium for example. The only information that would be provided to an AUS is that the subject property is a condo and the value. However is the condominium for what ever reason does not conform to spot approval guidelines requirements, lets say it has only 2 units, this information would not be evaluated by the AUS and would appear anywhere in the findings.

I would say that I recommend new underwriters take a look at the 4155 and 4150 and review all the mortgagee letters pertinent to credit analysis and valuation after 2005 in order to make sure that you have the guidelines down. Like I said in some cases $1,000,000 of uninsurable loans is enough to put a company out of business and we don’t want it to be yours. 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.

SOURCE: Published by NAMP Publishing Group, a division of the National Association of Mortgage Processors (http://www.MortgageProcessor.org)