Investigative Underwriting

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

Underwriting – Noun; the business of an underwriter. Investigative underwriting is on the other hand a verb and should be the practice of an underwriter or least a thorough one. Its a new term not yet found in Webster’s but with any hope will be soon. Unlike it’s sister word underwriting, investigative underwriting describes an action to be performed by an underwriter in order to carry out the function of determining both credit worthiness of a borrower entering into a financial transaction as well as the overall creditability of the financial and collateral data provided by the borrower as well as third parties involved in the transaction to determine long term performance of the asset being underwritten. Nice huh!

Now, what does it means for us as underwriters. It means that due diligence in itself is no longer enough to provide us with answers sufficient to answer the most important question: Will this loan perform long term and is the data provided consistent and accurate to demonstrate this? Due diligence in underwriting is extremely important don’t get me wrong but will only lead you to the conclusions as to if the borrower has demonstrated capacity to repay debt as well as willingness to repay and it the property collateral is sufficient to support the loan amount applied for.

We of course accomplish this by reviewing all data provided in terms of pay stubs and W-2’s to determine adequacy and consistency of income, bank statements to determine not only if the borrower has sufficient funds to close but if the borrowers spending vs savings habits support the proposed increase in housing. The comparable sales data as reflected in the property appraisal report will help us to determine if the fair market value as indicated by the appraiser is accurate and supported which will in turn help us to determine if our collateral position is sufficient should the case go into default.

But what about all of the other questions we should be asking, the ones which will help us to determine an underlying circumstances that may lead to an early default on the borrowers part that are not clearly evident in a cursory review of paystubs, bank statements and W-2’s. These are some of the questions asked during an investigative underwriting review of a case file.

Credit Report:

1. Does the credit report exclude evidence of any undisclosed deed-in-lieu with verbiage such as “P&L Loss or “settled accounts:.
2. Is there a pattern of increasing balances on mortgage loans suggesting a dependence on cash proceeds to subsidize income?
3. Are there conflicting address references on the credit report, depository statements, and/or employment documentation?

Employment:

1. Are telephone calls to the borrower’s place of employment answered on a cell phone?
2. Do current earnings evidence a declining trend?

Savings:

1. Do withdrawals for rent on the depository statement match the figure on the rental verification and application?
2. Does the borrower have enough verified savings or stable cash-flow to meet his or her monthly obligation without liquidating retirement accounts and security holdings?
3. Does any depository account have a supporting average balance but a recent opening date?

Collateral:

1. Do the dated comparables have higher sales prices than the recent comparables?
2. Do the distant comparables have higher sales prices than the closer comparables?
3. Do extended days on the market show impaired marketability in the area?

As you can see, the above questions would help an underwriter further investigate the data provided to determine the overall creditability of the information provided and how it relates to the corresponding underwriting decision. Sometimes it will require additional documentation from the borrower other times the documentation needed will be provided within the standard documentation collected with each loan application. At any rate, it is something that we as underwriters can not afford not to review. So, that is the new catch phrase of the week, investigative underwriting. Lets look forward to it becoming industry standard. 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)