Assessing Risk More Important Than Ever

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

I recently reviewed the Annual Report to Congress Regarding the Financial Status of the FHA Mutual Mortgage Insurance Funds which indicated that the fund is currently experiencing some stress due to the increased rate of defaults which have resulted in claims being paid from the insurance funds. The information provided an explanation for the increase in defaults particularly where the 2005-2008 books of business are concerned which are the books that appear to be the most distressed and as we all could easily surmise, the economy and more importantly joblessness appears to be the culprit.

My personal experience where the subject matter is concerned also concludes the same. Over the past year of all the files I have audited that experienced early default the most common reasons were loss of income, curtailment in income or excessive obligations which is why it is more important than ever to assess overall case file risk as well as the borrower’s financial behavior. Needless to say a conservative approach towards underwriting regardless of the case type is going to go a long way in reducing the amount of future defaults and then there is always due diligence which if applied should also reduce the overall number of defaults that we as lenders contribute to due to poor underwriting practices.

The recent changes in FHA underwriting policy are not sufficient to deter future defaults in themselves, we as underwriters need to realize that it all rolls down hill. Depending on the size of your institution and overall liquidity of your institution, a few early defaults could result in buy backs from your investors that could put your firm out of business and as I am sure we will agree, now is not the best time to be looking for a job.

So, the question is what to do? There are several safe guards that can be put into place that will help your underwriters insure a quality portfolio of loans that will perform in the long run. Determining the predominant reasons for defaults in your area and developing credit underwriting overlays of your own which might be specific to your company regardless of its size is a great place to start. Perhaps develop some common practices that your underwriters will exercise in all situations and refer to them as best practices where your organization is concerned. Little things like second signatures for back end DTI’s greater than 45% may help reduce a magnitude of risk if your institution is approving cases with significant DTI’s on a regular basis.

I will agree in some cases it makes sense but in others is just an accident waiting to happen. Perhaps develop a policy which will allow your underwriters to assess residual income in cases with excessive HTI and DTI ratios’. Gap letters when the borrower’s gap in employment is greater than 30 days is a great policy regardless of AUS documentation waivers is always good. Making sure that your borrower has a steady stream of reliable income is critical for loan performance so have your underwriters do particular due diligence in this area if for no other reason then the current economy.

In summary, I will say that there are lot of things underwriters individually and lenders can do institutionally to create sound lending solutions that will not only benefit their book of business but also help us as lenders to meet our fiduciary responsibility to our borrowers which is to not only help them attain homeownership but to assist them is securing affordable housing that they can successfully maintain. 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)