Fear of Repercussion

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

Underwriting quality mortgages is not so difficult to do provided staff and underwriters alike have clear guideline where policy and procedure is concerned. The recent implementation of guidelines such as the more stringent underwriting practices currently being implemented by HUD will further assist underwriters in making sound lending decisions because quite frankly tough underwriting guidelines leave very little room for common sense. If it fits into the box approve it, if it doesn’t fit then reject it. I will agree however, it will shut out a lot of potential borrowers, say the somewhat marginal ones but you know who cares, like Commissioner Steven’s say, not everyone should own a home and if for some reason, a few individuals who really are deserving of the mortgage fall through the cracks, well better to be safe than sorry.

Now let’s take it up a notch, beyond tougher underwriting guidelines to lender responsibility and HUD’s more aggressive approach where terminating lender with excessive default rates. Now, I think the 200% is reasonable because quite frankly if a lender has a compare ratio greater than that then they really need to do some work where policy and underwriting practice is concerned. What concerns me however, is lender interpretation of how HUD’s efforts to more strictly enforce sound underwriting practices, this being lender termination, will affect how lenders will proceed with making sound underwriting decisions that are not driven by fear of termination.

I will tell you that I am employed by an institution that has for the most part stayed ahead of the game where implementation of sound underwriting practices is concerned. We had a 620 minimum credit score policy in place a year before the secondary market did, where pulling 4506’s 4 years ago and were using AVM’s as support for appraisal before declining markets where an issue. A step further, we will actually decline certain loans that receive approve ratings through Total Scorecard if the risk exceeds internal threshold and to this day require second signatures if a back end DTI exceeds 45% (by the way very few of those get approved). The end result is a loan portfolio that performs quite handsomely and post endorsement technical reviews that yield conforming results.

So you say, what possible fear of repercussion could we as a lender have? Honestly probably not as much as other lenders but the fear is still there. Needless to say at this point, HUD is taking down about 4 lenders a month, not saying they don’t deserve it but it is still pretty unsettling. Which brings me back to the point I was trying to make which is how this will really have an effect on over all institution underwriting practice and what will get approved. The bottom line is this, lenders may just feel more safe doing nothing but plain vanilla lending, you know the borrower who has 20% down 700 credit scores and could go either FNMA or FHA whichever they desire.

This will create a situation where lenders do not have to deal with scathing post endorsement technical reviews or potential termination because nothing remotely marginal will get approved which will again have an effect on how much mortgage business will get done in short there won’t be much of it but nothing will go into default either. I think it will harm certain segments of the population, lenders dealing with federal oversight will see a decline in their CRA ratings and quite frankly some loans that might have otherwise been a satisfactory credit risk will be declined but all in all, what loans are made should perform.

I will close this week by stating that yes we as an institution are already looking for more ways to ensure loan quality because we need to make it more stringent in order to ensure an acceptable compare ratio. Don’t rely on Total Scorecard and remember Due Diligence will trump that so just having an automated approval does not mean a loan should be approved. Perhaps second signatures on DTI’s greater than 43% or implementing reserve requirements say two months PITI in reserves after closing or maybe limiting the back end DTI to 36%, this worked for the conventional stuff for years and years. Wait maybe if we quire that the borrowers invest at least 3% from their own funds, no gifts allowed……..

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)