Relaxed Underwriting: What’s a lender to do?

Written By: Glenn Michaels, Op-Ed Writer

After many years of tightened underwriting, now the underwriting standards are going to be relaxed. If a lender does not follow the relaxed underwriting standards then their competitors will benefit from offering loans that they cannot do or will not do.

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Lenders know if their delinquencies increases due to relaxed underwriting they run the risk of buy backs, and indemnifications.

Now lenders have to make a decision, do we relax the underwriting and face more defaulted loans or stick to tougher underwriting standards to keep their defaulted loans to a minimum.

The Secretary of the United States Department of Housing and Urban Development (HUD) has stepped up his encouragement of lending closer to the minimum credit scores. To reach more low to moderate income borrowers.

Historically, lenders have needed no urging to loosen up underwriting standards, especially when the refinance market ends. Some of the underwriting standards started to relax in 2013 when rates began to increase.

The low to moderate income borrower appears to represent about 25% of all applications taken and many of the underwriting changes were made with these borrowers in mind.

Now the government tries to find small procedural mistakes for indemnifications. They cannot force a lender to indemnify a loan due to relaxed underwriting standards that HUD has put forth.

Underwriters and lenders must make sure that the paper trail for loans that have a gift in the transaction. Very often HUD auditors have required lenders to indemnify against loss due to an inadequate paper trail whenever a gift is in a loan file.

Watch your income calculations. Remember to use the most conservative income calculation when determining the borrowers’ income. If HUD believes your over stated the income you will have an indemnification if the loan defaults. In fact it is a good idea to place in every loan file your income calculation.

Recently, I have inserted in each loan file my income calculation worksheet to eliminate the possibility of a indemnification as I justify my income calculation. I have been a mortgage underwriter more than forty (40) years and this is my way of justification of the income being used.

On every HUD – 92900LT regardless of ratios I put my justification for approving or not approving the mortgage. If more room is necessary I add an addendum to the remarks section of the loan transmittal.

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Always cover your reasoning and there will be less likely a request for an indemnification.


About The Author

Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter ( As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years. 

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