Written By: Bonnie Wilt-Hild, Op-Ed Writer
Each day we read more information on the volatile housing market, declining values and who might be responsible for all of it. It seems like just about everyone and everything has been blamed at one point in time or another. Alan Greenspan, Wall Street Investors, credit scoring companies and lets not forget subprime lenders have taken their fair share of beatings in the press. Combine this with web articles like “Why You May Never Own a Home” and you got a panic on your hands.
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I’m sure that when you look at the role that everyone played in the recent market downturn you will see that just about everyone contributed equally to the mess. Borrowers purchasing more house then they could afford, subprime lenders catering to borrowers who had not necessarily demonstrated a reputable credit history, Wall Street investors who would securitize anything, so on a so forth. As the market turned to the more exotic mortgage types even FNMA and FHLMC jumped on board. New products were available everyday from 105% financing options to No Documentation loans, which were based solely on a borrowers credit score. No underwriting required.
Everyone had what they needed with the mighty credit score and a little Risk Based Pricing, it was all good. FNMA and FHLMC even came out with their own form of stated income loans. With an Accept Plus from FHLMC all you needed was a verbal VOE. No need to warrant credit or ratio’s, actually no need to underwrite the loan, just have someone, anyone, validate the findings. Borrowers needed to demonstrate no discipline to attain mortgages, just a credit score. But if they didn’t have that they could still get a mortgage, just at a higher interest rate, you know the risk based pricing thing.
So here we are, the market has done a 360-degree turn, credit requirements have tighten due to excessive mortgage defaults and with all the new controls put into place the one thing everyone seems to have forgotten is prudent underwriting practices. Investors are still hanging on to the credit score and Automated Underwriting as a way to assess risk. A model designed to assess the likelihood of one individual defaulting on a mortgage is still being applied to thousands of borrowers in a pool of loans worth millions or even billions. It appears that even though the model has failed us, we are reluctant to allow the human factor as an alternative.
I have to say after 20 years in the mortgage business, most of them spent underwriting FHA and VA loans and using manual underwriting methods to do so, I have come to the conclusion that effective underwriting cannot be completed by a mathematical equation regardless how complex it is. Underwriting is not and has never been an exact science. It is an art. It takes the human element to assess an individual’s overall financial behavior based on a variety of documentation that cannot be read by mathematical equations. This is why we have guidelines in underwriting, not formulas.
I will agree that there are certain formula’s to determine if a certain piece of the file fits guidelines, however, it is still the guideline that we follow to determine if a case is approvable. Guideline implies a principal or rule that provides guidance to appropriate behavior, which implores the underwriter to use as guidance the basic rules of underwriting to determine if a borrowers overall financial picture fits acceptable risk criteria.
Given the fact that no two cases are alike, guidelines can only be used as guidelines, no more. Mathematical equations will never be able to determine if a borrower’s credit explanation is acceptable or if delinquent credit was a result of financial mismanagement on the borrower’s part. They cannot determine if a borrowers overall employment history is acceptable, actually AUS do not even considered employment. More so, AUS systems can be duped with artificially increased credit scores and when this is all a lender is using to make a credit decision, then disaster is sure to follow. AUS systems and credit scoring models are very useful, however, they lack the one ability, which cannot be written into a program or included in the complex mathematical equation, and this is the ability to reason.
When these systems can be modeled in such a way that they allow this function and approach underwriting as less of an exact science and more of an art, then I say use them to decision the case. Until then, let underwriters make prudent underwriting decisions using mechanical means as the tools they were intended to be.
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About The Author
Bonnie Wilt-Hild - As an op-ed writer, Bonnie has held many mortgage underwriting positions, including Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans".
