Written By: Bonnie Wilt-Hild, Op-Ed Writer
The past two months have been quite interesting in the mortgage industry. We are witnessing the slow death of the mortgage broker as well as a further tightening of mortgage credit standards where investor relationships are concerned. Each day it seems more difficult to sell mortgages on the secondary market as investors continue to bump minimum credit scores to 620 (in some cases 640) for FHA, require 4 years out of bankruptcy (yes even for FHA) and implement documentation requirements for streamline refinances. It’s becoming hard to keep up with the changes where the investor markets are concerned.
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As we can no longer underwrite to FHA, FNMA and FHLMC guidelines but must adhere to the more stringent investor guidelines in order to the business sold, it is making it more and more difficult to find mortgage business that will now fit into the very small window of acceptability from sales standpoint.
Given overall economic conditions, most borrowers no longer fit into that “plain vanilla” mortgage class. Even the universal AUS systems have jumped on board demanding lower ratios and higher credit scores with no guarantee of Approve/Eligible or Accept ratings. Taking it one step further is the new issues that small and mid size lenders are dealing with in terms of their overall correspondent agreements with their investors and what is acceptable in terms of overall lender performance regarding underwriting, pull through, delinquencies etc.
It seems that the newest trends include a tremendous amount of pressure where pull through is concerned but deeper and longer reaching, overall asset performance above and beyond the first 12 months of servicing. Further,it appears that most investors are no longer considering AUS approval where initial underwriting is concerned as a means of overall protection for the lender.
In short, if something goes terribly wrong for the borrower 18 months into the servicing of the mortgage say loss of job, divorce or some other extenuating circumstance that can not be addressed in the normal scope of underwriting, the lender is on the hook for the case regardless of AUS approval or anything else. When delinquencies and overall compare ratio where FHA is concerned become slightly excessive, the investors are now eliminating the lenders ability to do business with them. Quite frightening considering the tremendous default rates recently where FHA streamline refinances are concerned, by the by, these to affect your compare ratio where FHA is concerned.
So now, lenders are not only in the position of trying to develop a solid business base without tapping the wholesale market, but developing a business base in a market where a large segment of the population has been cut out do to increasing credit score requirements and overall tightening of mortgage credit underwriting standards.
Further, we must now consider long term asset performance where the mortgages are concerned and under current economic conditions, this means giving credence to things that a year ago we would not have considered during the normal course of underwriting. All of this without indication of unfair lending or disparate lending practices. We now need to rewrite all of the rules where overall risk assessment is concerned to conform with long term assessment of the asset as opposed to the snap shot view that has been taken over the most recent 10 years where Automated Underwriting methods ruled.
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The current economy has rendered this form of underwriting useless. No longer is a borrower with a 720 credit score with 60,000 in assets and 3 years on their current job a fair and acceptable risk. These factors alone do not demonstrate viability for the long term. Consider this; if this borrower is employed in the financial industry and the 60,000 in assets are from a 401k on which the borrower has two existing loans, then the overall picture become bleaker.
Employment in the financial industry is volatile at best by today’s standards and more often then not, withdraw of funds from a 401k requires extreme hardship, such as a property in foreclosure, medical emergency and so on. The simple loss of a job can render the borrowers credit score far below acceptable levels with even one late payment so this factor in itself is really carries no significant weight where overall risk assessment is concerned.
This is where the rules change. From an underwriting standpoint we now need to reassess how we evaluate risk for the long term, setting aside what we thought might be protection under AU practices and now manually assess the risk to develop evidence that the mortgage is viable long term. This will require considering factors that previously would not have been considered during the normal course of underwriting in the past. As current underwriting methods are not designed to do this nor is methods involving AUS, underwriters must again underwrite.
Now is the time to re-evaluate how we do business in terms of underwriting and develop practices and procedures which will safe guard lenders from future losses while not discriminating or participating in unfair lending practices. What practices will suffice remains to be seen. As always, happy underwriting.
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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".
