Written By: Bonnie Wilt-Hild, Op-Ed Writer
As most of you are aware, I teach a few government underwriting classes for FHA Online University. Very recently while teaching the underwriting courses I have decided that there are two types of underwriters, those that embrace underwriting in the truest sense of the word and by that I mean underwriting beyond the AUS finding and those underwriters that still embrace the AUS as the literal decision and by this I mean an underwriter that has chosen to remove themselves from the underwriting process to act solely as one who validates the AUS, which has made the decision.
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So often I talk to students who questions seem to be driven not by common sense or by credit and valuation assessment, but by credit scores and AUS indications. For instance when discussing a borrowers overall credit behavior, these individuals don’t seem to be interested in things like the number of late payments on a borrowers credit report, the age of the late payments, the extent of the borrowers credit history, the number of newly opened accounts, if or not the borrower demonstrates an overall conservative use of consumer credit, what the borrowers current ratio is versus what it will be once the transaction will be completed, were the late payments caused by extenuating circumstances that were beyond the borrowers control or did it appear to be a case of financial mismanagement.
Instead they would simply state, the loan can’t be done, the credit score is to low. My response might have been, “well, based on the information you have, could it be a false negative or in some instances a false positive.” By this I mean if a borrower has only 3 revolving accounts appearing on their credit report and for the sake of discussion all of them are demonstrating a history of 60 months with no late payments, however, two of them have outstanding principal balances of 90% of the available line which is causing the low credit score, would this be indicative of a false negative?
For instance say the total outstanding credit available to the borrower is only $900.00 between all three accounts because the borrower has chosen not to incur debt. Further, the borrower’s outstanding balance is a total of $400.00 with an outstanding balance on each of the two credit cards of $200.00 with total lines of $300.00 each. Taking it a step further, the borrower has demonstrated a significant savings pattern, say $15,000 in a passbook account and for the most part pays the two accounts in question, in full each month. In this particular instance the credit score, as a snap shot in time, could be demonstrating a falsely low credit score which overall examination of the case would indicate that the borrower is more then a fair credit risk. In other words AUS findings and a credit score alone is not enough to determine if the case is approvable.
In contrast, the underwriter that embraces mortgage credit and valuation analysis in addition to using AUS and credit score indicators as a tool, are more likely to evaluate each piece of documentation provided to determine the overall credit risk where the case is concerned. In most instances this type of underwriter may lay the AUS findings aside and view the documentation provided on its own merit excluding the documentation checklist requirements even from a documentation reduction standpoint thinking to themselves yes, the doc checklist states I only need one pay stub but prudent underwriting requires that I collect more because it does not appear that the borrower is working a 40 hour consistent work week. Or perhaps, they will want an additional month bank statement because they are seeing a regular monthly payment to an account that is not appearing on the borrower’s credit report.
In this day and age of underwriting we are beginning to see a blending of both concepts, the use of the AUS coupled with the authority and responsibility of the mortgage underwriter. It is no longer acceptable to just view the AUS findings and credit score as a means to approve or reject a loan. Every underwriter needs to review all documentation in the file, document certain situations further regardless of AUS and demonstrate consistently the risk or lack thereof of the mortgage application which they are underwriting.
In short underwriters today need to understand the principals behind credit and valuation underwriting, overall risk assessment as well as collateral assessment. Depending solely on AUS and credit scoring is not enough in this environment. For those underwriters that learned to underwrite in the most recent era of the AUS, forget what you know and begin looking at the over case and I don’t mean to make sure that you have enough pay stubs or bank statements. You need to assess risk beyond the AUS.
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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".
