Why are mortgage pre-approvals broken today?

I was talking with one of Houston's top listing agents who has had several transactions fall out due to the client not being able to get approved for a mortgage.  She asked me why so many lenders issue a client a preapproval letter and then turn around and deny the loan.  I could tell by the tone in her voice that it was extremely frustrating for her and I imagined that if she had this question many other real estate agents might also.  So I decided to make it the topic of my first blog.

When I first started in the mortgage industry nearly 15 years ago Loan Officers were much more responsible for the viability of the loan.  We were required to field underwrite each loan application to determine if it made sense to move forward or to coach the clients on the requirements to get approved and point out their short comings.  We couldn't deny a loan or keep any one from applying, but we could help the client save time and the embarrassment of getting denied.  Field underwriting did a couple of things it filtered out many of the applications and allowed underwriters to focus on loans that could get approved.   The other thing it did was force loan officers to look at each loan with the eyes of an underwriter. 

As a field underwriter we didn't just look for a credit score we reviewed the credit.  We looked a pay history, type and age of accounts, the aggregate amount of debt, and we looked at the public records to see if anything showed an unwillingness to repay the loan.  We reviewed the bank statements and tax returns with the same diligence.  The application was thoroughly reviewed and job history meant something back then.  If you were a good field underwriter your prequalification was solid and that skill is why you were referred by real estate agents.  Also, if you issued a client a prequalification and you shouldn't have there was hell to pay as a loan officer.  If you did it too many times you got fired.  So what has changed in the last few years that has made preapprovals so unreliable. 

In one word, Technology.  Point of sale decision engines like Fannie Mae's Desktop Underwriter and Freddie Mac's Loan Prospector has made it easy to let a program take on the responsibility of telling a client they are approved or not.  Today most loan officer's don't even review income or asset documentation before they issue a preapproval.  They just take the information right over the phone and run it through the decision engine and poof they get an approval.  Believe it or not many people embellish their income or honestly believe they make much more than they do and when that happens your preapproval is broken.  It amazes me how often this happens and I wonder why so many loan officers do not learn their lesson.

Another factor is the way we used to do mortgages.  Prior to the meltdown, most people could get a mortgage especially if they had decent credit.  Loan Officer learned to base a preapproval based solely on the credit therefore reviewing anything else was just a waste of time.  If the client's recollection of his income was low you just did stated income.  If his assets were not seasoned then you did stated assets.  All these things made loan officer's lazy and most have lost the skill of field underwriting.  In addition, mortgage companies no longer relied on their loan officers to field underwrite so they were not being held accountable for their preapproval letters.  I know that doesn't make sense, but it is true.

Things have come fulls circle.  Clients have to qualify for a mortgage and everything is verified.  I think most loan officers realize this but either do not have the skill to field underwrite a loan or they haven't adjusted to the times.  I believe that is why many more preapprovals are broken then in years past.  A combination of strict guidelines with no products to help you if you make a mistake and a bad habit of relying solely on the credit report to make a judgment on a clients ability to qualify for a loan. 

So how do you as a real estate agent fix this portion of your business.  First make sure your financing partner is knowledgeable and receives all the documents prior to issuing a preapproval.  Second, give your financing partner enough time to get the documents from the client and review them before you require a preapproval.   Third, if you get an offer on a listing require the buyer to get pre-approved with your financing partner.  Clearly explain to them that they do not have to use your financing partner, but to accept an offer on your home a trusted lender needs to review your ability to purchase the property.  These three steps will drastically reduce the time and money lost on dead deals.