Why underwriting is tighter

Have you noticed lately that loans are a bit tougher to close today? It seems that things we used to be able to get around are now road blocks. I have been asked why this is, and without giving the obvious "its the market" answer, I dug a bit deeper to help people understand what is happening.

What many people do not realize is that there is a great deal of pressure and the responsibility placed on underwriters to make sure the loans they approve do not default. Take FHA underwriters for example.

FHA underwriters must go through training to be qualified and approved to underwrite FHA mortgage loans. They are given an ID number that is included with every loan. Every underwriter's loans are tracked for defaults and foreclosures. If a certain percentage of their approved loans end up in default, they can have their approval status revoked for life... yes, for LIFE and the ability to underwrite loans anywhere could be in jeopardy. So they are really looking hard at every loan to ensure that it is a good risk. Otherwise they may have to change careers.

Stressed UnderwritersSo while the Realtor, the seller / buyer, and the loan officer are all stressed over the outcome and commissions over that questionable deal, the underwriter sees the same deal as a deal they could potentially loose their job over.

As professionals in this business, we must understand the responsibilities each individual has to make the entire thing happen. And while we all specialize in our own fields, a mutual understanding and respect for what's at stake with the other parties will help us all prepare our clients appropriately.

I hope this helps you better understand why things are a bit tighter right now. Underwriters are being held to stricter standards in what they allow to get through. And in many cases, their very livelihoods are at stake.

To the underwriters out there working hard and making it happen, I thank you for your diligence.

Ed Nailor - Charlotte home loans

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Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production
This is just a reflection on what has happened in our field.  The mortgage mess has created a need for this.  They should have been tighter earlier, but now they are implimenting what should have been instilled years ago.
Feb 20, 2008 01:04 AM #1
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Karen Kruschka
RE/MAX Executives - Woodbridge, VA
- "My Experience Isn't Expensive - It's PRICELESS"
It is amazing to me that the lenders let this get out hand in the first place - it doesn't take a rocket scientist to know what would happen,  Karen
Feb 20, 2008 01:06 AM #2
Rainer
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Charlotte Home Loans Your Charlotte Mortgage Lender
Charlotte, NC
Larry and Karen: You are both right. Underwriters were given a magic wand in the past few years. But understand that during those years, while Wall Street was begging for more of these questionable loans, these same underwriters were under pressure to allow more flexibility. It all starts at the top. I feel for the underwriters. They have to put up with the constant pressures to approve more, without permitting more risk. What a job!
Feb 20, 2008 01:11 AM #3
Rainer
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Charlotte Home Loans Your Charlotte Mortgage Lender
Charlotte, NC

Another note worth considering...

Many of the "lenders" that allowed the craziness were not really lenders. They were entities that simply created loans to feed into the craziness that Wall Street clammored for. Once Wall Street got a bad taste, these "lenders" have folded and many of their top leaders left with full pockets while the working man got an unemployment check!

Feb 20, 2008 01:15 AM #4
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Kirk Williams
Private Venture Capital - Everett, WA

Tighter does not mean better underwriting. It just means in the knee jerk reaction to the exotic loan market and the fear of regulation by the idiots in "DC" lenders have gone through this superficial "renovation".

Risk analysis, which is what underwriting is about, is just that. Analyse if it is reasonable for a person to make the payments on what they are buying. Not everyone fits the "mold" and that's where an experienced underwriter is very important. They can still approve the loan if the person is outside of the box because there are "mitigating circumstances" OR "compensating factors" OR they may be in a unique scenario. All of which should be approved loans however many banks today don't have the experienced underwriters to work the files appropriately. In the end consumers gets screwed!

Today, as lenders, we are subjected to people that don't even understand the term risk analysis. They think loan guideline means "gospel" vs. the reason behind the guideline. So today you get what I call box checkers instead of real underwriting.

If anyone thinks regulation is needed they are wrong. Good underwriters are needed and they are hard to find anymore.

Feb 20, 2008 01:18 AM #5
Rainer
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Charlotte Home Loans Your Charlotte Mortgage Lender
Charlotte, NC

Kirk: You are right. Finding good quality and experience underwriters is tough. But part of the fault for that does lay at the loan officer's feet. Too many Loan Officers are submitting loans to FHA that used be only considered subprime. FHA lenders are overwhelmed and have had to hire more inexperienced underwriters. And now a smaller percentage of submitted loans are getting approved.

I wrote an article about how FHA Lenders say "No More Subprime Please!" that you may find interesting.

Ed Nailor - Charlotte mortgage lender

Feb 20, 2008 01:44 AM #6
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Eleanor Thorne
Equity Resources - Cary, NC
Equity Resources 919-649-5058
Ed -thanks for not going the same path Ken Cooke did with we're" all a bunch of sleeze balls."  There's a pent up demand of homeowners - and they are not bad buyers - they can make payments - and will if we can just get them a loan at a decent rate...
Feb 20, 2008 02:14 AM #7
Rainer
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Charlotte Home Loans Your Charlotte Mortgage Lender
Charlotte, NC

I don't believe we are all a bunch of sleezeballs. I honestly believe there is a large majority of mortgage professionals that actually care about what they do and are responsible in their business practices. I still firmly believe that the majority of the mess we are all feeling is the result of greedy business owners that saw money instead of people and opened a floodgate of bad loan decisions without any real exit stragety beyond bankruptcy, cut and run.

I still think that subprime, in its former "pre-madness" state will return. Wall Street also dumped the Dot Com businesses after realizing that those businesses should actually offer something more than a dotcom name. However, Wall Street no loves the solid dot coms... the Googles, Amazons, Ebays... the ones that actually make sense. Wall Street will come back to subprime, just with a better understanding of what it SHOULD be. In the mean time, borrowers that only fit in subprime loans should begin working on improving their situations by making payments on time, creating postive tradelines and keeping their spending and debt well under their budget.

IMHO

Ed Nailor - Charlotte FHA Mortgages

Feb 20, 2008 02:38 AM #8
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