Oct. 13, 2012: The current state of underwriting and documentation guidelines – tales from the crypt; punny Halloween tale

Oct. 13, 2012: The current state of underwriting and documentation guidelines – tales from the crypt; punny Halloween tale Rob Chrisman

As 30-year rates hit historic lows, some borrowers are hoping that lenders will be loosening their underwriting standards and that it will be easier to qualify for a mortgage.  They’re hoping in vain: industry data shows that controls have gotten even tighter. I don’t remember where I saw the stat, but the average credit score on new loans closed in August 2012 was 750, nine points higher than a year prior.  Fannie and Freddie borrowers’ scores averaged 763 for that same period, and considering that fewer than 22% of Americans have credit scores over 749, there are a lot of people out there who are highly unlikely to qualify for a loan.  Lenders also appear to be requiring larger down payments, with the average Fannie and Freddie borrower putting down 21% (to put that in context, the median down payment in 2005 was 2%.) Originators hope that eventually lenders probably will relax about upcoming regulation, be less fearful about costly buyback demands from the GSEs, and strip away some of their extra credit-risk fees.  The key word here, though, is “eventually.”

I continue to hear that the underwriting pendulum has swung too far, excluding common sense borrowers, self-employed borrowers, and loans being held up for requests on explanations for a $100 deposit four months ago. And borrowers are in a tough spot. An individual living on a fixed income over the last 20 years (i.e., from the end of 1991 to the end of 2011) would have suffered a 39% loss of purchasing power over the 2 decades using the CPI as a gauge of his/her inflation.

Now often times loan officers become involved in their client’s finances. This happens much more frequently now, versus ten years ago, as LO’s tend to work with clients on improving their financial condition. I received this note from a broker in Tennessee. “A question that sometimes comes up during the home buying process is if the borrower should use their mortgage payment for the 401(k) catch-up contribution or just stay the course. The payoff can save money on the interest rate, but by paying for the home mortgage and tax you’re trading off a reduced retirement account for lower future loan expenses. To determine whether this makes sense, consider several factors. Namely, the cost of withdrawing from your retirement account, as your withdrawal will be taxed as ordinary income at the federal, state and local rates. Even with an estimated tax rate, borrowers with higher incomes and local taxes could owe 40% or more on a retirement distribution and anyone under 59½ must add a 10% penalty to that tax bill. Also, will you be able to rebuild your retirement portfolio? Repaying such a large sum may not be possible, especially if the 401(k) is your only pool of funds for retirement, and the savings on mortgage payments rarely will make this work. If you think you might spend all or some of the mortgage money, it is better to pass on paying it off. Lastly, do you have more costly debt you should pay off first, like high interest credit card payments? Borrowers should know that agents can help them with managing expectations, which is essential to having a smooth home buying experience, and asking, ‘What happens next?’ and, ‘What’s the margin of error on this cost estimate?’ Also, borrower should ask, ‘What do you see that I don’t?’” But speaking of tough guidelines, a while back I received this note from an LO. “I like the idea of a top ten list for strict underwriting. I have a couple contributions. I had a hospital administrator recruited by Phoenix Children’s Hospital. He moved from Kentucky and put his house in Kentucky up for sale. He got in a 3-month short term rental here in Phoenix while he moved his family out here and sold the Kentucky home. Without the sale of the home he had 20% to put down on his Jumbo Loan home here in Phoenix. Everything about the borrower was perfect; extremely high FICO, good investment and retirement fund reserves, a long and steady employment history, 20% liquid funds sourced and seasoned for years, extremely low DTIs etc. A week and a half from close I get the notice from the wholesaler that his loan had been denied. I check the denial when it comes. The reason he was denied was that he paid for the 3-month short term rental up front, which was reimbursed to him by PCH. Still confused? So was I. The reason for the denial was the fact that he was unable to document on time MONTHLY payments for his rental. It took 5 days and 3 layers of management to help them understand how absurd that was. It was finally approved and funded.

“The second is where another perfect borrower doing a 20% down conventional loan had recently travelled to Las Vegas and won a little bit of money. He deposited $780 cash into his bank account that had a balance of over $40,000. The investor denied the loan because he could not document the actual money. We showed airline tickets, hotel receipts and the deposit slip. No go. We had to switch investors to get it done.” And Joe B. writes, “I was talking to a close friend yesterday, a 30 year veteran of the industry, having held several significant executive positions. He’s now with a third-party company.  I know this guy: he’s very conservative, never any flashy spending, etc.  He’s now in the 61st day of a very simple refinance.  He had to have his wife sign a statement indicating that he had access to their JOINT checking account.  When he questioned the underwriter about the absurdity of this, she didn’t have an idea of what a joint account was.  All she said was ‘our investor requires this.’ The biggest issue is that we have dramatically gone from one extreme to the other.  Until recently, most underwriting was automatic engine based.  Now we are having ‘real’ human underwriting.  Unfortunately we haven’t spent years training underwriters to actually underwrite.  Now that they are being tasked to do this, many of these hard-working, well-intentioned individuals have no idea what passes as true underwriting.”

Phil G. wrote, “Regarding appraisals, the value expected from the appraiser seems more tied to the LO’s ability to predict it through research, or should I say the LO’s inability. That is, some LOs consistently predict the value within $10k while most haven’t a clue how to research it or they are so lazy they rely on the home-owners idea of what the value should be (which is always distorted). It’s almost like they think that if they write in the submission application then it will all work out somehow.  Since the loan is submitted to the lender before the appraisal is completed, the lender ends up with a completely distorted loan profile when the real value comes in.  Sure, appraisers screw up from time to time, but I have found in these situations the expected value put on the submission application is usually more hopeful than factual. My big issue with the process is the unwillingness of many lenders to accept ported appraisals.  So, you have a borrower that pays $400 for an appraisal but then the loan is denied for an unrelated reason at the lender – so, the LO finds another lender.  But the new lender will not accept the recently completed appraisal and forces the home owner to purchase a new one. Why? How does not accepting an appraisal from a national AMC protect the borrower, or the lender?  Why must the borrower pay again?  Ridiculous.”

Speaking of underwriting, let’s check on some relatively recent guideline, documentation, and process changes from investors to give you a sense of the trends.

Guild has announced that it will purchase USDA Rural Housing loans that are issued with the “subject to availability of commitment authority” verbiage on the Conditional Commitment.  The “subject to” language has already been used when issuing refinances but will be used for purchases beginning on October 1st. Franklin American has relaxed (!) its guidelines on state properties without a permanent source of heating or cooling as long as it is “common, customary and compatible for the area.”  Guidelines on employees who are not required to file US income tax returns have also been revised; these borrowers are now subject to additional income and employment verification measures. Guidance has been added on the sale of personal assets, subordinate financing documentation, and property flip transactions for Conventional loans.  FAMC has also revised guidance on FHA cash-out refinance transactions, USDA property flip transactions, and Social Security Administration and disability income.  Clarification has been issued on flood insurance and FHA abbreviated loan applications. Affiliated Mortgage terminated all third party addendums to the Origination and Sales Agreement with lenders on October 9th.  As of the 9th, lenders will be permitted to lock only loans that are both originated and closed in their name or one of their DBA’s.  Loans that don’t comply with this requirement will be ineligible for re-locks or extensions; to be eligible, they must be delivered in fundable condition by November 9th or purchased by AMC on or before November 23rd, whichever is earlier.  For the time being, all TPO loans are required to contain an acceptable Anti-Steering Disclosure. Bob Hill and his new wife Betty were vacationing in Europe – as it happens, near Transylvania. They were driving in a rental car along a rather deserted highway. It was late and raining very hard. Bob could barely see the road in front of the car. Suddenly, the car skids out of control! Bob attempts to control the car, but to no avail! The car swerves and smashes into a tree. Moments later, Bob shakes his head to clear the fog. Dazed, he looks over at the passenger seat and sees his wife unconscious, with her head bleeding! Despite the rain and unfamiliar countryside, Bob knows he has to get her medical assistance. Bob carefully picks his wife up and begins trudging down the road. After a short while, he sees a light. He heads towards the light, which is coming from a large, old house. He approaches the door and knocks. A minute passes. A small, hunched man opens the door. Bob immediately blurts, “Hello, my name is Bob Hill, and this is my wife Betty. We’ve been in a terrible accident, and my wife has been seriously hurt. Can I please use your phone?” “I’m sorry,” replied the hunchback, “but we don’t have a phone. My master is a doctor; come in, and I will get him!” Bob brings his wife in. An older man comes down the stairs. “I’m afraid my assistant may have misled you. I am not a medical doctor; I am a scientist. However, it is many miles to the nearest clinic, and I have had a basic medical training. I will see what I can do. Igor, bring them down to the laboratory.” With that, Igor picks up Betty and carries her downstairs, with Bob following closely. Igor places Betty on a table in the lab. Bob collapses from exhaustion and his own injuries, so Igor places Bob on an adjoining table. After a brief examination, Igor’s master looks worried. “Things are serious, Igor. Prepare a transfusion.” Igor and his master work feverishly, but to no avail. Bob and Betty Hill are no more. The Hills’ deaths upset Igor’s master greatly. Wearily, he climbs the steps to his conservatory, which houses his grand piano. For it is here that he has always found solace. He begins to play, and a stirring, almost haunting melody fills the house. Meanwhile, Igor is still in the lab tidying up. His eyes catch movement, and he notices the fingers on Betty’s hand twitch, keeping time to the haunting piano music. Stunned, he watches as Bob’s arm begins to rise, marking the beat! He is further amazed as Betty and Bob both sit up straight! Unable to contain himself, he dashes up the stairs to the conservatory. He bursts in and shouts to his master: “Master, Master! The Hills are alive with the sound of music!” If you’re interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses the looming fiscal cliff brought on by Washington DC. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries, go to www.robchrisman.com. Copyright 2012 Chrisman LLC.  All rights reserved. Occasional paid notices do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)