An Underwriter Explains Why Are Loans So Hard To Approve
Lately I have been hearing from producers, some of whom are upset about the current lending environment, some not. But for a slightly different view of things, here is what one very experienced and knowledgeable underwriter wrote to me. This is worth the read even for consumers who wonder why their loans are so hard to do:
“It used to be that we could ‘underwrite’ a loan and use common sense to navigate individual circumstances and actually make a decision that a loan was a good credit risk. Then DU and LP [Fannie and Freddie’s automated underwriting engines] came along and gave us the laundry list that had to be followed. We were still able to manually underwrite loans for those transactions that did not fit the box. Then the bottom fell out of the business and everyone got scared and new rules came out. Investors and Wall Street were to blame for allowing individuals who were not telling the truth to buy homes. Today investors are pre-underwriting loans prior to purchase and we have to ‘march to their tune’ including getting pieces of paper that seem ridiculous, but since we need the investor to purchase the loan so we obtain them anyway. Only the most qualified borrowers with all their ducks in a row get loans these days. Manually underwritten loans are subject to scrutiny such as we have never seen before and frankly, we do not have the courage to paint outside of the lines because we cannot afford to have a loan purchase refused. Today, it takes two to three times as long to underwrite a loan and we have checklist upon checklist that help us make sure all of the i’s are dotted and the t’s are crossed. I have been doing this for over 30 years and frankly we are back to the rules of the early 80’s or worse when it comes to documentation.”
And Even More On Why Loan Approvals Are So Hard
Speaking of analyzing credit, are you ready to have an underwriter at the closing table? In Fannie’s latest letter to lenders, the company states, “Borrower Credit – Undisclosed Liabilities: Lenders are responsible for determining that all debts incurred or closed by the borrower, up to and concurrent with settlement on the subject mortgage loan, are disclosed on the final loan application that is signed by the borrower at closing. These debts must be evaluated and included in the qualification for the subject mortgage loan. Lenders must have adequate internal controls and processes to support this requirement.”
Overview of ‘Millennial’ Consumers Ages 18-29
What is a “millennial”? It is anyone currently age 18-29, and the Pew Research Center released a comprehensive study of the 50 million people in the millennial generation, which is useful to anyone trying to reach this audience. But doesn’t this group contain the next critical segment of potential borrowers? They tend to be pro-government Democrats, liberals, likely to not join a church, favoring non-military solutions, and very diverse: only 60% white. (38% of them have tattoos, and of those, half have more than one.) The millennial generation says older people have better moral values and a better work ethic. 68% believe that either now or at some time in the future they will earn enough money to lead the kind of life they want, higher than previous generations even though they have this high level of unemployment. 1 in 8 have moved back home after college. Most of their education about ads, trends, and news comes from the web, through Facebook, Twitter, blogs they find their information from these sources.
The Tail-End of the Fed’s MBS Program
The market has twenty trading sessions before the cessation of the MBS purchase program. Traders believe that mortgage rates should increase, most noticeably in the lower coupon, current production area. At this point, besides the Fed, traders are not seeing much buying outside of some hedge funds and money managers for current coupon product. There was some hope that with the agencies buying delinquent mortgages out of pools, demand would pick up, but so far they have seen little interest in spite of the ultra-clean current production. Possibly their reinvestment decisions are now going to coincide with the end of the fed program. Much of this community is concerned with higher yields because of this and the overall macro environment.
Unexpected Increase in ISM, Beige Book, Unemployment Predictions
Mortgage prices got off to a softer start Wednesday as the Non-Manufacturing ISM number showed an unexpected increase. The 8:15AM EST ADP employment number suddenly had analysts lowering their forecasts for tomorrows Non-Farm Payroll number, and the estimates now seem to be -60,000 jobs with an unemployment rate of 9.8%. Yesterday, as stocks lost some steam and the results of the Beige Book came out, bonds rallied somewhat and mortgage spreads tightened, and investors produced some intra-day price improvements which were welcomed. The Fed’s Beige Book (which is literally beige, but is a report of the various Fed districts) showed some improvement but with soft labor markets and a weak commercial real estate sector.
Today we have Jobless Claims, some productivity numbers, and Factory Orders, along with the Treasury announcing the amounts of next week’s 3, 10, and 30-year auctions. And tomorrow we could see some volatility with the unemployment data. Greece is still in the spotlight as investors are still wary, but most agree that a bailout is likely with Greece issuing a 10-yr note and a meeting scheduled for tomorrow between the Greek Prime Minister and the German Chancellor. Currently the US 10-yr is, once again, hovering around 3.62% and current coupon mortgage prices are roughly unchanged.
One dark night outside a small town on the Wisconsin – Minnesota border, a fire started inside the local chemical plant and in a blink of an eye it exploded into massive flames. The alarm went out to all the fire departments for miles around.
When the volunteer fire fighters appeared on the scene, the chemical company president rushed over to the fire chief. “All our secret formulas are in the vault in the center of the plant. They must be saved. I will give $100,000 to the fire department that brings them out intact!”
But the roaring flames held the firefighters off.
Soon, more fire departments had to be called in as the situation became desperate. In the distance, a lone siren was heard as another fire truck came into sight. It was the nearby Norwegian Rural Township volunteer fire company composed mainly of Norwegians well over the age of 65. To everyone’s amazement, the little run-down fire engine roared right past all the newer sleek engines that were parked outside the plant and, without even slowing down, drove straight into the middle of the inferno.
Outside, the other firemen watched as the Norwegian old-timers jumped off right in the middle of the fire and fought it back on all sides. It was a performance and effort never seen before. Within a short time, the Norse old timers had extinguished the fire and saved the secret formulas.
The grateful chemical company president announced that for such a superhuman feat he was upping the reward to $200,000 and walked over to personally thank each of the brave fire fighters. The local TV news reporter rushed in to capture the event on film, asking their chief, “What are you going to do with all that money?”
“Vell,” said Ole Oleson, the 80-year-old fire chief, “Da first ting ve gonna do is fix da brakes on dat focking truck!!”