Written By: Bonnie Wilt-Hild
For those of you who consistently read my blogs, you know I am a serious fan of manual underwriting methods not to mention full documentation under every circumstance.
I will agree that a lot of it has to do with the fact that I’m kind of compulsive, a little more because, I am sort of a busy body but mostly because I hate answering post endorsement technical reviews with the possibility of indemnification. For those of you underwriters out there that are new to FHA it is really important that you understand the meaning of a post endorsement technical review, the process which one would follow should they be subject to one and the potential consequences should you be unable to convince a HUD underwriter using explanation and documentation to reverse your unacceptable rating to a conforming one.
First it’s important to understand that HUD completes PETR’s on about 1 in 10 of all cases underwritten by a particular lender. During these reviews, the reviewer assesses the overall case file to determine that it
a) Meets HUD’s mortgage insurance guidelines
b) There are no significant material deficiencies which will affect the overall integrity of the case and
c) That the overall risk associated with the case is acceptable for HUD purposes.
They do this by re underwriting the case to determine if the DE underwriter missed anything from a documentation standpoint or neglected to do their due diligence and ultimately approved a loan that should have been otherwise rejected because it didn’t meet HUD’s credit or other standards.
If during the review, it is determined that the DE underwriter did an adequate job documenting the case and adhering to HUD’s guidelines then the case is given a conforming rating and the underwriter is generally never made aware the case was reviewed.
If the case however is determined to be deficient, the underwriter is notified by mail with a letter which outlines all of the deficiencies found during the review. It is at this point the underwriter must respond in writing within 30 days and provide either explanation or the missing documentation and sometimes both in order to have the unsatisfactory rating overturned to a conforming rating. If the HUD reviewer still does not feel that the underwriter has done a satisfactory job then the unsatisfactory rating sticks and in some instances, the lender is required to indemnify the loan and hold HUD harmless where future losses are concerned.
Now I will assure everyone that keeping oneself out of the indemnification game is difficult enough now without HUD tightening the standards and is only going to get more difficult in the future. According to the press release as well as the information found in the federal register HUD has made it crystal clear as to what they expect to see from a documentation standpoint and when HUD will require cases to be indemnified. Specifically the release is stating that lenders will be required to indemnify if they fail to:
a) Verify and analyze the creditworthiness, income and or employment history of the borrower
b) Verify the source of assets brought by the borrower for payment of the required down payment and/or closingcosts
c) Address property deficiencies indentified in the appraisal affecting the health and safety of the occupants or the structural integrity of the property or
d) Ensure that the property appraisal satisfies FHA appraisal requirements.
In short any small mishap will result in indemnification which is different than the standards in the past. In the past, a HUD reviewer would determine if the deficiency affected the overall quality of the case and if it didn’t lenders were generally not required to indemnify. Under the new policy however it appears that any deficiency may very well result in indemnification. Additionally, the lenders that now self insure will now be required to maintain compare ratio’s less than 150% in order to maintain the ability to continue to insure electronically.
In short to many defaults and they will be back to submitting paper binders.
There were a few other things to take note of in the new provisions including a five year seasoning period where HUD will have the ability to review defaulted loans which were not selected for PETR and determine if any deficiency exist and if so, require the lender to reimburse them for any losses incurred as a result of poor underwriting. So what does this mean for all of us? Simple, document your files well. Under these new provision, Due Diligence in underwriting takes on a whole new meaning so make sure your underwriting decisions are sound and everything in the file is supported from a documentation standard. Have a great week!
About The Author
Bonnie Wilt-Hild - As an NAMP® staff writer, Bonnie currently serves as a senior instructor for FHA Online University (www.FHA-Classes.org) as well maintains a full-time mortgage underwriting position as the 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". If you're interested in becoming a writer for NAMP®, please email us at: firstname.lastname@example.org.