Why Underwriting to Guidelines Isn’t Enough

Written By: Bonnie Wilt-Hild, Op-Ed Writer

How many times have you suspended or possibly rejected a loan and then listened politely as the processor or loan officer provided a very long dissertation as to why the case should be approved which usually ended with one or both of them stating very strongly, “but it meets guidelines!” Yep me too, lots of times. Five or six years ago, a statement like that might have sold an underwriter as long as the AUS findings demonstrated an approve/eligible and documentation as required by the AUS was provided but in the mortgage universe today, adhering to guidelines is simply not enough.

I will agree that underwriting guidelines provide a tool by which to measure salability and provide for overall universal conformity where the mortgage product is concerned, but guidelines alone will not provide for a fair assessment of overall case risk which is a matter that is critical in the mortgage environment we operate in today. When considering the current state of the economy and a market where property values are just beginning to stabilize, it is more important than ever to determine that the mortgage being granted to a perspective borrower will perform long term. Let’s face it everyone, in a market that is flooded with foreclosure and short sales, the likely hood of a property on the auction block receiving a bid for any greater than 75% of the fair market value is pretty slim and that is generous in a solid real estate environment.

In an environment plagued with foreclosure sales, REO stigma could be more depending on the current market conditions in a particular geographical area which is why the emphasis where qualifying the applicant is concerned must be placed on the potential borrower. It is the borrowers overall financial health and behavior that will dictate if a mortgage will perform long term and as guidelines assist us in determining the acceptability of the overall case as well as the borrower, they should not be decision maker when determining if a loan should be approved. Quite frankly all, I have seen plenty of cases that have received AUS approvals and meet underwriting guideline criteria end up on the reject pile simply because of layering of risk or other factors that fall outside of the realm of guidelines.

Guidelines not unlike AUS findings provide a useful tool for underwriters to determine that a mortgage applicant meets the basic criteria for mortgage approval and act as somewhat of an underwriting recommendation. They provide for uniformity with regards to program parameters and acceptable criteria so as to prevent weak underwriting practices as well as provide for underwriters a base line of sorts as to what a potential applicant should demonstrate in order to be considered an acceptable financial risk. But as no two cases are alike, guidelines alone cannot be applied to all cases as the final decision for loan approval. Remember everyone, underwriting is not an exact science but more of an art form and to that extent, meeting guideline criteria does not necessarily warrant loan approval.

There is more to underwriting then determining if the borrower meets guideline criteria or receives an AUS accept, as stated above we need to take a good look at our borrowers overall financial health before we can determine if the case will perform long term because at the end of the day, we are signing these people up for a 30 year loan. Guidelines may indicate ratio direction and even LTV criteria but in some instances compensating factors may be present to exceed these guideline recommendations. In other cases, guideline suggestions may be far too generous based on the borrowers overall financial picture and we may need to reduce LTV or provide for more stringent ratio requirements based on the borrowers overall credit history or lack thereof, savings patterns, use of consumer credit, spending habits and/or employment history.

These factors among several others need to be examined while applying guideline policy where underwriting is concerned before we can determine if the case is an acceptable or unacceptable risk regardless of rather it meets guideline criteria or not. In short, measuring loan quality by borrower financial merit should be your primary objective and once this is determined make sure you meet guideline criteria to determine salability and insurance acceptability. Here is wishing you sane at the end of the week, enjoy!

About The Author

Bonnie Wilt-Hild - As an op-ed writer, Bonnie holds 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".


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