Written By: Bonnie Wilt-Hild, Op-Ed Writer
When origination staff hears the words financial reform, it generally evokes a groan signifying that things just got a little more difficult where qualifying a borrower is concerned. On the other hand, there is underwriting sounding off with a sigh of relief because finally FHA and company will put into writing what underwriters have fought to put into practice for the past 3 years and that is the return to prudent underwriting practices that existed pre-AUS. It seems that everyone is starting to agree that relying solely on the underwriting recommendation afforded by AUS was not sufficient where sound underwriting practices are concerned.
Now I hate to say I told you so, but I have to say “I told you so”. I know a few of you regularly read my blog posts so you know my stance on things like total utilization of a mathematical equation for the purpose of underwriting and of course let’s not forget credit scoring, but for those of you who are new to my world, I will reiterate how I see very little value in either. Now I am not saying that AUS is not a usefully tool, it is, but to depend solely on a system of underwriting, which bases completely on the evaluation of numeric values without assessing any variables that might affect the numeric values is simply irresponsible. The heyday of AUS taught us that the hard way. Additionally, it provided the total basis for the lack of responsibility where underwriting and lender accountability was concerned. Think about how many arguments underwriting had with support staff and management because we asked for something that was waived by AUS. More frightening still were the underwriters who were just approving everything because the computer said they could, you know the ones who said, “Well whatever, AUS approved it so it’s not my problem”. I personally fired a couple of them, irresponsible people annoy me. Anyway it’s on again, responsible underwriting, sustainable homeowners and the best of responsible underwriting practices that FHA will make a matter of policy, implement in writing so that all lenders are required to comply.
Now for the originators, I will say don’t fret over much because quite frankly all of these changes will level the playing field, so really it’s a good thing. The institution that employs me tends to be conservative where underwriting and qualifying is concerned so my guys constantly complain when we deny a loan that has been approved by AUS stating that someone is going to make the loan. You know how that works, it doesn’t really matter to the lender that the risk threshold exceeds that of anything that might be considered remotely responsible from a loan approval level, they have the AUS approval and they are going with it. What the changes will do is force them to stay within a responsible ratio arena and employ the same safe and prudent underwriting practices that the more conservative lenders employ, so chin up guys. Underwriters, this is a kudos for us because it really will cut down on the number of arguments we engage in with support staff, which should considerably bump overall production from an underwriting standpoint. I don’t know about the rest of you but I swear I spend at least 2 hours a day saying things like, “What don’t you understand about NO! Is there some way I can explain this to make it less confusing, like how about NO!” Admit it, you’ve been there.
So while we all sit at our desk feeling all tingly thinking that our days of wondering if everyone had a bowl of lead based paint for breakfast are over, I will share a few of the new rules with just so you know what you are celebrating. First of course is the reduction in seller paid closing costs to 3%. I know this one give us a little pause particularly where the low to moderate income group is concerned but statistically speaking everyone, there is a significantly larger rate of default amount borrowers who utilize the full 6% where seller contribution to closing costs is concerned so it will really reduce lender exposure where overall risk is concerned. Next and my particular favorite is the reduction and cap on maximum DTI. This is such a large arguing point for me, I hate excessive ratio’s so enforcing an industry wide cap regardless of credit score delights me to end. Now if they would just implement the residual income test along with it I think we would be good. Other highlights include additional provisions regarding appraisals and HVCC, prepayment penalties as well as some changes to the HMDA act so tell your compliance officers to get on their mark.
In closing I think the overall changes are long overdue and should for the most part help to stabilize the mortgage market. Newer underwriters may need to learn to embrace due diligence, prudent underwriting behavior as well as learn how to manage overall credit risk but once they have it they should be good to go. With that I will wish everyone a successful week and of course happy underwriting.
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".