Written By: Glenn Michaels, Op-Ed writer
As an old time underwriter, more than fourty years of mortgage underwriting I feel we are heading to another housing bubble. Conversations with other seasoned underwriters also feel that we are also going down the road to another housing bubble.
Common sense underwriting is now out the window. All underwriting now must be performed by an automated underwriting system (AUS) and in modt cases the human underwriter does not have to put their name or number on the paper work.
The United States Department of Housing and Urban Development;s Single Family Hand Book (SFH) 4000.1 requires all lenders to utilize their automated underwriting system (AUS) with their Technology Open To All Lenders (TOTAL).
Whenever a loan file is underwritten by an AUS with TOTAL the Direct Endorsed (DE) underwriter’s CHUMS number does not appear as the underwriter. Instead the universal underwriting code for automated underwriting is utilized. The approval number is ZFHA.
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In theory the Direct Endorsed Underwriter is suppose to validate all of the information inputted in the mortgage loan file and to review the appraisal report. The DE’s CHUMS number is placed on the HUD – 92900 = LT that they reviewed the appraisal report.
Data Integrity is very important due to automated underwriting. Jumk in is junk out. However I have talked to young inexperienced underwriters who tell me they do not check the data so much. The DE is not on the hook if the loan defaults early since they did not underwrite the file. However the originating company could be forced to buy back or indemnify against loss during the file has serious issues in the first eighteen (18) months of the loan’s life.
The AUS and TOTAL are asset based systems. Loan files with a lower loan to value or that more assets are often approved with ratios way over the suggested housing and debt ratios. When I first got in the business in 1972, the ratios were 28% for housing and 36% for housing and liabilities. Now the SFH 4000.1 states 33% for housing and 41% for housing and liabilities. A borrower with a lower loan to value or one that shows cash can be approved by an AUS with TOTAL with ratios of 45% housing and 55% for more for housing and debts. These number are too high and will more than likely go delinquent along the way.
Recently I had a file that was approved by FNMA’s Desk Top Underwriter (DU) with Total that I would never approved. However I am not accountable for the loan based on the Approve/Eligible status in underwriting. The file was a cash out refinance with a 69% loan to value, currently paying 2% going to 4.375% and coming out of a loan modification. Due to the fact that the loan to value is 69% DU/TOTAL approved the loan file with 45% /53% ratios. The credit score was 625 with an added occupant coborrower to qualify.. This is a high risk loan! My employer wants to do the loan even after I warned him that he will be on the accountability for 18 months.
The government and the agencies want all lenders to utilize automated underwriting and there are so many flaws in the system.
There are many borrowers obtaining mortgage loans that they do not qualify but they have a low loan to value or have about 10% of the loan in assets, the AUS will pass the borrower.
Right now common sense underwriting is not very common.
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.