Waking Up to a New Era

January 6, 2014Articles

As the housing market changes, so does its underwriting requirements.

By Karen O’Brien
Vice president of credit, Mortgage Lending Division
Carrington Mortgage Services LLC
Reprinted from Scotsman Guide Residential Edition and scotsmanguide.com, January 2014

What a difference a year can make. Following what seemed like an eternity of foreclosure spikes and depressed home values, the U.S. economy and housing market finally went into recovery mode this past year. Home values in many markets saw double-digit appreciation, resulting in a shift back toward traditional purchase loans after years of distressed sales dominating the market.

Even with all of this positive momentum, many brokers and originators find themselves beginning 2014 feeling troubled by lagging consumer confidence. With the recent federal-government shutdown, continued debt-ceiling debate and predictions of rising interest rates weighing heavily on the minds of consumers, lenders now are trying to prove their ability to get borrowers into the homes that they want.

One thing seems clear, however: A new era has arrived, one that will be shaped by shifting underwriting demands. What should your organization know to make the most of this new day?

As 2014 begins, refinances — once the lending community’s bread and butter — continue to decline rapidly, forcing mortgage banks and brokerages to rethink their target markets and the way that they compete for purchase business. And the competition is fierce; even traditional lenders and big banks are working hard to get ahead.

Remaining competitive in this new landscape requires an ability to offer consumers — and the real estate professionals and loan
brokers who serve them — more of what they need in this market: a breadth of products, speedy processing times and more realistic
expectations regarding what constitutes an acceptable credit score today. Above all, however, the most important deliverable is simply
the ability to close, something that depends on underwriting that’s efficient and thorough.

To better understand why effective underwriting is more important than ever, let’s take a closer look at what matters most among today’s consumers and the professionals who work for them.

Product breadth

To account for the unique financial situations and expectations of a larger pool of borrowers, mortgage banks and lenders must expand
their offerings to include a wide variety of conventional and government-loan products. The growing number of government offerings available to borrowers is impressive and well worth the consideration of organizations looking to grow their portfolios — provided they keep in mind that processing these loans can present some challenges.

Effective government lending requires a deep knowledge of underwriting terms. Because of the various exceptions that must be considered, these loans rely heavily on manual underwriting, a process that may seem foreign to underwriters who entered the field in the wake of advanced processautomation tools designed to expedite turn times.

Today’s underwriting teams must be trained to account for the difficulties associated with processing loans that are driven by exceptions to the norm. That means mortgage banks and lenders should encourage their more-seasoned underwriters to mentor less-experienced staff members, educating them on how to process loans the “old school” way while still focusing on efficiency.

Speed

In today’s housing market, the ability to close quickly — regardless of loan type — is crucial. Consumers depend on this speed to avoid losing their homes to other buyers, and agents rely on it to ensure that they get paid.

According to Ellie Mae, the mortgage industry’s average time to close a purchase loan was 46 days in 2012. Although this average has improved slightly over the past year (dropping to an average of 43 days this past September), further enhancement across the industry is in order.

Ideally, an average of 25 days to close should be the new standard. This requires significant process refinements in terms of
underwriting, which has been a major area of focus for many mortgage banks and lenders. Investments made in this regard can pay off in terms of significantly expedited processing times, reducing the time to close to as few as 15 days in some cases.

By providing borrowers with a shorter, more predictable timeline during what can be a stressful waiting period, mortgage bankers and originators can have a competitive advantage in many of the nation’s tight housing markets. By promising qualified borrowers that their documents will be ready for closing within 25 days or fewer, your mortgage bank can make itself a go-to lender among a growing number of
purchase-market homebuyers.

Realistic expectations

In the wake of the recession and the related housing-market meltdown, mortgage banks and lenders should take a fresh look at their qualification requirements for borrowers and make sure that they match up with reality. Otherwise, they could be overlooking potential groups of borrowers, including those who temporarily may have been affected by a lagging job market and now are employed.

Although many banks still require FICO scores higher than 700, this expectation may be overlooking millions of otherwiseeligible borrowers. Additionally, there should be greater flexibility concerning the appropriateness of conforming, high balance and jumbo loan options.

To accommodate the needs of today’s market, some mortgage banks and lenders have expanded their credit requirements, reducing their minimum FICO scores to 580 for certain products and making the qualification process easier on borrowers. This decision can help a mortgage bank widen its pool of applicants and also attract the attention of other banks and credit unions that may wish to sign on as third-party originators to better serve their customers.

It should be noted that lowering credit expectations means taking on an additional risk. That said, this risk can be minimized
considerably in the underwriting process by requiring lower loan-to-value ratios and by reserving part or all of the fees and gain on
sale as part of the credit-risk management process. It’s clear from historical data that requiring more money down greatly lowers the probability of loan defaults.

Quality underwriting

For some time now, the mortgage community has been preoccupied with the uncertainties surrounding the qualified mortgage (QM) rule set to take effect this month. The mortgage industry continues to wait for additional guidance from the Federal Housing Administration, the U.S. Department of Veterans Affairs and the U.S. Department of Agriculture concerning the guidelines specific to their government products. Mortgage professionals, however, are beginning to understand generally what will be needed for conventional loans.

Mortgage professionals should pay close attention to whatever transpires in terms of approved regulations and begin to anticipate
possible outcomes. As various mandated changes become more apparent across the industry, mortgage banks and lenders that have been tracking the various compliance and underwriting implications will be in the best position to execute the necessary program changes fluidly and move to market QM loans faster, making the brokers and real estate professionals that they partner with more successful and the clients of these parties their biggest fans.

Although the looming QM mandate has resulted in some originators making plans to focus their businesses on non-QM products, these loans may prove to be just as much work as QM loans. Moving forward, all loans — QM and non-QM — likely will require full documentation, and their debt-to-income ratios will continue to figure prominently in mortgage professionals’ business.

In other words, whether you’re originating QM loans or non-QM loans, ultimately it’s the underwriting that will make or break your
company. In time, banks and other lenders with the ability to underwrite and approve all types of loans should have a natural advantage
in attracting repeat business.

• • •

Just as the housing market continues to evolve, the assumptions, strategies and processes of lenders are changing in a big way. Competing in this new era requires demonstrated excellence on the underwriting front, as well as a dedication to helping more consumers achieve their full borrowing potential while preserving the integrity and risk parameters of the business.

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