Did you know that underwriting subprime loans without assessing the risks was one of the prime factors that led to the downfall of Lehman Brothers in 2008?
The ramifications of Covid 19 has had a crippling impact on the mortgage underwriting process. While on the one hand, underwriters had to qualify loan applications as per relaxed lending standards, on the other, they had to ensure that loan was saleable in a secondary mortgage market that was particularly averse to borrowers with less than 700 credit scores. To top it, underwriters were burdened with the additional task of verifying borrower employment up until the date of closing, which slowed down the process of completing the underwriting loans. And to make things worse, the shortage of qualified underwriters in a pandemic hit industry brought the underwriting process to a grinding halt.
Given that the prevailing uncertainty of 2020 has spilt on to 2021 and is likely to worsen with the worsening of the pandemic, the going for underwriters is set to get tougher than before. It is against this backdrop that the argument for automated underwriting and the criticality of the underwriter’s role in processing loans has come to the fore.
What Newer Outlook are We looking at in the Mortgage Underwriting Process?
In terms of a newer outlook, the first thing that is bound to cross every lender’s mind is benefit analysis of automated vs manual underwriting process. There is no doubting the fact that in the digital age failure to embrace automation is to take steps back in the mortgage underwriting process growth trajectory.
Did you know that using Freddie Mac’s credit scoring system, Loan Prospector, about 60% of mortgages can be processed within a span of lesser than 10 days resulting in about USD1000 cost savings per loan?
However, the current dilemma of lenders as pointed above renders the practice of solely depending on automated underwriting impractical. Considering the pressure on lenders to consider borrowers with thin credit lines, manual intervention in the mortgage underwriting process becomes critical. With this being the newer outlook in the mortgage underwriting process strategy, here’s looking at the steps that an underwriter must consider.
Steps to Consider in the Mortgage Underwriting Process
Minimum requirements and approval standards establishment– To begin with, lenders must set the minimum requirements for the documentation process, information analysis, and risk assessment. This sets the mortgage underwriting process on the correct foot. In case this task is outsourced to a mortgage underwriting vendor, it is assured that they would follow the gold standard Fannie Mae and Freddie Mac guidelines. However, it is always recommended that lenders set their credit standards that are aligned with the kind of risks they habitually face.
Verification of the three C’s– The first C that is borrower’s credit history should undergo a strict scrutiny by underwriters. This involves a thorough review of borrowers’ credit score and check how well they have repaid their past loans such as auto loans, student loans, and others. This predicts their capability to repay mortgage payments within the specified times. The second C that stands for capacity determines borrowers’ means to pay off a loan. This involves an underwriter review borrowers’ debt, assets, income, tax returns, 401k and IRA accounts, and other sources of income. The third C that stands for collateral involves an underwriter ensuring that the current market value of a borrower’s property is good enough to serve as a collateral for a loan.
Adoption of pre-underwriting– This is the first layer that filters out unqualified loan applications which is critical in catalyzing the entire mortgage underwriting process. This stage processes only the files that meet the pre-underwriting qualifications to lenders’ loan fulfillment center. Setting up a pre-underwriting review brings under the scanner all the loan applications which have zero scope of funding as well as flags any instance of missing document. In the due process, it minimizes the overall production costs and accelerate the mortgage underwriting process.
Additional scrutiny keeping in mind the current economic climate– For a mortgage loan that is in forbearance, underwriters must seek a history of the payments made on that loan. If that history includes skipping of a payment, it is essential that underwriters request that loan to be made current for its refinancing.
Did you know that lenders cannot foreclose FHA or USDA-backed loans till March 31, 2021 and Fannie Mae or Freddie Mac and VA-backed loans cannot be foreclosed till February 28, 2021?
For individuals receiving rental income, underwriters must ensure getting proof of whether they are continuing to receive the rental income in the most recent months. For self-employed loan applicants, it is critical to ensure that the level of income generated is the same as calculated from tax returns in the past recent months.
Adoption of an unorthodox underwriting model– Lenders are departing from the orthodox model of reviewing a borrower’s financial credibility to leveraging data analytics to analyze their financial prowess. Abundance of data and proliferation of AI are the two factors that are fueling the adoption of this unorthodox model for mortgage underwriting process. AI algorithms help in an efficient prediction of a borrower’s likelihood to repay the loan. The evolution of this model is hinged on the fact that a borrower who appears to be a risky proposition today can be a profitable prospect after a few days because of a turn of financial events. To keep track of such financial ups and downs is a daunting task for a lender. This reinstates the usage of data analytics such as social media analytics to analyze the creditworthiness of an individual beyond the Covid 19 financial impact.
The pandemic has unlocked avenues for lenders to adjust their conventional approach for mortgage underwriting process to employ a fresher outlook in terms of technology adoption and process alterations. However, government-led stimulus packages to aid a financial rebound of consumers amidst the pandemic will invite further complications in the mortgage lending process. For instance, the recent announcement of the US president-elect Joe Biden’s American Rescue Plan specifies extension of the application period for forbearance on Federal-backed mortgage loans till September 30, 2021. This is expected to bring several adjustments in the traditional mortgage lending procedure.
Who are We and What Makes Us an Expert?
This article is penned by an mortgage expert from Expert Mortgage Assistance (EMA), a leading mortgage loan servicing solutions provider. We have over a decade-long experience in providing mortgage underwriting services in the US commercial and residential markets. We leverage our proprietary automated platform, MSuite, to offer a much-needed technological edge to our clients in the current market.