- The Washington Times - Friday, January 22, 2010

The lack of common sense in mortgage loan underwriting persists in 2010. When I sit down with clients to take a loan application, I give them a heads-up. I look them straight in the eye and tell them to be prepared to become a circus act. Regardless of the amount of paperwork I ask from them, the lender will want more before the loan closes.

Here’s a real-life example of a client who recently was approved for a refinance.

The fellow called me up, wanting to reduce his 30-year mortgage, which had a fixed rate 5.875 percent. He and his wife are retired and live on Social Security and IRA distributions. He tells me he will be selling his home in Greenville, S.C., within five years and wants to take advantage of the low rates. They plan on permanently moving into a condominium they own in Charleston that they currently use as a secondary residence.

I recommend that he take out a 7/1 adjustable-rate mortgage (ARM) at 4.25 percent. The rate will remain fixed for seven years, longer than the borrowers intend to hold the property. The interest savings would exceed $25,000 over a seven-year period. There are no points or originations fees on the loan, so their transactional costs are not excessive.

The loan amount is for $200,000 and the property is worth more than $600,000. According to their tax returns, their annual income is more than $100,000, made up of IRA distributions, Social Security, interest and dividends. Their credit scores are over 800, which are deemed to be near-perfect.

In accordance with the lender’s underwriting guidelines, I submit the loan application for approval and include signed disclosures, two years of tax returns, a credit report, appraisal, Social Security benefits statements, and myriad other documentation proving these applicants are an excellent credit risk.

A few days later, I receive a phone call from the underwriter, who tells me he is declining the loan. On what basis, I ask him. He tells me that while the title of the property is in the names of both the husband and wife, the loan was submitted in only the husband’s name, and therefore he would only count half of the income listed on the jointly filed tax returns. (My borrower suggested that only he be on the loan to keep things simple). I tell the underwriter I will simply add the wife on the loan. He tells me that would help the case. No big deal.

We add the wife to the loan application and the underwriter approves the loan with a variety of conditions. Some of the more frivolous ones include:

• Utility bill from the subject property to prove that the bill isn’t sent to the Charleston address.

• Letter of explanation and certification that the Charleston property is not their primary residence.

• Twelve months of bank statements to prove the IRA distributions are taken in equal monthly installments.

• A disbursement letter proving the IRA distributions will continue for the next three years.

Can you spell “overkill”?

While I obtained most of what the underwriter wanted, I did successfully object to some things. Consider the following:

• The utility bill and explanation letter is to prove that the Charleston condo is not their primary residence. I already had enclosed copies of their driver’s licenses and tax returns, both indicating the Greenville home as their address.

• The underwriter seems to believe IRA distributions don’t count as income unless they’re paid in equal installments. While that makes no sense to me - it’s the borrower’s money, he can make withdrawals when he wants - I nevertheless obtained a letter from his financial adviser in lieu of making my client dig up 12 months of papers.

• I didn’t know exactly what a “disbursement” letter was, so I obtained a bank statement evidencing more than $800,000 in IRA funds.

Remember folks, these clients have credit scores of 800, plenty of income on their tax returns, enough money in the bank to pay off the loan many times, and are seeking a loan that’s only a third of the property’s value.

Today’s lending policies make no more sense than the myopic policies on the other side of the spectrum when the subprime-lending market was the rage. The mortgage industry is in desperate need of common sense and balanced underwriting.

Henry Savage is president of PMC Mortgage in Alexandria, Va. Reach him at henrysavage@pmcmortgage.com.

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