- The Washington Times - Friday, June 26, 2009

I recently wrote about the stricter underwriting guidelines for mortgages and how borrowers should expect to provide a lot more paperwork and jump through a lot more hoops if they want to get their loan closed.

Common sense certainly didn’t prevail when mortgage money was easy to obtain a few years ago. Now that the pendulum has swung the other way, common sense is still uncommon - especially as it relates to automated underwriting.

More than 10 years ago, I was invited to comment on Freddie Mac’s Loan Prospector automated underwriting (AU) system that was being developed. Freddie Mac is one of the two giant mortgage companies that purchase loans from banks and package them into mortgage-backed securities. Earlier this year, Freddie and its counterpart, Fannie Mae, were taken over by the feds.

The idea of automated underwriting is simple. Accurate income, asset and credit data is input into a computer. The computer evaluates the information and decides whether the loan requested should be accepted. It also will decide what documentation is required for the file, such as W-2s and bank statements.

My primary comment to the Freddie Mac folks was that if a good loan applicant is approved by the AU system, then the lender should follow the system’s findings. My concern was that if a perfectly qualified borrower receives an AU approval that requires one pay stub and one bank statement as documentation, the lender should close the loan requiring only that paperwork. If a human underwriter manually underwrites the loan after the AU process and requires more documentation, I suggested that the whole AU process would be a waste of time. The Freddie folks understood my comments and agreed.

It turns out that, until recently, my concerns were unwarranted. AU had been a terrific mechanism to streamline the loan-approval process, reducing cost, paperwork and headaches. The AU system wasn’t designed to approve loans for unqualified borrowers, but to simplify the process for qualified borrowers.

Unfortunately, today’s paranoia in the market - which, by all accounts, is being created by Fannie and Freddie - is transforming the AU process into something akin to digging a hole and filling it back up.

I recently took a refinance application from an old client. He has been a self-employed dentist for more than 20 years. His credit score is an excellent 750. He is refinancing a $400,000 loan secured to a property worth $900,000.

My processor fed the information into the AU system and it approved the application, asking for one year of tax returns and one month of bank statements. The borrower provided us this information, and we saw that the income on the tax return exceeded the income we used for qualification.

This should be a no-brainer, right? We submitted the loan to our investor, who decided the AU findings were insufficient. The lender asked us for two years of tax returns and two months of bank statements along with myriad other documentation.

I sheepishly asked my client for the paperwork and he complied. The extra documents showed that the income and assets are still more than enough to support the loan requested. I submitted it to the underwriter, who came back to me a few days later requesting a financial statement prepared by a third-party accountant that will indicate year-to-date income.

Holy cow. Remember: This fellow has great credit, great income and is borrowing less than 50 percent of the property’s value. I asked the bank representative why it is not following the findings of the AU process. She told me Freddie Mac says that AU now is merely a “tool” for underwriting, whatever that means.

It sounds as if my concern of 10 years ago has come to fruition. If lenders aren’t going to follow the findings of the automated underwriting system, there’s no sense in using it.

My fear now is that potential purchasers may not use AU as a reliable credit approval when negotiating a contract. This nonsense is sure to hold back any housing recovery.

The feds have taken over Fannie, Freddie and many Wall Street banks. They have engaged in an ongoing media blitz touting their efforts to get credit moving again.

I’m in the trenches every day working with this stuff, and I can tell you one thing: The government’s efforts are a farce. Common sense is nowhere to be found.

Henry Savage is president of PMC Mortgage in Alexandria. Send e-mail to [email protected]



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