- The Washington Times - Friday, February 19, 2010

I have spent the past few columns discussing the stringent underwriting guidelines today’s borrowers face when applying for a mortgage loan. While loose underwriting standards of the past certainly contributed to the mortgage meltdown, the overreaction in the industry makes no more sense than the subprime craze.

I spent the better part of last week contacting various representatives in the industry. I described two different borrower profiles and then requested a comment.

The first borrower is seeking to refinance his $400,000 fixed-rate loan from 6 percent to 5 percent. The property is worth more than $1,000,000. The borrower has more than $1,000,000 in the bank and an excellent credit score of 780. Because he is retired, he has very little income. Regardless of his excellent credit, his millionaire status and his million-dollar property, the automated underwriting systems used by government-supported mortgage giants Fannie Mae and Freddie Mac won’t accept the borrower’s application because his income is insufficient to carry the loan payment.

To contrast, I described another borrower with the same loan amount seeking to refinance his 6 percent rate to 5 percent. This fellow has an annual salary of more than $100,000. Though his income is more than sufficient to carry the mortgage payment, his credit score is 680, considered to be marginally acceptable. He has far less equity in his home because his property is worth just $500,000. Moreover, his entire savings amount to less than $3,000 in his checking account.

Both Fannie’s and Freddie’s automated underwriting systems accept this applicant with no problem.

Anyone would find this conclusion confusing. This didn’t make sense to me, so I decided to do a little investigating. I contacted Freddie and Fannie, which purchase loans from lenders and are largely responsible for the mortgage rules. I also spoke with a lender who originates mortgage loans and sells them directly to Fannie and Freddie. I then spoke with a representative from a large portfolio lender that retains its loans and is therefore not bound by Fannie’s and Freddie’s rules. Here’s what I learned.

A media-relations representative from Freddie Mac told me the company does not comment on any specific loan scenario. He told me its underwriting guidelines and the decision on whether to buy a loan is made based upon what is in the best interest of the “conservatorship.” Since the federal takeover of Freddie, its mission is to “conserve our corporate assets.” I couldn’t get any specific answer for why I can’t get a millionaire retiree approved for a Freddie loan.

The media-relations representative from Fannie Mae told me its automated underwriting system may not accept an application without sufficient income, regardless of assets, loan-to-value ratio and credit. But the company has a procedure in place called a “single waiver,” which allows a lender to request that Fannie manually underwrite a loan and accept it even if it wasn’t accepted by the automated system.

I received a very different story from the representative from a lender that sells loans directly to Fannie and Freddie. This fellow told me Fannie and Freddie won’t “touch” a loan that hasn’t been accepted by an automated underwriting system. He told me I was being paid “lip service” and that the underwriters at Fannie and Freddie are “robotic” and do not underwrite with common sense. He told me a single waiver simply is not used. If a loan isn’t accepted by the automated system, it is not approved by the lender because it won’t get purchased by Fannie or Freddie.

Finally, I spoke with the head of credit analysis of a portfolio lender. While this gentleman confirmed that its underwriting guidelines are strict, he implied that his company likely would be interested in making a loan to our wealthy but low-income retiree. He said his staff underwriters may decline the loan based on insufficient income, but the application could be appealed and granted if a highly ranked underwriter deems the application to be a good credit risk.

Of course, our retiree’s application should be approved and accepted by any lender - but what “should be” is irrelevant. My conclusion from this research project is that lenders are still wary of making loans, and Fannie’s and Freddie’s internal bureaucracies are inhibiting much progress in the efforts to alleviate the credit crunch.

As a last resort, I reached out to one more entity - the Federal Reserve. Because Fannie and Freddie are now controlled by the Fed, I figured I would take my case there. I sent my scenarios and questions via e-mail through its Web site. As of this writing, I have received no response.

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

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