The Truth About Mortgage Underwriting Pt.3

From Housing Wire 8/15/14

When Lobbying Hurts the Industry More than It Helps


This analysis would not be complete without addressing the many frustrations we heard from people wishing the good old days would come back. We believe those who share these complaints are hurting the mortgage recovery because they provide ammunition for the interest groups that do not want to see large levels of default ever again. Here are a few common complaints that we believe need to stop, at least until we fix the major problems. In reality, most regulators and decision makers do not agree that federally insured institutions should:


  1. Help tax cheats. Affluent people who report low incomes to the IRS are not going to get a lot of sympathy in today’s regulatory or political environment. They will need to make large down payments.


  1. Lower FHA limits. FHA dramatically increased their loan limits in 2008 to help stem the housing crisis and then dropped them to more normal limits this year. While that has hit a few home builders in a few markets particularly hard (and it has slowed economic growth in those markets), FHA is now back to historical normal limits. Given all the assistance FHA is already providing and the housing recovery that is taking place, it is unlikely Congress will decide to revert to another loan limit increase.


  1. Stop or reverse FHA fee increases. FHA has increased their insurance costs, particularly on high LTV / low FICO loans. All in, a borrower with poor credit and low savings is still paying the equivalent of less than a 5.5% interest rate, so there is little sympathy here as well. If fees were 75 basis points lower, and rates were 75 basis points higher, the borrower would be in the same place. While underwriters may not like it, many folks in DC believe that now is the time in the recovery for the FHA to shore up their reserves.


  1. Bring back seller-funded down payment assistance and closing costs. The government determined these programs resulted in risky loans that may have even been above 100% LTV on day one. Now is not the time to lobby for these programs.


  1. Loosen documentation. Several industry veterans said that today’s documentation is not too much more difficult than it was in the 1980s before automated underwriting took place. While costly and perhaps a bit overboard for many, less than full documentation is not going to garner a lot of sympathy today either.


  1. Have sympathy for those who sold short. Short sellers include very honorable people who did everything they could to help the bank recover as much as possible, as well as less honorable people who strategically forced the banks to take huge losses even though they could have kept their mortgage current. At this point in the recovery, asking short sellers to wait four years to get a federally insured or guaranteed mortgage is not viewed as unreasonable.


  1. Offer FHA terms on homes above the FHA limit. There are borrowers who cannot qualify for a FHA loan but want to buy a home above the FHA limit and do not qualify for a conforming loan. They are not going to get a lot of sympathy right now either, as homes above the FHA limit are more expensive than half of the homes being sold in the market.


To the extent that any of these scenarios above can produce good loans, banks or non-banks will start making them and charging the appropriate risk-based return.


We could go on and on with respect to loans that industry executives think banks should be making, but instead we hope to focus people’s attention on the paradox in today’s lending environment and the current reality that could help buoy sales.


In conclusion, let’s:


  1. Get the word out that loans below the FHA limit are readily accessible, with monthly payments that are a great historical value in comparison to gross incomes.


  1. Let the bankers use manual underwriting in instances where they can document that the loan has a very low likelihood of losses.

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