Breaking the Underwriting Code

The major advantage of being a mortgage broker is
that we have access to many lenders.

In addition to the banks and major mortgage companies,
we also have lenders that serve niches in the market-
place.

For those loans up to $417,000, commonly known as
conforming loans because they conform to guidelines
for purchase by Fannie Mae (FNMA) and Freddie Mac
(FHLMC), there are many lenders who create these
loans because of their marketability.

The Stimulus Act allows for FNMA and FHLMC to temporarily
purchase loans up to $697,500 in San Diego, through the
end of this year. These are commonly called conforming-
jumbos.

Jumbo loans, traditionally those above $417,000 and now
temporarily for those above $697,500, are purchased
through Wall Street by institutional investors.

After the "mortgage meltdown" that began about a year
ago, the jumbo investors left the market. They had
lost confidence in the quality of the loans that were
in their investment pool.

FNMA and FHLMC tightened up their guidelines, but loan
approvals with them are more predictable and the process
is more straight forward.

We are able to submit loan request electronically and
to receive automatic approvals immediately. The lenders
will always verify the figures that we use in the submission
when we submit the physical file, but we can know the list
of conditions for the approval right away.

The key here is that if FNMA and FHLMC are willing to
approve the loan through the electronic system, they are
in essence telling the lender that they will purchase
the loan from them. The lender is willing to make the
loan as approved, because the risk of them creating a
loan that the investor (in this case, FNMA and FHLMC)
will not purchase has been been eliminated.

In the jumbo category, however, what we are encountering
now is some extremely conservative underwriting. Since
there is a less predictable process for when the investor
will commit to purchasing that loan, the lender wants to
leave no doubt that if they create the loan, that they
can sell the loan. Typically, lenders do not want to keep
big loans in their own portfolio because they have rate
risk if interest rates go up.

Many underwriters are in CYA mode. We can call that
"Cover Your Apathy" for our purposes. These underwriters
are more interested in making sure that they create
a bullet-proof file than they are in granting the loan.
They are equally happy to approve or decline a loan, as
long as there is no room for criticism of their decision.

It's almost as if they have forgotten about evaluating the
borrower's qualifications and assessing reasonable
risk. Instead they want to over-document the files and
analyze the numbers in the most conservative way possible.

All of this stems from the lack of investors in the
jumbo market. If there were more investors, and the
market was more liquid, the lenders' underwriters could
make more reasonable judgments knowing that they had a
high probability of selling the loan.

But, just because some of the lenders are in this mode
does not mean that they all are.

I am constantly evaluating the underwriting patterns of
our lenders. I know who is reasonable and who is
squeezing the files real tightly. I know who can work
quickly and who has a backlog that is in front of our
request.

As you make a decision to work with someone to obtain
your mortgage loan, seek professionals who can advise
you about market reality, who help you prioritize what
is important to you, and can educate you so that you
make informed decisions.

Feel free to call me for a recommendation. Don't be
surprised when I recommend Doug Brennecke!