Written By: Bonnie Wilt-Hild, Op-Ed Writer
Like myself, I am sure many underwriters in this fine nation of ours spend a fair amount of their time on conference calls or web based training with new investors that their employers have recently became associated. At least one, sometimes twice a week, I have loan originators who are barely able to control their euphoria over the prospect of yet another lender’s account rep stating that they will purchase FHA loans that have been manually underwritten. As you can well imagine we sign up with them and during the training they indicate that the cases must be reviewed by their organization prior to closing to determine if it is in fact something would purchase and as you can again well imagine there are a few things they don’t share.
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I think the biggest issue for most of us underwriters where manual underwrites are concerned is the increased risk where the overall case file is concerned. Bottom line is, we need to watch not only the potential for buybacks from our investors with regard to case quality and early default but also our default rate and compare ratios with regard to the Federal Housing Administration. Seriously, having your investor request you repurchase a delinquent loan is bad enough without having HUD sanction you or worse still, terminate your ability to originate FHA insured mortgages. Therefore, having an investor state that they will not only purchase manual underwrites but also “underwrite” them prior to closing seems like really great way to get some of the more difficult cases done without any increased liability to the originator. Increased originations with limited liability sounds almost as good together as Godiva truffles and Merlot however as you can imagine most things are never as great as they seem.
Very recently I have a few situations which involved cases that had been referred by Total Scorecard and of course the first thing the loan originator suggested is that we send it to one of those investors who will “manually underwrite” the case prior to loan approval and if all is in order, purchase the case upon closing. Needless to say I had a lot of questions regarding the whole concept starting with “How can they do that since we are a full eagle lender, they can’t act as our sponsor or authorized agent, we have 3 DE’s on staff,” to “If this loan goes into default, who’s compare ratio is getting hit.” After a lot of speculation and educated guesses my boss asked me to please contact the investor and present the questions to them and what they shared with me was certainly not shared in the training session. Things like requiring one of our underwriters to sign off on the loan as the DE manually underwriting case was interesting, considering there wasn’t a single DE in my office that wanted to approve it and the compare ratio question, well since it was technically be underwritten by our DE as would be required by HUD, if the case goes into default, it was our compare ratio that would be affected. Lastly the reps and warranties within the correspondent agreement were almost verbatim of the reps and warranties found in any other correspondent agreement which would prohibit the sale of this kind of business. If the loan goes into the default we are on the hook for it. If Steve Irwin were here he’d say it, “danger, danger, danger!” Bottom line is this everyone, you might get it sold on the secondary market but the overall liability in doing so far out ways any potential profit.
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In closing I would like to say there is still one product that can be manually underwritten and for the most part, most the investors participating in purchasing loans on the secondary market will still purchase them as such, and that is VA loan types. Yep, surprised me too however 90% of the investors I discussed such sales with stated that yes if the case was referred and manually underwriting and was a VA loan type, purchase, refinance etc, they would purchase it if the file demonstrated that the overall risk factors causing the refer recommendation had been mitigated with compensating factors and supporting documentation provided supported loan approval. Now given the subjective nature of have two underwriters review the same file and know that no two underwriters think alike, you bigger question might be do you want to take the chance that the reviewing underwriter on your investors staff may disagree with your mitigating factors and therefore refuse to purchase case. All very tricky stuff, so be careful with how you proceed with your business and remember, if it sounds too good to be true, it probably is.
About The Author
Bonnie Wilt-Hild - As an op-ed writer, Bonnie holds mortgage underwriting position as the Senior FHA DE Underwriter for a major lending institution. With over 25+ years of senior-level FHA/VA Government underwriting experience, Bonnie is considered the "Queen of FHA Loans".
