Back To The Future – The Benefits Of Manual Underwriting And Why It’s Needed In Non-Qualified Mortgage Loans

Analytic Focus, Blog.pngIn today’s Qualified Mortgage market, so much is made of automated underwriting systems that I fear the industry is somewhat paralyzed.  Underwriters have regressed to being merely condition-clearing clerks rather than thoughtful, rational, common-sense decision makers.   While there is clearly a place for automated underwriting in the QM market, I believe that, more broadly, our industry must create a similar space for well-reasoned and carefully thought out portfolio underwriting. 

Underwriters Make Reasonable Decisions for the Borrower and Lender

One logical evolution to anticipate in portfolio underwriting is the need for lenders to expand their offerings to the Non-Qualified Mortgage (Non-QM) market.  In order to responsibly expand NonQM, underwriters need to make reasonable decisions that benefit both the borrower and lender.  That is, we need to, once again, recognize and emphasize the ability of the underwriter to fully understand the transaction and communicate a balanced view of the borrower’s ability to repay.  Similarly, the underwriter considers the overall risk of the loan and what compensating factors can be used to underwrite to meet the requirements of reasonable policies and guidelines.

Manual Underwriting – A Reasonable Credit Decision Method

At its core, manual underwriting embeds the ideals of reasonable and responsible decision making.   I always attempt to bracket the risk and ask, “What’s the best and worst thing that can happen?” based on the facts of the loan.  I make sure each area of the loan – property, assets, credit, income and transaction – falls within my risk parameters.  If not, what compensating factors do the borrowers have? Does the borrower have slightly diminished credit but strong income and job stability?  Finally, if I feel that the risk is too great, then I decline the transaction and offer my reasoning to the originator.

Have Lenders Lost Touch with Automated Underwriting? 

When I look back and ask myself, was the emphasis on Government Sponsor Enterprise (GSE) automated underwriting and the need for QM “safe harbor” necessary?  Was it the result of the economic crisis of the first ten years of the 21st century?   Perhaps.  Clearly, back then some lenders lost touch with their guidelines, believing that pricing could overcome obvious borrower flaws.  At the same time, lenders deemphasized the thought and reason that goes into making an underwriting decision.  Instead, some within the industry felt the pressure of “It’s my best broker” or “This is an extremely important deal for my relationship with the realtor” and approved loans that may have fit poorly with their own guidelines.

Are Qualified Mortgages Out of Reach for Qualified Borrowers?

With this background, I fully understand the industry’s hesitation to make a loan decision that doesn’t quite fit in the GSE box.  It was a reasonable initial reaction to the housing market crisis.   Now, with the benefit of hindsight, it’s clear that many well qualified borrowers are being left out of the current Qualified Mortgage market.  Their exclusion is mostly due to slightly expanded ratios or a need for an exiled product feature such as “interest only”. To compound the expanded ratio hurdle, for the first time in many years we are in an increasing interest rate environment, which will further erode the Qualified mortgage market.

Will Expanding Ratios Broaden NonQM Opportunities?

Finally, I believe we also should consider an anticipated policy change that will privatize the GSE’s and possibly remove their current QM exemption.  The removal of this exemption will have a significant impact on the number of GSE approved loans with slightly expanded ratios over 43%, again diminishing the number of Qualified Mortgage approvals and increasing the need for NonQM lending.

With Greater Knowledge Comes Greater Understanding

My excitement for NonQM and Portfolio lending is that we now have another chance to get the manual underwriting process right and help reasonably expand the market.  That doesn’t mean that we throw out all the rules.  It does mean that, in order to regain our standing as the recognized experts and the key to better lending, we must explain our actions and understand the ramifications of each transaction.  Neither the borrowers nor the mortgage industry can afford another meltdown.  As mortgage underwriters, we need to unite in the idea of analyzing the complete borrower profile and be willing to make difficult decisions that will ultimately benefit borrowers, lenders and the mortgage industry as a whole.  I take great pride in helping borrowers attain their dream of home ownership.  It’s time to supplement the automated underwriting market with thoughtful decisions which allow all sides of a transaction to complete the mortgage experience with greater knowledge and understanding.