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Underwriting, Not Regulation May Stall Housing Recovery

cutimes.com | October 5, 2014

By David Morrison

For some first-time homebuyers, the underwriting process may be the culprit that prevented them from obtaining mortgages and hindered a solid rebound within the housing market.

Stuart Miller, CEO of Lennar Corp., a Miami-based home construction company, was among those who voiced that concern during a Sept. 17 third quarter earnings conference call, saying the procedure to obtain a mortgage had become invasive and scary to borrowers.

Miller told analysts that Lennar is “very well positioned” for what he characterized as the home building industry's “slow and shallow recovery” from the housing crises and Great Recession.

However, during a question and answer period, he said problems with the mortgage process were among the reasons first time homebuyers were not coming back into the market in great numbers yet.

“It's still very difficult for that market to get reignited until we start to see a little bit more movement in terms of access to the mortgage market,” Miller told the analysts.

He cited what he called the three barriers to the first-time homebuyer coming back into the market: the requirement for a down payment, very stiff underwriting on mortgage loans and the process of obtaining a mortgage.

“The process itself has become fairly invasive at least in terms of how people see the process and feel the process,” Miller said, adding that whenever he speaks about this topic to a group of people, three or four in the audience always raise their hands and say, “yep, I know just what you mean by invasive.”

“The process right seems almost to scare people away,” Miller said. “The barriers are a little bit steep right now.”

Still, he expressed optimism that the loan process would moderate over time and that the market for first time home purchasing would pick up again.

Lennar builds single and multifamily homes in 18 states and posted earnings of $177.8 million in the third quarter, according to Miller.

Tracy Ashfield, CEO of Ashfield and Associates, a Madison, Wis.-based consulting firm that specializes in helping credit unions develop and manage housing finance programs, said while she would have used a different word than invasive she nonetheless understood how Miller described the underwriting process.

“What we are really talking about here is a high degree of verification and double checking,” Ashfield explained, adding that the verification had reached “a level that would have been unusual.”

For example, Ashfield described how previously, a borrower produced pay stubs and W-2s to verify their income. That requirement remains. In addition, now the borrower might also have to sign a form allowing the lender to request the borrower's tax forms from the IRS.

 

“Only then would a lender move forward and consider the borrower's income documented,” she noted.

Ashfield's income check example provided an insight into what Miller and some credit union executives say is happening. There are not necessarily new regulations in place – lenders who solidly underwrite loans have always asked for income verification – but the degree to which existing processes are being taken has reached a new level that is actively discouraging borrowers.

But Ashfield countered that credit unions can ease these member apprehensions with more education up front about the process and what it will entail.

“Members aren't stupid,” she said. “They understand, particularly after the crisis the country went through, lenders will need to ask for information.”

What credit unions need to do is to build in as much education and transparency into the process as possible so that the members know up front about what is needed and why, she suggested.

The number of mortgage loans Fannie Mae and Freddie Mac have rejected and refused to purchase has become an additional obstacle in front of homebuyers, some executives said.

Known in the industry as put backs, the rejected mortgages are loans where the lender has claimed a loan has met secondary market guidelines but then, upon closer examination, the loan was found to have errors in its underwriting or sometimes, egregious gaps in its file.

Both Fannie and Freddie then reject these loans, which mean the lender has to return the payment for the loan and then either find it another buyer or carry it on its own portfolio.

This is something the government sponsored enterprises have done for a long time and while the system is not new, Fannie and Freddie have stepped up the practice.

“Prior to the Great Recession, Fannie Mae only requested a put back if the loan became delinquent and some material error was found in underwriting the loan, usually with an appraisal value being too high, income being incorrectly calculated, or verification of deposits errors,” a credit union mortgage executive told CU Times on background.

However, in August, Fannie Mae issued a seven-page “Loan Defect Categories” document that listed more than 250 reasons lenders can request a put back, the executive said.

“Any one of these mistakes may result in a loan repurchase request,” he added, saying even “simple mistakes that have nothing to do with a credit decision can now cause a loan to be repurchased.”

A credit union mortgage CUSO executive agreed who also spoke on background, said because of appraisals, put backs are among the most difficult of loans because they are often entirely subjective. No one can point to an error in calculations or in underwriting as the reason for the rejection, he said. They just do not necessarily agree with the appraised value of the property. And, because they are the 10,000-pound gorilla at the center of the industry, there is little credit unions can do, other than try to negotiate the loan's acceptance, find other buyers or ultimately, book the loans.

At their current level, the numbers of put backs will not stop their institutions from lending, the executives who spoke to CU Times agreed. However, they have introduced another level of caution and uncertainty into the process that can make the mortgage lending process feel even more arbitrary than it previously did.

“One person can approve a mortgage loan file in our shop,” explained one of the executives, “but a committee is needed to reject one. I believe many credit unions probably do it this way. So, a committee at credit union A worries more about put backs and decides to reject a mortgage application that another committee at credit union B down the street might accept.”

Neither Fannie Mae nor Freddie Mac issued a comment on their loan audit or put back policies by press time.

 

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