The mortgage underwriting landscape has become increasingly challenging, primarily due to the pervasive impact of buybacks and other market conditions. Underwriters (UWs) are now facing a myriad of pressures and obstacles that complicate their decision-making process. Here’s a detailed look at why recent underwriting decisions are more difficult:
The Impact of Buybacks
1. Fear of Buybacks: Buybacks occur when loans sold to investors do not meet their stringent quality standards, resulting in the originating lender repurchasing the loan. This has led underwriters to add additional “feel good” conditions to avoid future buybacks. The heightened fear of buybacks is driving underwriters to be overly cautious, sometimes to the detriment of the loan origination process.
2. Tighter Credit Standards: Agencies have either tightened their credit standards or there is an increased rate of file audits due to fewer loan files being processed. This results in a greater percentage of loans being scrutinized. The need to adhere to these tighter standards further complicates the underwriting process.
3. Marginal Loan Quality: The current market is seeing a higher volume of marginally qualified candidates. This decline in loan quality necessitates more conservative underwriting to mitigate risk, making the decision-making process more rigorous and time-consuming.
Market Conditions and Underwriting Pressures
1. Scratch and Dent Market: The scratch and dent market, which deals with loans that have minor issues preventing them from being sold to investors, is currently unfavorable. Lenders face significant financial losses if they have to sell these loans, adding pressure on underwriters to ensure initial loan quality.
2. Employment Pressures: Lean times have resulted in highly compensated, and often the best, employees being let go. This reduction in experienced personnel means the remaining underwriters are under more pressure to perform without errors. Additionally, underwriters are wary of making mistakes, as those on performance improvement plans are often the first to go during reductions in force (RIFs).
3. Overlays and Conservative Underwriting: Buybacks have led to the addition of overlays—extra layers of underwriting guidelines beyond the standard criteria. These overlays are designed to further minimize the risk of loan defaults but also add complexity to the underwriting process. This conservative approach aims to protect lenders from financial losses but can complicate and prolong the underwriting process.
Operational and Industry Challenges
1. Quality Control (QC) Pressures: Quality control departments from investors have more time to meticulously review loan files. This increased scrutiny translates to more pressure on underwriters from their managers and higher-ups, who are concerned about meeting quality standards to avoid buybacks and protect bonuses.
2. Quiet Quitting: A trend of “quiet quitting”—where employees do the bare minimum rather than going above and beyond—is seen across industries, including mortgage underwriting. This mindset can negatively impact the thoroughness and quality of the underwriting process, leading to more conservative decisions to cover potential lapses in diligence.
3. Increased File Complexity: Files currently being handled by underwriters are often more complex and less straightforward than in the past. This complexity requires more time and effort to ensure compliance with guidelines and to mitigate risks, further complicating the underwriting process.
The combination of buybacks, tighter credit standards, unfavorable market conditions, employment pressures, and operational challenges has made mortgage underwriting significantly more difficult. Underwriters are caught between the need to maintain high standards and the pressures of avoiding financial pitfalls. As the market continues to evolve, these pressures are likely to persist, requiring ongoing adaptation and cautious decision-making from those involved in mortgage origination.
Lenders are not created equal. Underwriting guidelines and loan programs can vary widely between lenders. After almost 40 years of experience in every aspect of mortgage origination in different economic environments, knowing which questions to ask and how to package a loan properly before submission is crucial to avoid complications. In the present environment a borrower attempting to submit a package unilaterally through an online lender without the knowledge of what’s required will have a difficult time getting a clean approval.
If you are in the Los Angeles area, and have any questions or real estate sales or financing needs, feel free to contact me
Ron Henderson GRI, SRES, SFR, RECS, CIAS, CREN, GREEN
President/Broker
Multi Real Estate Services, Inc.
Gov’t Affairs Chair – California Association of Mortgage Professionals (2017-2018)
Chairman – OutWest Marketing Meeting (Real Estate Education)
BRE #00905793 NMLS #310358
www.mres.com
ronh@mres.com
Specialist in the Art of Real Estate Sales and Finance
Real Estate market, mortgage rates, Los Angeles, San Fernando Valley, Conejo Valley, Simi Valley, Woodland Hills, West Hills, Calabasas, Chatsworth
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