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Your underwriters are underwriting from a place of fear. How fearful? That depends on the disposition of your company. The thing is, fearful underwriting equates to longer findings; more ticky-tacky conditions. My personal favorite are conditions that beget more conditions and of course, stickier interpretations regarding income and letters of explanation that boarder on court hearings. Hint; it’s going to get worse. Sorry, don’t shoot the messanger.
Question; why is this happening? Like appraisals, where we had to demonize appraisers for the pending policy changes, or back in 2008 when we demonized mortgage brokers; again we have to demonize underwriting borrowers and the status quo, to rationalize where we are and what needs to be done.According to David Stevens, the GSEs are not being consistent with commitments made in recent years about materiality and options for remediation. And they fear retribution if they make these points. Instead they simply engage with their respective GSE each month to try to get them to take back the repurchase requirement on this loan or that loan. It’s a loan-by-loan drudgery that takes staff time and adds costs to a lender’s bottom line.
At a time when the customers of Fannie Mae and Freddie Mac are losing money, or barely breaking even, the GSEs are having a heyday. As was reported last week in Inside Mortgage Finance for example, “Freddie Mac racked up $2.94 billion in net income in the second quarter, up 41.0% from the first quarter and 20.0% from the same period last year. This marks the enterprise’s fourth consecutive quarter of increasing profits, which reached their highest level since the first quarter of 2022.”This all culimanetes in fearful underwriting and that means more complications for loan officers, Realtors and their clients. It creates more work and unnecessary complications. Further, this is a trend that’s not just coming from the GSEs, rather it’s a national governmental groundswell. Case in point; a working paper from the Philly Fed reserve titled, Owner Occupancy Fraud and Mortgage Performance, states that fraud caused the last bubble and if unchecked is going to cause this housing bubble. Either way, they suggest a housing bubble, and this little white paper is a preemptive game of blame and finger-pointing, right at you.
A quote from the Philly Fed working paper; “It was pervasive during the bubble and did not affect just private securitized loans, appearing in both government-sponsored enterprise (GSE)–guaranteed and portfolio-held loans. More significantly, we also show that fraud continues to remain a concern appearing even in recent originations.” In short, the boogyman is still lurking. It’s you and your clients, and you and your fraudulent loans that are going to cause this bubble to pop; not our policy. Our policy is sound, it’s fine, even boardering on great, and loans would perform perfectly if only you and your fraud hadn’t shown up. And that all culminates in fearful underwriting that trickles down to you. Right from the Fed.
Now we know the effects are real and tangible and we can qualify it through the Mortgage Banker’s Association’s credit availability index. Credit availability has fallen off a cliff at exactly the wrong time; manufacturing fear. We know from the Fed that this market is your fault and we know they’re coming after you for your part in fraud. Did you know that the Fed has inter-agency cooperation with the IRS and they know those homes that are said to be occupied are not occupied, and where fraud was likely the outcome from your origination’s. That’s what this paper is all about.
From Steven’s opinion piece; Jaret Seiberg of TD Cowen released a report that states: “Our worry is that Washington policy changes could contribute to a mortgage credit crunch in the coming years as banks face capital challenges and a tougher economic environment, while the government appears unlikely to take key steps to ensure non-banks will remain key providers of mortgage credit.” Again, we think there’s more fraud. We need it to be fraud and not government policy so let’s go find us some fraud! Let’s look at origination’s of owner occupied, non-owner-occupied and investors and see how this plays out. Would you look at that…more fraud than we thought! Even on loans that are performing! Kinda setting the stage for things to come, don’t you think?
If you have multiple mortgages or recent significant activity with mortgages on your credit report, you’ve probably already been quietly audited by the Fed and IRS and, that file is going to be under additional scrutiny in underwriting for the foreseeable future. Communicate your file clearly, early and often with your Realtors and borrowers in order to avoid headaches.
