The occurrence of FHA loans receiving an FHA TOTAL Scorecard approval and subsequently having the loan denied once it hits the underwriter’s desk is happening more and more. It’s a reality the field must acknowledge and from what I have seen, the good originators have taken note and have adjusted their game accordingly.
However, before adjusting your game, you must understand the reasoning behind why this is happening and will continue to occur in the future. Quite frankly, it is at this execution juncture point, that the details and actions of originators are what separate the superstars from the rest of the pack.
The Reason
While the technical reason behind this shift has been in place for years, the enforcement has not until recently. In a nutshell, HUD has stepped up their post endorsement technical reviews and NOT letting lenders insure loans they allowed in the past. In short, previously they were letting lenders slide and NOW they are NOT!
HUD has from the beginning made it clear to lenders that regardless of the Automated Underwriting System (AUS) findings, it was still the lenders responsibility to ensure the data input to TOTAL Scorecard was accurate as required per FHA guidelines AND also demonstrate if there are factors that could not be determined, measured or quantified by the TOTAL Scorecard decision that would invalidate the initial approval decision.
An example of such, is multiple and excessive Non-Sufficient-Funds (NFS) on the borrowers bank checking statements. Since FHA TOTAL Scorecard cannot measure nor account for NSF’s in their decision (recommendation), they defer this determination of layered risk analysis to their Direct Endorsement (DE) lenders to establish if unaccounted layers of risk invalidate a TOTAL Scorecard approval/recommendation.
It is important to note a point HUD stresses to lenders on the back-end…the TOTAL Scorecard decision is ONLY a recommendation and it is the responsibility of the DE lender to determine the accuracy of the approve recommendation. Thus, “due diligence” is the ambiguous “standard” DE lenders are being held to in regards to TOTAL Scorecard approvals. What this means to originators, Realtors and builders is the “approval” received from TOTAL Scorecard (Fannie and Freddie included) rests upon a lender providing a guarantee that all the data within the loan file has been validated. From a practicality perspective, that translates to risk falling upon the lender if said loan should default, even if the loan was insured by HUD.
Having been countless times in front of regulators and agency auditors defending an insured loan that defaulted, I can authoritatively tell you, HUD, Fannie and Freddie will dig for material items that were missed by lender when they initially funded defaulted loan; regardless of whether the loan fired Approved/Accept or Referred by the decision engine. When agency auditors find a material item post closing on a defaulted loan, they will then request lender indemnification against any losses, regardless of whether the loan was insured.
What this means to lenders, originators, borrowers, Realtors and Builders is that the AUS decision is actually only a recommendation based upon the information it was supplied. The information the AUS makes its recommendation is based on data supplied it concerning monthly income, asset values, appraised value, credit scores, etc…. What is does not access is:
1. Whether the income was calculated according to guidelines
2. What is the average balance on the verification of asset
3. Is there a large deposit or overdrafts in the borrowers banking account?
4. Are all debts accounted for on credit report
5. Rental late payments on Verification of Rent
6. Address and Social Security variations
7. Property flipping considerations
8. Gift fund appropriateness
9. Identity of Interest issues
10. Etc…
In short, the AUS uses basic statistical data to assess overall case file risk, but it can’t underwrite the file, only the underwriter can do that, which from HUDs perspective puts the lender on the hook for everything where due diligence is concerned and provides HUD with all of the leverage they need when suggesting that any case is materially deficient after the completion of a post endorsement technical review.
What this means to originators; they must now act as front-end underwriters and conduct their own due diligence when packaging there loans for presentation to underwriters. Since underwriters are ultimately charged with ensuring each loan meets agency guidelines, doesn’t it make sense an originator step into the shoes of an underwriter and originate/document accordingly?
I have been both an originator (412 funded loans in one year) and a national retail vice president of government lending for the largest mortgage originator ($25 billion) in the country; so I can without reservation tell you the difference between the average and the superstar originators (Brian Brady, Mike Grace, Rhonda Porter, etc…) is they understand and work by the rules of proper execution.
Rhonda Porter says:
Tony, I’m totally flattered to be included on your “short list”. 🙂 Mortgage Professionals can not afford to be slackers… and I’m not sure how one (a lazy LO) would even exist in today’s market.
September 11, 2009 — 2:36 pm
Tony Gallegos says:
Rhonda – I know the idea of being lazy or slacking is an idea that is foreign to you. in fact, that is probably the one common denominator amongst top originators.
September 11, 2009 — 10:27 pm
Brian Brady says:
Gracias for the mention, Tony.
Ultimately, the FHA approval is at the mercy of a DE underwriter. They, like everyone else, are motivated by fear and greed. Lately, fear is winning. DE underwriters are choosing risk aversion at the expense of common sense, regardless of the FHA guidelines. I have heard an underwriter say “it’s and insurable loan-someone else can fund it” more than ten times this year. Reasonable discourse and proactive documentation avoids those conversations.
Origination is much harder today because of the changing LENDER guidelines. What worked in March doesn’t necessarily work in April.
September 12, 2009 — 11:33 am
Tom Thomason says:
Excellent article,problem is, loan originators take the application, they don’t review the docs, pay stubs could contain garnishments, child support, that was not disclosed by the applicant. Plus the DU (desktop underwriting) may give approval, but isn’t read the bank statements showing overdrafts, deferred student loans, large deposits, etc,your article hit it right on the nose. I am going to forward this articles to the Realtors I am associated with.
September 12, 2009 — 3:05 pm
Grog says:
It makes sense that HUD would go this way. I agree that it should be the responsibility of the originator to run their own credit desk and perform the proper due dilligence.
September 13, 2009 — 6:14 am
Thomas Johnson says:
It seems to me that a local bank could clean up by originating loans in this environment, borrowing for zero at the Fed window and lending at a 500-600 basis point spread and hedging the long term rate risk. Am I missing something, or are all the banks impaired zombie banks and have no wiggle room on their balance sheets?
I cannot for the life of me understand why good loans are so hard to underwrite given the cost of money for the banks is zero. A mortgage secured by property returns almost double the Treasury rate to the lender.
September 14, 2009 — 8:43 am