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Underwriting and the Truth, Part 1

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At a recent town hall meeting a 24-year-old self-described “Hispanic” man complained about the ‘hoops he had to go through’ to get a mortgage’, to which Hillary Clinton replied, “You are three times more likely to get a mortgage if you are white than if you are black or Hispanic, even if you have the SAME CREDENTIALS.” She later went on to say, “If you were not Hispanic you wouldn’t have had as many hoops.” After the entire mortgage and banking industry went NUTS, her campaign acknowledged that she ‘misspoke.’ Actual statistics do not support her claims, and the actual mechanics of the underwriting process make this type of discrimination almost impossible. As for the hoops…


houseAlthough it is up to an actual ‘person’ to approve—or underwrite—the mortgage, the real decision is made electronically. The infamous GSE’s (Fannie Mae and Freddie Mac) have very specific guidelines—which are very similar—that are accessed through their websites. Typically the mortgage professional—be it a broker or a banker—would upload the electronic loan file (containing the borrowers credit, income, and asset information) to either Fannie’s (Desktop Underwriter) or Freddie’s (Loan Prospector) live interface and submit for approval. Information about the borrowers race, gender, and ethnicity is requested for government monitoring but is NOT considered in the algorithm, and this information is not required to get an answer. FHA, which entails a different set of guidelines (much more flexible in terms of credit, income, and asset requirements) can be accessed through the Fannie or Freddie website’s or through its own program (‘Total Scorecard’). (95% of all the loans my company originates fall into one of these three categories and I would take an educated guess that is also the case nationally, although there are other loan options such as USDA and VA.)


Once the loan is submitted electronically it takes seconds—literally—for the decision to be made. Assuming the loan is approved electronically it is then up to the underwriter to review the actual documentation (paystubs, W2’s, tax returns, bank statements, etc.) to confirm that the information used to obtain the approval was accurate. The underwriter will then issue a ‘conditional approval’ and list any other documents or specific loan forms that are needed. If the computer says ‘NO’- in rare cases it is possible to get what is known as a ‘manual underwrite’, but the vast majority of mortgage lenders, and NONE of the banking giants, offer this option.


Although it sounds relatively simple, the price we are now paying for the abuses that took place 10+ years ago are those HOOPS. Although the computer generated approval, and the specific (Fannie Mae/Freddie Mac/FHA) guidelines are pretty specific about what in needed (leaving very little to ‘underwriter discretion’), it can be pretty intensive. In many cases, to verify income on a salaried borrower, we will need to provide recent pay-stubs (covering the previous 30 days), W2’s (typically for the previous 2 years), tax returns (also covering the previous 2 years), and a verification of employment completed by the employer. We are also required to file a specific form (4506T) with the IRS to verify that the tax returns provided to us by the borrower match the actual tax returns that were filed. AND, if borrower has an occupation (teacher?) for which they are required to sign an annual contract, we are required to provide that as well. That is basically six different types of documentation to verify the SAME PIECE OF INFORMATION. Welcome to mortgage underwriting in 2016