As published in Scotsman Guide's Residential Edition, July 2009.
Due-diligence underwriters' roles have changed in the past three years. They were once employed primarily by large investment banks and firms looking to purchase residential mortgages on the secondary market. Loan-default and foreclosure increases, however, have caused private-mortgage-insurance companies to hire these firms. Additionally, holders of recently defaulted loans now rely on due-diligence underwriters to support repurchase actions against mortgage originators.
At the same time, many due-diligence underwriters now work for mortgage brokers. Who better to help brokers defend against repurchase demands and potential denials of mortgage-insurance claims than the people who work for the other side?
The increase in demand has caused the advent of many new due-diligence-underwriting firms. It has not, however, put an end to all mistakes. Due-diligence underwriters -- new and old -- continue to make serious errors when re-underwriting closed mortgages. These blunders often result in poorly supported repurchase demands and mortgage-insurance-claim denials.
Brokers who learn to spot due-diligence underwriters' missteps can better fight for their and their clients' rights. They also can better oversee any due-diligence underwriters they might choose to employ. Here are six common areas where due-diligence underwriters go wrong.
1. Overtime and bonus calculations
Standard underwriting requirements for using overtime or bonus income in debt-to-income (DTI) calculations call for proof that the additional income has been received for the past two years and that it likely will continue in the future. Underwriters often take the latter half of this requirement for granted.
Often, overtime and bonus income is annualized improperly. One way this can happen is when only the borrowers' overtime or bonus income -- and not their entire income -- is averaged over two years. This mistake results in dramatically lower gross monthly income and higher DTI figures.
2. Automated underwriting
Too often, due-diligence underwriters recommend repurchases based on the claim that the original automated-underwriting findings were invalid because of errors in input data. This, however, does not matter if the data improved the loan submission's quality.
Fannie Mae and Freddie Mac have specific guidelines for when their automated-underwriting reports must be run again because of changed input data. If changed data such as increased income or assets, a lower DTI ratio, or a lower loan-to-value ratio (LTV) decrease a borrower's risk level, automated-underwriting systems would still produce an approve or accept finding.
If a file was approved at 85-percent LTV and the true LTV is 80 percent, resubmission wouldn't matter.
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