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   ARTICLE   |   From Scotsman Guide Residential Edition   |   May 2015

Keep the Window of Communication Open

Emerging groups of borrowers require special attention in mortgage-loan underwriting

Keep the Window of Communication Open

Employment numbers are up, the economy is improving, and more borrowers are entering and re-entering the housing market. This is a big win for the mortgage industry, but originators, underwriters, and mortgage insurance carriers still have many lessons to learn in the wake of the financial crisis, especially when it comes to underwriting new mortgage loans.

As more aspiring homebuyers are attracted to the market, it is likely that a growing percentage will need mortgage insurance. Unfortunately, some borrowers with special circumstances may get lost in the flock and never find their way to that new home. Mortgage originators and their insurance partners must collaborate closely to open the window of opportunity for as many creditworthy borrowers as possible, and it all comes down to maintaining open lines of communication.

Three emerging groups of borrowers in particular can require mortgage brokers to put in some extra phone-and-face time to make sure their loans pass through the underwriting process unscathed. These “special attention” groups are: returning homebuyers with previous delinquencies, borrowers with current student-loan debt, and those who have credit score anomalies. Let’s look at these groups and how increased broker communication can help them secure loans.

Previous delinquencies

The first emerging group of special-attention borrowers is people who have previously experienced a foreclosure or a short sale. With the onset of the housing crisis now almost seven years in the past, there could soon be a large pool of these seemingly high-risk individuals re-entering the market. This raises the question of whether lenders should once again extend credit to these returning borrowers.

Many of these borrowers will undoubtedly require 80 percent or higher loan-to-value (LTV) ratio loans and thus need mortgage insurance. Mortgage insurers in the first-loss position have a lot at stake if these borrowers fall back into old nonpayment patterns, so these loans will require extra scrutiny in the underwriting process.

Unfortunately, many borrowers with checkered pasts erroneously adopt a “less is more” approach with their mortgage brokers to avoid saying something that might hurt their eligibility. Underwriters are looking for the exact opposite, however. They want a thorough, open dialogue that will provide enough context to enable them to approve the loan. Mortgage originators can help their clients by getting as much information as possible upfront.

Delinquency example

There are almost as many reasons for past delinquencies as there are borrowers. Here’s an example: A couple with a spotless payment history, low debt-to- income (DTI) ratio thanks to high salaries, and a small nest egg in their savings account purchased a house in 2004.

Through 2010, their payments came in on time and in the right amounts. Then, the payments suddenly stopped. Six years of excellent payment habits gave way to months of falling behind and, ultimately, a foreclosure or short sale negotiated with the loan servicer.

If these borrowers applied for a new mortgage today, a mortgage insurer might be skeptical about the couple’s sudden inability to repay given their lifestyle and background. A letter of explanation and some backup documentation, however, could explain to the underwriter that a car accident in 2010 left one of the partners hospitalized for 12 months with life-threatening injuries. The combined burden of hospital bills and loss of work kept the couple from remaining current on their previous mortgage.

It is unlikely that this couple will be involved in another car crash, but the foreclosure or short sale event still dampens their current credit picture. If the couple’s mortgage broker works with them to properly explain these details to the underwriter analyzing the loan, it may be dismissed as a one-time occurrence, and the couple can get their new loan approved.

Letters of explanation

The letter of explanation, therefore, is critical. Unfortunately, these letters are often not included with applications even when the borrower’s circumstances warrant one. It’s not uncommon to receive a mortgage application with a 620 FICO score — low by all accounts — and a noted delinquency with no detailed account of the reasons for the delinquency or the low credit score.

Your borrowers may think brevity in an application shields them from scrutiny. In fact, the opposite is true, and you should work with them to present the full picture. Mortgage insurers are not there to keep borrowers out of the housing market, but rather to ensure they allow every worthy candidate in. Help your borrowers help themselves by working with them to equip underwriters with every possible detail about every borrower’s credit history.

Student-loan debt

Another emerging post-recession trend is borrowers who carry student-loan payment plans with monthly installments smaller than a fully amortized amount. These borrowers can have approved plans where they’re paying very small amounts per month on very large student loans. Some mortgage insurers are taking measures to better understand how student loans impact the  repayment ability of borrowers and their risk levels.

Student loans deferred for more than 12 months can be omitted from the DTI ratio for some loans, but a benchmark requirement of 1 percent of the aggregate balance is more common. In addition, loan programs exist for highly paid, highly educated borrowers, such as doctors, that allow underwriters to omit deferred student loans from the decision process. It’s important that originators communicate with borrowers upfront about how their student loans will be evaluated during the approval process.

Credit-score anomalies

The third emerging borrower group that requires extra communication efforts is those with high credit scores but little credit history — often as little as a single trade line. When faced with borrowers with credit-score anomalies, it’s even more crucial to collect supplemental items such as letters of explanation, bank-account statements, retirement accounts, rent-payment histories and nontraditional-credit trade lines.

Credit-score anomalies can be found at the low end of the credit box, as well. An underwriter may, for example, still consider a low-FICO-score borrower with a long credit history who has generally always paid on time, except for a one-time event or write-off. Looking deeper into that borrower’s savings and retirement accounts, current rental payment history, and income structure (i.e., whether it is incentive-heavy or a steady base salary), can help indicate whether or not that low-FICO-score borrower is able to carry a new load of mortgage debt.

Again, it comes down to communication. It benefits no one to approve a loan that will ultimately default. There is also no benefit to a mortgage insurance company to decline a loan that, with proper explanation and context, could be approved.

•  •  •

Although the housing recovery is far from complete, the past several years have been a step in the right direction. Home values are increasing, which eases borrower LTV levels and makes the appraisal process easier, which had been challenging because of a lack of appropriate comps. In addition, lender and mortgage insurer guidelines are expanding, so people sitting on the sidelines are now more likely to be qualified. By thoroughly discussing everything that can potentially derail a loan with borrowers upfront and then maintaining open lines of communication during the underwriting process, mortgage originators can help underwriters qualify more of these special- attention borrowers. 


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