Residential Magazine

Heightened Vigilance

Extra caution is needed to help stabilize the mortgage industry

By Brian Kucab

With the impacts of the COVID-19 health crisis still rippling throughout the mortgage industry, there are pandemic-related underwriting concerns that must be addressed. Some concerns such as income and employment are not so new, while credit scores and other issues may prompt underwriters to look at things in a new light. 

Underwriters must be vigilant when writing loans during this time, as being extra careful now ultimately helps the industry stabilize in the midst of what has been a volatile time. Mortgage originators should understand what underwriters are looking for in the coming year

Disrupted income

Underwriters are always looking out for gaps in employment history and inconsistencies in line of work. Post-pandemic, this is even more critical as furloughs, layoffs and business closures will have a significant impact on many borrowers’ 2020 income. 

This impact creates challenges in documenting and determining a reasonable qualifying loan amount once things return to normal — if they ever do. Additionally, many borrowers will be working for new employers in 2021 out of necessity, and these jobs may not align with their historical line or level of work.

Given the challenges many businesses are facing, the pandemic also caused significant reductions in 2020 for variable compensation, such as overtime, commissions, bonuses and other incentive-based incomes. Due to individual company circumstances, many borrowers will not have a variable income that matches their historical experience. Underwriters must be diligent in reviewing additional information and using their best judgment to project what is reasonable going forward.

Another employment-verification challenge for underwriters comes in the form of accounting for temporary closures when assessing business returns for self-employed borrowers. At the end of 2019, originators were still working to implement various investors’ guidance on the documentation requirements needed to supplement that year’s tax returns, yet qualifying self-employed borrowers will become even more challenging once 2020 tax returns have been filed. Many businesses were not open for the full calendar year, so underwriters need to determine how to put 2020 into a larger context of earnings while also considering any impacts that might be more permanent.

Underwriters must consider how to handle previously successful entrepreneurs with new businesses that don’t have a lengthy track record. The fact of the matter is, some businesses won’t survive or will have to reinvent themselves in response to the pandemic. Think about how these business owners will be considered from an income perspective.

On the other hand, underwriters also must analyze borrowers with jobs in which the hours or pay increased specifically due to pandemic-induced circumstances that may not continue. This inflated their 2020 income and will make it tricky to assess. 

Some borrowers will have substantial overtime, commissions or even second-job income as a result of the pandemic, but many of these situations also are unlikely to continue. Underwriters need to assess a reasonable level of projected income once circumstances return to a state of normalcy. Will borrowers continue to work heavy hours when restrictions are lifted? Ironically, this includes mortgage professionals, particularly those brought into companies at inflated pay rates due to the surge of applications.

Inconsistent credit

Credit is another area that has been shaken up by the pandemic. Assessing the ability to pay will require putting recent credit performance in the appropriate context without losing focus on traditionally reliable indicators. 

Underwriters have a host of new factors to consider when looking at a borrower’s credit in 2021. Non-mortgage delinquencies, possibly those resulting from a COVID-19 illness or ancillary problems, have spiked, as have non-mortgage forbearance plans or partial payments.

Underwriters should expect that many individuals will cite the pandemic as a cause of payment disruptions, which will include some situations in which this isn’t readily supported by income or asset history. This is when underwriters must assess the ability to pay by looking at how employment was or was not impacted, or whether the borrower had significant savings to rely on. This will include both the non-mortgage scenarios previously mentioned, as well as mortgage forbearances that the government-sponsored enterprises have provided guidance on.

Renters also may have similar difficulties making consistent housing payments throughout the pandemic, in some cases because of proactive offers from landlords. Underwriters must again decide how much scrutiny should be applied to these borrowers given the unusual circumstances. 

Also, underwriters must be sure to take a strong look at borrowers with a history of delinquencies but clean credit during the pandemic. They may have benefited from the lockdowns in ways that are unlikely to repeat in 2021.

Given the strain on operations staffs in the past year, will they be as diligent about identifying fraud indicators that start to reappear?

Potential fraud

The risk of fraud also increases considerably in heavy purchase markets, which the mortgage industry may be returning to in 2021. Given the strain on operations staffs in the past year, will they be as diligent about identifying fraud indicators that start to reappear? 

This is particularly concerning given how benign the fraud environment has been during the refinance boom of the past year. Given the employment, income and credit issues previously discussed, new types of misrepresentation could crop up in loan packages. Underwriters and originators will need to be diligent in looking for inconsistencies, including those not seen in recent years.

There also will be an increased focus on technology and automation that has been largely neglected over the past year. Many companies have been too busy closing loans to properly focus on implementing some of the tools that would have helped them manage the surge in 2020 volume.

Similarly, 2021 will likely see renewed focus on training, development and certification programs. If 2020 taught the industry anything, it is that it is important to be prepared. After a year that has consisted mostly of fighting to keep their heads above water, mortgage professionals will need to focus on training to make up for lost time and missed educational opportunities.

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Although it is clear that no one knows everything that 2021 will bring, there are plenty of new challenges and opportunities that underwriters and their originator partners must be prepared for. From verifying income to assessing collateral, underwriters have new factors to consider and must ultimately develop a new way to work.

Adjusting to what the new year will bring may be challenging, but it’s unlikely to be more demanding than what underwriters have endured over the past year. Making these adjustments ultimately keeps the industry moving toward the brighter days that should lie ahead in 2021. ●


  • Brian Kucab

    Brian Kucab is director of underwriting at Genworth Mortgage Insurance. He has held various leadership roles with a focus on risk assessment and mitigation, as well as process enhancement. Kucab began his financial services career as a residential underwriter before joining Genworth in 2007 to focus on contract-underwriting recourse. In 2009, he moved into loss mitigation as director of investigations, with responsibility for delinquent loan reviews and forensic underwriting.

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