Automated Underwriting In Pre-Qualification or Pre-Approval Letters
It has become a trend for real estate agents who think they're being "smart" to require an automated underwriting approval.
These are automated underwriting programs from Fannie Mae and Freddie Mac saying that Fannie or Freddie will buy the loan providing that everything is precisely as represented. The advantage to automated underwriting is that it will often approve people who might not qualify under manual underwriting rules, but usually due to a particularly stirling credit score Fannie and Freddie will move someone who's marginal to an acceptance. The problem with automated underwriting is that absolutely nothing can change or it is no longer valid.
Let me tell you a true story that has happened to me twice now with different processors. In both cases, I ran automated underwriting on loan and got a full regular approval. Then my processor, for reasons known only to them that neither one of these two women were able to articulate to me, decides to run automated underwriting again on exactly the same refinance and gets a level 3. This is not a good thing. Level 3 acceptance is not the third level up the corporate food chain approving the loan. Think of it like life insurance, where level 3 means you're getting three bumps up the cost ladder because you're a riskier bet for the insurance company. That's what level 3 is. They'll still take you, but they want to charge extra. In each case, it could just as easily moved from "accept" all the way to "caution" (Freddie Mac's code word for "No, we won't buy it") What Level 3 meant in practical terms was that instead of making money on the loan, I lost money but completed the loan anyway because that's good business and the right thing to do for the client who trusted me. However, not every lender follows that business model.
If anything about the assumed scenario changes, automated underwriting that was previously done is useless. The two classics are if the purchase contract is for a little bit more or if the tradeoff in rate and cost gets a little higher rise a tad before they are locked. If the down payment is a couple hundred dollars less, or a slightly lower percentage of the purchase price. If one of the buyer's credit cards lowers the credit limit, resulting in a credit score a couple of points lower.
There are exceptions and points in the process where as long as something is still within the same basic band of guidelines, you don't have to run automated underwriting again. For instance, if an appraisal for a refinance comes in slightly low but you're still within the same loan to value ratio band, I've funded loans without re-running automated underwriting.
The thing to take away from this is not to put your faith in automated underwriting from Fannie and Freddie. Above the cutoffs for manual underwriting, it is extremely finicky. It can be finicky even below those guidelines, as one of the above mentioned processors found out. Truthfully, if lenders didn't give price breaks for automated underwriting, I wouldn't do it except in those circumstances where the buyer doesn't qualify under manual underwriting rules.
In fact, the real Gold Standard for preliminary approval is manual underwriting. Going through manual underwriting isn't sexy, and it doesn't generate a result that looks like it was Handed Down From On High. "Hey, I put this information into the computer and it said I was approved!" as voices from heaven sing "Hallelujah!" (at least in the mind of that deluded individual). But if a borrower qualifies under manual underwriting rules, then they qualify. Maybe that lender won't give their loan officer that quarter of a discount point for automated underwriting, but they will fund the loan provided everything checks out and there aren't any loanbusters. Somebody will approve it and it will fund.
If there are loanbusters present, automated underwriting won't catch that any better than manual. As a matter of fact, manual underwriting is better at catching loanbusters before it gets that far. If the buyer's ratios are tight and qualification depends upon rates that might not be there tomorrow at a cost they can afford to pay, that shows up quite well under manual underwriting. As a listing agent, if I see someone with a 44.9% debt to income ratio and just barely enough cash to close under the listed assumptions, I know that's a shaky deal at best. Automated underwriting doesn't tell you how close to the line it is, it just tells you the result. Manual underwriting lets you know how resilient the buyer's ability to carry through on the purchase is likely to be if something goes a little bit differently that projected. I don't know about you, but in my experience, transactions where everything goes precisely according to the initial plan are about as common as battle plans that survive contact with the enemy.
(Note however, that the originator of that quote strongly believed in planning the whole campaign out in an extensive and detailed manner beforehand so that when issues happened, he and his officers knew what their options were and were not. As a result, he was the most successful general of his day even if most Americans have never heard of him. While Lee and Grant were mucking about mostly over a small patch of Virginia for years, Helmuth von Moltke the Elder planned and executed two successful winning wars in a single campaign each)
As a listing agent, I will not accept automated underwriting results attesting to the buyer's qualification. I want to know how subject to failure this offer is. As a buyer's agent, I don't write them unless clueless listing agents demand them. The object, after all, is to get the property for the buyer at a price they are willing to pay, and beating the listing agent up on this subject is counterproductive to that, no matter how stupid it is. If you're a seller and want to know how qualified a buyer really is, insist upon seeing the manual underwriting numbers.
Caveat Emptor
Article UPDATED here
Categories
Mortgages4 Comments
Logical failures (straw man, ad hominem, red herring, etcetera) will be pointed out - and I hope you'll point out any such errors I make as well. If there's something you don't understand, ask.
Nonetheless, the idea of comments should be constructive. Aim them at the issue, not the individual. Consider it a challenge to make your criticism constructive. Try to be respectful. Those who make a habit of trollish behavior will be banned.
Leave a comment
The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read
Links to free samples here
The Man From Empire
Man From Empire Books2Read link
A Guardian From Earth
Guardian From Earth Books2Read link
Empire and Earth
Empire and Earth Books2Read link
Working The Trenches
Working the Trenches Books2Read link
Rediscovery 4 novel set
Rediscovery 4 novel set Books2Read link
Preparing The Ground
Preparing the Ground Books2Read link
Building the People
Building the People Books2Read link
Setting The Board
Setting The Board Books2Read link
Moving The Pieces
Moving The Pieces Books2Read link
The Invention of Motherhood
Invention of Motherhood Books2Read link
The Price of Power
Price of Power Books2Read link
The End Of Childhood
The End of Childhood Books2Read link
Measure Of Adulthood
Measure Of Adulthood Books2Read link
The Fountains of Aescalon
The Fountains of Aescalon Books2Read link
The Monad Trap
The Monad Trap Books2Read link
The Gates To Faerie
The Gates To Faerie Books2Read link
Gifts Of The Mother
Gifts Of The Mother Books2Read link
C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information
Questions regarding this website:
dm (at) searchlight crusade (dot) net
(Eliminate the spaces and change parentheticals to the symbols, of course)
Essay Requests
If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!
Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
Add this site to Technorati Favorites
Subscribe to Searchlight Crusade
My Links
-
Heavy Lifters
- Instapundit
- Hot Air
- Wizbang
- Victor Davis Hanson
- Q and O L Places I get to as often as I can
- Soldier's Angels
- The Anchoress
- Argghhh!
- Armies of Liberation R
- Asymmetrical Information
- Belmont Club
- Tim Blair
- Eject! Eject! Eject!
- Jihad Watch
- Michelle Malkin
- Neo-neocon
- Powerline
- Protein Wisdom
- Real Clear Politics
- Mark Steyn
- Strategy Page
- Vodkapundit
- Volokh Conspiracy Personal Finance, Economics and Business Sites
- Bloodhound Blog
- Financial Rounds
- Free Money Financea> Other sites I've linked and visit
- Ace of Spades
- Ann Althouse
- The Anti Idiotarian Rottweiler
- Atlas Shrugs
- Professor Bainbridge
- Baldilocks
- Beldar
- Blackfive
- Classical Values
- Coyote Blog
- Daily Pundit
- Drudge Report
- IMAO
- The Jawa Report
- Just One Minute
- Libertarian Leanings
- Liberty Papers
- Normblog
- Patterico's Pontifications
- Right Wing Nut House
- Samizdata
- SCOTUS Blog
- Stop the ACLU
- Unalienable Right Consumer and Research Sites
- Better Business Bureau
- Consumer Reports
- NASD Home
- California Department of Real Estate
- California Licensee Lookup
- California Department of Insurance
- National Association of Insurance Commissioners (NAIC)
- Do Not Call Homepage
- IRS Charities Search
- Internet Fraud Complaint Center
- SEC Home Page
- Stop Mortgage Fraud
- Report Mortgage Fraud Debunking Many so-called Real Estate Gurus
- John T. Reed Worthwhile Web Comics
- Sluggy Freelance
- Day by Day It is site policy to list the main page of every site I reference. Sometimes the real world intervenes and I haven't gotten to it yet, or one falls through the cracks on a long post with multiple references. It is also site policy to list the main page of every site that lists this one on their equivalent roll, as well as the main page of all sites that are members of any of the same groups this site is a member of. Please send me an email with a link to the main page of your site if I've overlooked you (dm at the domain name). For the clue-challenged, note that it is a requirement for your link to appear on every page of your site, just like mine does, and I will not link to spam sites.
With the invent of AU, most underwriters today will insist on having the originator 'run' DU before they will consider a manual underwrite. In addition, whereas a borrower may obtain an approval with a 52% DTI in AU, an underwriter will not manually sign off on a backend that high.
Alan,
No kidding. Exactly what I said in the article.
If one is approved for automatic underwriting, why would a lender drag their feet throughout the process, ask for documents almost weekly, and then two months later tell a customer that they will have to pay more for the loan even though they professed over and over that the rate lock expiration was not an issue?
Because nobody locks loans until fairly late in the process any more. They might tell you they're going to lock it, but that doesn't mean it's actually locked. Just another change from the same people who brought us all the lending meltdown. I was one of the last to do it, but the costs of not funding a locked loan got to be too large.
As for the underwriting runaround, sad to say that's Standard Operating Procedure these days.
The large lenders have used this crisis as an opportunity to leverage many things (which had gone towards consumer favor due to competition) a large distance back in their favor. Thank lobbyists, campaign contributions, and important politicians (Chris Dodd, Barney Frank and Barack Obama among others) who are in their pockets.