Deal-maker, Deal-breaker

Behind the scenes, a borrower's best friend may be the underwriter

April 22, 2001|By Nancy Jones-Bonbrest | Nancy Jones-Bonbrest,SPECIAL TO THE SUN

IT COULD BE 30 days, perhaps 60 days.

It's the time between when you signed the contract to buy the home of your dreams and the day of settlement.

For some buyers, the time is filled enjoyably by fantasizing about what Martha Stewart-type changes will be made to their new house. But for many it's many anxious hours of waiting to hear the words "You're approved."

Applying for a mortgage not only can be a nerve-racking time, but also signal the time when loan officers start asking you for what seems to be every piece of financial data. Pay stubs. Tax returns. Bank statements. Stock statements. Employment verification.

Yet, all of this isn't just for the guy across the desk taking your loan; it's "for the underwriter."

And the fact that loan approval rests with the lender's underwriter - a person the buyer never sees - doesn't help ease the anxiety.

Underwriting - by definition - is the analysis of the risk involved in making a mortgage and determining whether the risk is acceptable to the lender. It involves an appraisal of the property and an evaluation of the borrower's ability and willingness to repay the loan.

Underwriters essentially can make or break a deal. Thumbs up to a borrower with little risk. Thumbs down to a borrower who may cause the lender harm.

It wasn't that long ago that the art of underwriting was done strictly by an individual working for the lender. But since the mid-1990s, the most common form of underwriting - established by Fannie Mae and Freddie Mac, the two quasi-governmental companies that supply funds to lenders by purchasing mortgages - has changed to combine computerized automated systems and human underwriters.

The automated system processes the loan. If it reports an acceptable level of risk for the lender, then the loan is approved. If not, the system refers the loan to an underwriter for further review or documentation.

While it may seem that an impersonal computer would make it more difficult for a borrower to be approved, the computer model actually factors in more information than a human could. And it does it quicker, in a matter of minutes in most cases, thus allowing lenders to process more loans more quickly.

But while advances using computer models have changed the industry, the final decision to approve or deny a loan still rests with an underwriter. "When I first started in mortgage banking it was much more black and white. There were ratios that needed to be met and there were no exceptions. If the borrower exceeded those guidelines, the loan was denied," said Lois Tringali, an assistant vice president with Sandy Spring Mortgage, a subsidiary of Sandy Spring National Bank.

"Now, with so many different mortgages out there, it's not that underwriting is getting lackadaisical, but there's more of a common-sense approach."

Tringali, the education chairwoman of the Maryland Mortgage Bankers Association, often tells her students to think of underwriting as an art instead of a science because there are so many factors to look at and balance.

For the underwriter to remain unbiased when reviewing a loan application, the borrower never meets the underwriter directly.

"If the loan originator comes in and says, `But they are such nice people' about the borrowers, the underwriter can't take that into account," Tringali said, adding that underwriters must evaluate the documentation that shows the borrowers' willingness to repay the debt.

"That's why in any shop they keep the borrower away from the underwriter - so the underwriter can look at the file on a one-to-one basis and be as objective as possible. They don't want to know the borrower. It's tough to put up that wall once you make contact."

Usually the lender begins the evaluation - or underwriting - process by seeing what kind of mortgage program a buyer is seeking. Each lender has a different set of criteria that must be met. Usually the buyer's real estate agent will know what mortgage works best for a buyer and fills out the sales contract accordingly.

Before 1995, the next step would have been what is referred to as traditional underwriting. The underwriter would have manually reviewed each piece of the file - slowly and surely - and, based on set income and debt ratios, either approved the loan or denied it.

Today, the process is much more streamlined using computer models. Typically a lender will run the information through an automated system first. In Fannie Mae's case it's called Desktop Underwriter. For Freddie Mac, its system is called Loan Prospector.

"Our philosophy is, we put every loan we get in through the automated underwriting system. This is pretty standard throughout the industry," said Deborah Miller, senior vice president and director of operations for Susquehanna Mortgage Corp., a subsidiary of Susquehanna Bank. "With traditional underwriting ... we're pretty strict. With the automated systems, it's a more common-sense approach."

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