Magazine article American Banker

Restore Common Sense to Underwriting

Magazine article American Banker

Restore Common Sense to Underwriting

Article excerpt

Byline: Joe Garrett

The residential mortgage sector needs to return to its roots when it comes to how credit decisions are made.

Let's take a walk back in time.

When I joined the industry in the late 1970s, loan files were thin. Underwriters with a decade or more of experience would look at the credit report, verify the source of the nonpayment, make certain the borrower was employed and calculate the debt-to-income ratio. There were no FICO scores, but underwriters knew how to analyze the credit report and they tended to make sound decisions.

There were no automated valuation models.

Back then there was no hegemony of the two government-sponsored enterprises, and most mortgage bankers sold loans to and serviced them for a variety of thrifts and other institutional investors which set their own criteria.

Although the phrase became overused and abused, a big part of the process was what was called common-sense underwriting.

Rather than worshipping at arbitrary rules like never making a loan to someone with as FICO down to, say, 580, how about making a very human credit decision that, like the old days, looks at all the facts?

What if someone is putting a 60% down on a purchase, has a 28% debt-to-income ratio, is highly liquid with well a few million in the bank, and has never missed a mortgage payment in his life? He sounds pretty good, doesn't he?

But what if he went through a protracted illness a few years ago and now has a FICO on 580? …

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