The nation is arguing over health reform and how government should stay out of it. But what about mortgages? Now that the government is involved, there has been a great chasm created between common sense and a thing called DO/DU.
DO/DU is Fannie Mae’s automatic underwriting system. When an application is taken, it is run through this pre-determined set of criteria to determine a borrower’s eligibility for a new mortgage loan. The problem is that these criteria do not take into consideration other compensating factors.
Why America needs to go back to manually underwritten loans and not a computer generated decision? Here are two examples that have happened in the past week of why America needs to go back to manual underwriting of mortgage loans.
Scenario 1: The borrower has a credit score of 740. Is putting down 10-20% of the purchase price. The debt-to-income (all monthly debts plus PITI) is 20%. Has been on the job for 3 months, but in the same line of work for 20 years. His new job has a higher salary then his previous employer. These are all things that under a common sense, manually underwritten loan would have me saying congratulations.
FNMA’s DO/DU denied the loan. Why? Because he had a mortgage credit late of 30 days. Why did he have a mortgage credit late? Because his previous employer laid everyone off. If was not his fault, he did what he could to stay on top of his payments till he could find a new job. In his quest to find a new job, he had to relocate to where the job would hire him. He sold his house without having to do a short sale and moved to the new area. Now, he cannot buy despite that credit mortgage late. It is a pity that the bank will not even take a look at this to argue an exception because FNMA is not allowing exceptions.
Scenario 2: This is very similar to scenario 1, but instead of a mortgage late there was a bankruptcy approximately 3 years ago. This time last year, no problem. Now, it has to be 4 years, no exceptions. Never mind the fact that he has 20% down, or a credit score in the 700s, or a very low debt-to-income ratio, or many years on the job.
A trained underwriter would see that the bankruptcy was actually stemming from a divorce to handle the debt accrued during the marriage. It was not that payments could be made. It was to get him from being responsible for debt that his ex-wife got him into by being on joint accounts.
Going back to manual underwrites opens many doors for many people that are qualified borrowers, but are getting the door slammed in their face because a computer cannot look at the big picture. Plus, if we go back to manual underwrites, lenders would need to hire more underwriters (a boost in employment), they would close more loans, and more money would be back in the economy. By letting a computer decide, there are no jobs, there are no common sense decisions being made, and there is no help to the economy.
Perhaps, we should take the same voice that we all hold for the medical reform and shout it out at reforming the mortgage industry and going back to good old traditional manual underwriting.
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