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?
As unfair as it seems, this poor fellow is simply not going to get a loan from any lender that sells its loans in the secondary market. And there is no longer a thrift industry of local portfolio lenders who could see through the fog of arbitrary credit standards and see that this was a perfectly good loan.
If this loan can get FHA insurance, and a common-sense underwriter would surely insure it, it can be put into a GNMA security and sold, servicing retained.
What the American homeowner needs is a new breed of mortgage banking leaders who are not afraid to make that loan.
I heard about one mortgage banking company (Pacific Union Financial in Walnut Creek, Calif.) that will do a loan like this. I'm pretty curious about things, so I called one of their executives to see if they really did these kinds of loans. When he confirmed this, I looked up their FHA Neighborhood Watch Compare Score, and it was a shockingly low 31%. This means that their delinquencies were only 30% of the national average.
This isn't thinking outside the box and it's certainly not a groundbreaking new model. It's simply a call for the industry to return to the proven ways of the past, ways that, in all their quaintness and simplicity, worked much better than the brave new world of arbitrary decisioning rules that failed us over the past decade.
