I started as an originator back in the '80s, and I learned very quickly that there was a difference between one underwriter versus another. In fact, I not so fondly remember one particular underwriter (call her Betty Barracuda) who would be far tougher to get loans through than others.
I knew it, and knew I was in for a tough ride if she got my loan file. I knew to explain a one month gap of employment (even on a six figure salary senior manager) and made sure to get all those detailed explanations of the JCPenney's credit card late payments from four years earlier. You see, Betty believed in underwriting by the pound, and I must have always been a few ounces light.
We all observed the early 2000s when mortgage loan underwriting was somewhat of a lost art. Some would argue that we didn't really underwrite loans at all. You've heard all the jokes about "fogging mirrors" but that turned out to be not as funny as a lot of people thought. For years we only had to get a lead to know that we had a good shot and getting the loan closed.
In other words, conversion of application to funding was pretty high, and you did not have to really worry about underwriting creating many problems along the way. After all, in a period of "light doc-alt doc-no doc," hardly anyone got denied.
Customers may have liked how fast and easy it was too close loans, but the investors sure ended up not liking the results (apologies to the industry vets for actually using the phrase "fast and easy" in a column—click here for a trip down memory lane). So, if the '80s was "underwrite by the pound," then the 2000s were lean and mean!
Skip ahead to today. Now, underwriting is back in style and underwriters are in high demand as the requirements of investors and regulatory considerations require more documentation and more scrutiny around whether a borrower can pay back the loan. In fact, in our surveys, we saw a sharp increase in compensation for underwriters as the market demanded more from them and more of them.
But before we get knocked over by the pendulum swinging back in the other direction (from "no underwriting" to "excessive underwriting"), maybe we should think this whole part of the process through a bit, and think about how it impacts the customer and ultimately impacts conversion. (Have I mentioned that I think Conversion should be the word of the year for 2014?!)
One thing that has become crystal clear to lenders using our MortgageSAT program is that the loan underwriting process has a significant impact on overall customer satisfaction. This is true even when the loan goes all the way to close. Some borrowers demonstrate marked dissatisfaction with the length of time it takes to get an approval and the amount of documentation required to do so. Leading lenders are asking, "What can we do about it?"
Well, it turns out, plenty.
Solid underwriting is the new world order for mortgage lenders, that's a given. Investors want it and regulators require it. However, every company has to realize that you shouldn't just measure what an underwriter forgot to ask. That's not effective quality control in today's environment. It should also be, "Is an underwriter asking for too much and what is the resulting impact on customer satisfaction?"
What we see consistently is that humans matter, when it comes to customer satisfaction. That means we have to take a closer look at their performance. Take your underwriter, an employee that on average is involved in two funded loans a day. That's about 40-50 closed and funded loans per month. A really good loan originator may close 10 loans per month, so an underwriter touches at least four to five times more loans than a typical LO, and probably twice as many as any processor.
So, underwriters have an impact on a lot of loans, and if you measure borrower satisfaction by underwriter you may see some differences among underwriters, where certain underwriters have lower satisfaction scores than others. That's been the experience of some of the banks that work with Stratmor. Those lower scores are driving down conversion rates. Underwriters don't just kill loans through denials, they also kill through conditions. Call it death by paper cut, but it still ends up dead.
Underwriters think they're doing their jobs by stopping questionable deals, and they are, but they can't treat every borrower like a problem in the process. Here are some ways you can make your underwriting department more consumer friendly.
First, realize that the underwriting process starts at application. Provide enough information about the process to shape the borrower's expectations, to prepare them for what's coming. Then try to get as much documentation up front as possible so there are no surprises.
Secondly, if your LO knows that there are items that will need to be explained and that information doesn't fit neatly into the boxes of a 1003, write it out, put a memo to file, even get the borrower to sign the explanation so you're not asking your underwriter to guess. They hate guessing. For instance, say your borrower tells you some great story about how they switched careers.
That doesn't fit into a box on the 1003, but it explains some things about their work history. Put this into a memo or a note to the underwriter. And if you do it early you may not need to "ask for an explanation" later in the process. The same thing goes for the borrower's credit report. If there is a pattern of credit report issues or there was a high debt service because they went back to school and got an advanced degree—maybe that doesn't show up on a loan application, but it absolutely shows up in a loan file if it's properly documented.
The final step is to measure the impact of the process on the customer. You need to measure the impact of the borrower's satisfaction, based on the files being underwritten by each individual on your team. You need to know how this process is impacting your borrowers and make the changes necessary to keep your conversion rates high. Sometimes, it's just a matter of additional training.
Sometimes it's awareness—just publishing results can drive change in culture. In some cases you may be working with underwriters who can't transition effectively into the new environment. And that's a problem.
Today, borrowers vote with their feet. If they're not satisfied, they'll go elsewhere, dropping your conversion. Also, regulators have no sense of humor when it comes to customer satisfaction, so make sure everyone on your team is on the same page about it. That's the way to keep your conversion rates high.
Until next time...oh, and if you see Betty, tell her I said hello.
Garth Graham is a partner with Stratmor Group, and has over 25 years of mortgage experience.