Ask the Expert: How to Underwrite Mortgages in the 21st Century

September 24, 2020

Jessica Shamoun Welcome, everyone, to Ask the Expert, where we ask industry leaders about their unique perspective on how to navigate the most difficult challenges based on the real estate and financial services market today. We’ll also give you a chance to ask the expert some of the most pressing questions on your mind.

My name is Jessica Shamoun and I’m the Senior Director of Business Operations at States Title, and today, I’m really excited to welcome Dani Hernandez. She is a nationally recognized independent underwriter and we’re going to be talking about “How to Underwrite Mortgages in the 21st Century.”

By way of a quick background, Dani is a mortgage underwriting, guidelines, and content creation expert. She joined Envoy Mortgage in March and is also a consultant for Ludwig Plus, and previously a marketing and communications director for Freddie Mac. She also is a routine contributor to HousingWire’s blog “Ask the Underwriter.”

She has spent over five years working with top mortgage fintech companies to create a top user experience for borrowers and lenders, so we’ll get into that a bit today as well. Her joining Envoy is really helping to cement their commitment to best in class workflow and error-free loan manufacturing, which I know is something that we are all excited about.

So with that, welcome, Dani!

Dani Hernandez Hi. Good to be here today.

Jessica Shamoun I’m very glad to have you and we have tons of questions, so we’ll jump right in. We know that people come from all different industries into the mortgage industry, and you have gone extremely deep and fully specialized in underwriting and forensic analysis. What about your skill set in particular and the current state of the mortgage industry led you to want to share your voice on major issues of the day?

Dani Hernandez Yes, so I think that I have a unique perspective. I started out on the origination side of things back in 2003 and then realized I actually really like the puzzle of figuring out how to underwrite. And so I switched over to the operations side of things and found that, I don’t know why, but I am just a huge mortgage nerd, and I love guidelines and that kind of stuff.

So later, when I was working with Newcastle in Chicago, I realized that nobody really understands mortgages, like a lot of people in the mortgage business don’t really understand all aspects of mortgage. And so I started doing a Q&A on Reddit and Quora where I would have borrowers that were in the process of getting a loan or loan officers who had underwriting questions, and they would just submit questions to me.

And I started publishing those in a blog called “Ask the Underwriter,” and then HousingWire picked it up. I got really involved with DACA and that kind of stuff, and I’m just passionate about helping people. And I think that one of the best ways to help people is to help them to understand things because when you understand something, you don’t fear it and it brings your stress levels down. So I think that providing a place where people can go and get answers from someone who makes decisions and isn’t trying to sell them on anything has been really beneficial – and I’m really happy with it.

Jessica Shamoun Yeah, it certainly is an industry that, even for those in it, can be confusing because everything is changing all of the time.

One thing that I know you have spoken publicly about and written about are different ways that mortgage loans can be managed to close faster – which is something that borrowers want, and lenders want. In your mind and in your experience, what are the essential elements of how lenders should be thinking about streamlining their processes?

Dani Hernandez Yeah, so I think that a lot of the technology that has been developed lately is amazing and it allows borrowers to have a more streamlined experience. But I think that usually where most mortgage companies fall short is that they forget about the operations side of things, and not just that, but the way that loans are processed.

The loan process has been the same for forever. I don’t know, I guess I can only speak to 15 years in the mortgage industry, but before that, I imagine it was pretty much the same. You have a loan officer take a loan and an application, and they gather a bunch of documents that they think they need, and then it goes to a processor, and then to an underwriter. But now we feel like, with the automation that is available, there is software that you can have a borrower apply online, upload their documentation, disclose to themselves, and at that point, really, they can pull their own written VOE’s and import their bank information. And so at that point, you have a credit package, and I think that instead of having to go through this crazy process of loan officer, then processor, and sit… send it directly to the underwriter, which scares people, right? Because we’ve always been like, oh, you need to send a full package to an underwriter.

But I feel like if you underwrite that borrower’s credit upfront, so you have income, assets, and credit, you essentially could do that in less than 30 minutes and then you just wait for the borrower to pick out a property. And all you have to do at the end when that’s ready is underwrite that property, and you could close in 10 days – I think is the minimum you’re allowed to close – but ten to fifteen days and there’s no surprises.

…even if you get new technology and software, if you don’t redesign your workflows behind the scenes to match that technology, you’re still going to be waiting for two weeks before the underwriter even looks at it and then there’s going to be surprises when it comes to the credit package.

Whereas if you wait, even if you get new technology and software, if you don’t redesign your workflows behind the scenes to match that technology, you’re still going to be waiting for two weeks before the underwriter even looks at it and then there’s going to be surprises when it comes to the credit package. As well as, you know, the property possibly. But I really think that mortgage companies need to not just invest in technology, but invest in redesigning your workflow to meet the capabilities that that technology provides you.

Jessica Shamoun Yeah, it’s interesting because a lot of that upfront work would actually fall on the borrower, but has to be enabled by the lender. So it kind of is also an education piece of here’s how to do it and what to do and that it’s even available.

Dani Hernandez Yeah. I mean, imagine what I kind of think of as a DIY mortgage, which if you give your borrowers the tools and knowledge upfront, how great would it be if you could just – kind of like everything else that we do nowadays – where you just go on your phone, you fill out an application, you know, and all of these processes and automation happens instantaneously, basically. And, you know, if you’ve got questions, you want to talk to a loan officer, that’s great. If you don’t, you can just kind of do it yourself. I’m somebody who prefers not to talk to people, surprisingly.

I just think that you’ve always got the loan officer there to help you restructure whatever you need to do. But I think it’d be really great if you could give them the power to be able to help themselves.

Jessica Shamoun I think a lot of borrowers would be excited about that in addition to the efficiency of the lenders.

So, as an underwriter, you’re thinking about the current climate and changing regulations and GSE changes. Are there types of loans that you would be nervous about servicing now, and how are you handling that from the underwriter perspective?

Dani Hernandez Yeah, I think right now there’s two situations that require more documentation and are a bit stricter. The first one is: anytime that we see a loan, a mortgage on a credit report that is in forbearance. They come up really strange in different ways, it’ll say like “disaster” or just different things. And so when that happens and those loans are in forbearance, we require a history from the servicer to make sure that they know which payments have been made, and which payments have not been made. And if there were payments that were skipped, then it’s required that the loan be brought current prior to us being able to actually refinance a loan.

And the other situation is with self-employed borrowers and borrowers who receive rental income. We now require proof that the borrowers are receiving that rental income for the most recent two months, just because there’s been so much with forbearance and foreclosure and not having to pay rent kind of things. We just want to double-check to make sure that’s OK.

Then with self-employed income, we now require that you have proof of that self-employed income being received at the same levels as calculated from tax returns in the most recent two months. I mean, this pandemic and what we’re going through right now, there’s not one, you know, set or subsegment of people that have been affected. It’s everybody all over. So it’s really it’s hard to just say this is risky or that is risky – I don’t think that is really fair.

Jessica Shamoun It’s interesting. This climate is really impacting people. You know, unlike ‘07 and ‘08, it’s not just people who got in over their heads or something. This is very much people who should, under any normal circumstances, have been able to handle it. And just the climate has been so crazy. To that point, there are millions of people trying to take advantage of on-request forbearance, three, six, nine, 12 months.

And in 2007 and 2008, there were a lot of people who thought that they should be able to take advantage of things like the loan modifications or refis, but in reality, only a very few people were actually able to. Do you see that happening again today and what would be the impact of that if tons of people are not able to get the relief they need?

Dani Hernandez Yeah, I think that the Cares Act that was put into place is something that was incredibly smart of Congress. And I know that the industry as a whole, kind of when it first came out, they were like, “Woah, what? This is not okay. What have you done? This is gonna be disastrous.” But I think the thing that they didn’t realize, the people that were kind of freaking out about it didn’t realize was that if forbearance was not an option – I think 10 percent of mortgages are currently in forbearance – if that wasn’t an option, that would be 10 percent of mortgages that are currently in default. That would have a devastating impact on the secondary market, and the secondary market plays such a big role in our overall markets. And so I think it would have just been disastrous.

But I think the thing that they didn’t realize, the people that were kind of freaking out about it didn’t realize was that if forbearance was not an option – I think 10 percent of mortgages are currently in forbearance – if that wasn’t an option, that would be 10 percent of mortgages that are currently in default.

The thing that worries me is when these protections end. The government right now, it’s been the small business loans, which have gone to big corporations, small businesses, the unemployment leniency, and stuff that’s been allowed. I think once that ends, you are going to see a lot of people who won’t be able to continue making their mortgage payment. And so I really hope that servicers – because servicers made it incredibly difficult for people to take advantage of loan modifications and different programs after the 2008 crash – and if that is the case, again, I really worry that we are headed for disaster.

Because those 10 percent of mortgages are going to be in default and you’re going to have more people unemployed. Right now, like United Airlines, I think if they don’t get billions of dollars from the government next month, they’re talking about firing 53,000 people. And the jobs that are coming back, you know, people say, “Oh, the jobs are coming back. We’ve added all these jobs.” But the kind of jobs that we’re adding are not necessarily equivalent with the types of jobs that we’re losing. So I really hope that servicers and Congress continue to work together to really help borrowers and instead of just leaving them out there to float like last time.

Jessica Shamoun Yes, 10 percent would be a pretty huge market impact. To that point, what the GSEs have done is even creating more market uncertainty, right? So Fannie Mae and Freddie Mac came out and said, we want to implement this Adverse Market Refi fee right away. Then they kind of backtracked and said, OK, no, we’ll give you a couple of months to react. In that case, or, you know, if we need the opposite of that in the future, how does impact you or lenders – how are you having to change your processes?

Dani Hernandez Yeah. So as far as the underwriting side of things, that fee doesn’t really affect how a loan is underwritten. That fee, along with some of the other things that are happening with the FHFA, I honestly think it is just the FHFA administrator looking to take the GSEs out of conservatorship. And I think that if there’s a change in administration, I think what you’re going to see the day after the election is that, you know, you’re going to have the FHFA administrator pushing as hard as he can to take the GSEs out of conservatorship. So you’re going to have that fee, which is to help them with the capital rule. That fee nor taking the GSE’s out of conservatorship, I don’t think it’s going to do anything to benefit the borrowers or this industry.

For example, let’s say the GSEs were not in conservatorship right now. That the only reason that forbearance was possible for these 10 percent of mortgage borrowers is because the GSEs were under conservatorship. So the government could force them to allow borrowers to take that forbearance. But if you take them out of conservatorship that never would’ve happened. And I’m sorry, mortgage industry, but we’re not the best about doing what’s right. The mortgage industry as a whole typically, traditionally has a long history of doing what is best for their pockets.

And so right now, if they weren’t under conservatorship, we would have that 10 percent of mortgage loans in default, and things would look a lot more dire. I think that it’s this mad dash to where the FHFA administrator wants to make this his legacy, that he took the GSEs out of conservatorship. And I think a lot of people – shareholders and other interested parties – are going to make a ton of money, should that happen, quickly. But then I think it’s going to crash and burn and you’re going to see it doesn’t strengthen the housing market at all. So I just really think it’s irresponsible and shortsighted.

Jessica Shamoun I mean, it would be a huge change for the industry, for lenders, for mortgage brokers, and title underwriters. We’ll have to see what happens there.

Dani Hernandez But just to that point, a lot of the affordable lending programs that are available from Freddie Mac and Fannie Mae – like Home Ready, Home Possible – those things only exist because they’re mandated by the government, because they’re mandated under Freddie and Fannie conservatorship. So will those programs still be there? I don’t know. Like I said, this industry only does things like that when they’re forced to do, so I’m not sure what’s going to happen without those protections.

Jessica Shamoun Yeah, it’s definitely an industry where, you know, the status quo goes until there’s a push. But you know, Dani, to all these changes that you’ve been talking about, these regulations and rules. From the lender perspective, how can they make sure that their borrowers, their customers are actually informed and up to speed and feel like they actually know what’s going on, despite all of the changes?

Dani Hernandez I think that is a big thing. That’s something that we are not doing a great job of educating borrowers right now. There’s so much changing all the time. I think that even loan officers and underwriters right now are scrambling to make sure that they’re following all of the changes and that these loans are still salable.

I think Fannie has done a great job putting out literature on the changes that are happening and trying to help explain to borrowers. The only advice I can give is just, don’t be scared of these things. Understand them. So then as a loan officer, you know, you can be that person that your borrowers trust to know what’s going on. So just educate yourself, make sure you’re following up on things. If there are things you don’t understand, research it and become that expert for your clients.

Jessica Shamoun Yes, I think it’s like you were saying earlier – that education piece is actually a bigger part of the lender and underwriter work than we sometimes think.

Dani Hernandez Yeah, yeah, absolutely.

Jessica Shamoun Another example of that is remote online notary, which you and State Title, we’re all kind of trying to push the status quo to do new things. And the upside, I guess, of the current climate is that there is more adoption of things like that. How do you think, when a new process, new technology is implemented by a market player. How does that affect lenders at the macro, micro level and how does that impact you?

Dani Hernandez Yeah, I think that one of the best things, the silver lining, I guess you can call it, that’s come out of this pandemic is just the fact that we have, in the mortgage industry, kind of been forced to adopt that kind of technology. That was one of the things that I was concerned about back in March was like, oh, shoot, not everybody offers eClosing… the recorder’s office is closed and you can’t record your mortgage.

I think that one of the best things, the silver lining, I guess you can call it, that’s come out of this pandemic is just the fact that we have, in the mortgage industry, kind of been forced to adopt that kind of technology.

So I think that was something that was really great that came out of it. And also, you know, everybody’s working from home. – I really think that it forces companies to think forward. And for people, I think now it’s kind of a normal thing. Like before it was, “eah, it’s something maybe we’re looking at doing or we’ll do it in the future.”

But when some of the bigger players go in and adopt virtual remote online notaries and that kind of stuff, it forces the smaller people to also do it in order to compete because it provides a better experience for your borrowers. So I think that if anything, COVID has really propelled the technology for mortgages forward, and I think that’s a good thing.

Jessica Shamoun Yeah. You know, it’s one of those industries, too, where you can have all the technology in the world, but it won’t go anywhere unless people are ready to use it and are prepared for it. You know, all the different players need to be aligned, and COVID for us, it has been a great accelerator in that way.

Dani Hernandez Yeah, yeah. And I think, hopefully, we’ll start to see the same thing with appraisals soon where there’s more about appraisal on demand, where you can order out like you do an Uber. I think that’s where we’ll be headed in the future. I think that will really speed up the process and be great for everybody as well.

Jessica Shamoun Yes, that would be a big change as well. But I think when we talk about changes like these, a lot of these are really conveniences for the borrower, which, to your point, can make a really complicated, stressful process a lot easier and feel more familiar if it’s like ordering an Uber.

Thanks Dani, I have loved pestering you with questions, and I think there is a lot more to chat about, but I want to take some time to answer some Q&As or to pose some Q&As that we got from our listeners. So the first question is, can you refi during or after a forbearance?

Dani Hernandez Yes, so there are a couple of things it depends on. One, if your borrower was current on their mortgage when they went into forbearance, then that mortgage has been reporting as current for however many number of months that they have been in forbearance. So let’s say they missed six months, then we can go forward and we can refinance that.

If they were not current on their mortgage – let’s say they were 30 days late when they requested and were approved for forbearance – then their mortgage has been reporting a default or late for the last six months. And so you may have some issues there, because then you’re going to have kind of like a rolling 30 days late. Fannie Mae and Freddie Mac are more concerned with 60-day lates in the past 12 months.

So if you weren’t 60 days late, I think then you should be fine. But it really will just depend on the lender. So let’s say you bought a mortgage, they went into forbearance and they were current on their payment when they went into forbearance, you totally can refi that. But like I was saying, you’re going to have to get a payment history from the servicer to document which payments were made and which ones were missed. And then your borrower is going to need to pay any of the missed payments before they can refinance that loan.

You can start the process and you can pay them at any time, but you’re going to have to get a letter from the servicer after they make that payment, stating that the loan has been reinstated fully and that they are current on their mortgage payments, and it’s no longer in forbearance. And the other part of that is then you’re going to have to document the source of funds that were used to make that large payment. So as long as they take it out of forbearance, they make the payments that they missed, you should be good to go, there shouldn’t be any problem.

But I will say, just as a heads up, you’re not going to be able to use a credit supplement to verify any of that, because the credit bureaus have been instructed under the Cares Act to report that mortgage as current and no lates, and that kind of stuff. So as an underwriter, and for Fannie and Freddie, a credit supplement won’t suffice for that. So you are going to have to jump through all those hoops of contacting the servicer and getting all those documents.

Jessica Shamoun Can you give a little bit of detail on that credit supplement piece, and what other sources might be okay to use?

Dani Hernandez Yeah. So usually when you need to verify something, you call the credit bureaus and you ask them for a credit supplement showing that the mortgage is current and that it’s not in forbearance and that kind of thing. But under the Cares Act, the bureaus were required to report mortgages as current, no matter what during this time if they were in forbearance.

So you just need to reach out to whoever’s servicing the loan and ask them for a twelve-month pay history, you know, history of payments from the borrower. And then after they make the payments for the ones that were missed, you’ll have to call them back and ask them for just a letter stating that the loan’s no longer in forbearance and that the borrower is current and they’ve made all of the missed payments.

Jessica Shamoun Thank you for that detail there. And then the last question here for you is, there was some recent data out from the CFPB that there is vast inequity in the homeownership rates and the LTV and DTI and everything for Blacks and Hispanic Whites versus Asian and non-Hispanics. So what checks and balances do you think should be put in place to help ensure financial equality in the home buying process?

Dani Hernandez Yeah, so I think it’s a much larger problem than just anything that we can do in the mortgage industry. I think that inequality isn’t just in homeownership or the financials, and things to do with mortgages and home buying. I think that inequality exists on a larger scale everywhere, in everything. And I think that as a society, the inequality between wealthy and poor Americans is increasing. I think it’s like that all over the world.

And so I really think that we are going to need to put into place and we need to really just rethink the way that we act as a society and what we know with GDP being a big measure. I think that’s the wrong measure. It was never meant to be how we measure our financial health or the health of a country, especially with COVID. There are so many people that have lost their jobs that are in dire straits. And I really hope that the government stops with all of the other unimportant things and just does what’s right for people.

People are just desperate, and we’ve gotten one stimulus check, we haven’t really done anything aside from that. And I think that this is nobody’s fault, and so I would really hope that as a country, a global pandemic might be the thing that could bring us all together and realize we really are in this together. And just because you don’t know if your neighbor needs help, help your neighbor. Let’s work together to make things better. And I hope that maybe this could be something where in the future we’ll look back and we’re like, “Yeah, things were crazy, and there’s a lot of divisiveness, but in the end, we all came together to make the world a better place”.

But I don’t know if, as far as housing, that is something that we can remedy through regulations or programs because it’s really a lot deeper than that.

Jessica Shamoun I think that’s a great message to end on, actually. It will all come together. We have a challenge right now with COVID, but definitely a huge opportunity as well. So, Dani, I want to thank you so much for taking time to chat with us today. I know that I have learned a lot – I hope everyone else has as well. Thank you so much.

Dani Hernandez Thank you.

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