When The Underwriter Makes A Mistake

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"challenging underwriters mistakes in housing loan paperwork" was a search that I got.

You can't challenge them. Butting heads with an underwriter is stupid and counterproductive. There's only one person who gets a vote, and it's not you, whether you are an applicant, processor, or loan officer. The underwriter may not be the original application of the saying "a majority of one," but it certainly fits the situation.

Now keep in mind that as an applicant, you will never communicate directly with your underwriter. It is an anti-fraud measure constant throughout the industry. If someone tells you that you are talking to your loan's underwriter, either they are lying or the loan has just been rejected on procedural grounds.

If a loan officer believes that the underwriter has made a mistake in the underwriting of the loan, it is far more constructive to find out what it was - on what grounds the client was rejected. Actually, loans usually are not flatly rejected, they simply come back with conditions the client cannot meet. A loan that actually gets rejected usually has further adverse consequences for the borrower's credit, and is usually pretty good evidence that the loan officer was promising something they couldn't deliver.

Now it happens that underwriters, like loan officers, mis-compute things, miss things, and misconstrue things. This is one of the hardest lessons for a loan officer to learn: NEVER tell the underwriter anything that they do not absolutely have to know in order to approve the loan. The client has a rich uncle that gives them $10,000 every year? The client makes millions in the stock market as well as their salary? The client simply has millions in assets and they could buy the property for cash if they wanted? I wouldn't breathe a word of any of this to the underwriter. Not a peep, if I had my druthers. The underwriter will start asking all kinds of questions, asking for all kinds of documentation, both on the existing assets or income and on the likelihood of it continuing. If you're familiar with how the stock market works, you might have an appreciation for how hard it can be to prove that you're going to have income from it in the future. That underwriter isn't interested in trends or suppositions or even the fact that it's happened the last twenty years in a row. They want proof it's going to happen in the coming years. When accountants won't write a testimonial (trust me, they won't), you're probably out of luck.

Now sometimes the underwriter comes back with conditions that are beyond the bounds of reason. Dealing with this is part of my job, but it's more akin to a negotiation than a confrontation. I've got to get them to tell me what has them concerned, and see if there isn't some other way to reassure them. Remember, if the loan goes sour, both the underwriter and I are going to hear about it. It may cost them their job, and I may have to come up with thousands of dollars to pay the lender. Not to mention that the client isn't exactly happy. The underwriting process, properly used, is as much for the protection of the client as the lender.

So what I've got to do is find out what concern caused the underwriter to place this condition on the loan, and then a more reasonable alternative may suggest itself. If you ask in the right way, conditions can be changed if the request is reasonable. But you've got to know what you're doing. If the alternative you suggest does not adequately address the underwriter's concerns, they are within not only their rights, but also in full compliance with regulations where you are probably not, to refuse to make the change. Sometimes the underwriter and the loan officer disagree as to the computation of income, for example. By definition, the underwriter is right - unless I can persuade them that my way is better. Just human nature, you can't do that by challenging them, you have to persuade.

Now it is possible to run into an intransigent underwriter. That's one reason why brokers have the advantage over direct lenders, who are stuck with the same group of underwriters all the time. I can pull the loan and resubmit it elsewhere. Given that particular lender isn't going to approve the loan anyway, they won't fight too hard, although on several occasions I have had the lender come back and issue an exception on their own when I do that, but the ability and willingness to actually take it elsewhere is essential to this. And it is sometimes possible to go over a given underwriter's head and get an exception from the supervisor, but it tends to poison the well when you attempt this, whether it is successful or not. When you're asking for special consideration for your clients, they tend to look much harder at all of your clients. I've seen a couple loan officers talk themselves into one approval through an exception with the supervisor, only to have their other loans that were going through smoothly kicked back out for further underwriting. So you have one happy client, and three or four that otherwise would have been happy and who now are not. Sounds great if you're that one client, but how would you like to be one of those three or four others? Not a good situation for anyone to be in. Taking the approach of collaboration works better.

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This page contains a single entry by Dan Melson published on December 26, 2007 7:00 AM.

Buying Investment Property - An Example of the Issues was the previous entry in this blog.

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