Pat Kuether, president of Sibcy Cline Mortgage Services, answers some questions about the loan process:
Why does the loan process and underwriting take so long today? PK: You would think lenders would be just waiting to pounce on and approve the next loan that comes through. You would think the processing and underwriting turn times would be faster for processing a loan, underwriting, drawing loan docs, and closing loans. You would think loans could virtually fly through the home-buying process. You would think all that, and yet you would be wrong.
So, just exactly why are loans taking longer than they should right now? PK: Like the movie Risky Business, mortgage lending was a party out of control. And, mom and dad came home early and found the house trashed. Party’s over, we’re grounded! Mom and dad are making new rules.
PK: Here are some reasons why it’s taking longer industry wide:
Reason 1: Processing Delay
The buyer’s contract is accepted. He is expected to make loan application and pay the appropriate application fee for the lender to order credit and appraisal. But, the fee is nearing $500, so they want to wait until the whole house inspection is complete rather than loose the $500. Loss of time is 12 to 14 days, sometimes longer if they try and re-negotiate items for repair.
Reason 2: Tighter Standards
Credit standards were tightened. Every day brings new underwriting guidelines. Wage-earner stated income loans were an early casualty. Today, there is no common sense underwriting. The Loan Quality Initiative requires that lenders fully process their loans like the old days, however, just before closing the lender has to “re-verify” employment, “re-verify” credit obligations and “re-verify” property value through an automated valuation model. Adding a small debt to their obligations could stop the closing.
A questionable appraisal could require a second appraisal. Now, lenders are processing loans twice, not just one time.
Reason 3: Fraud – Systemic Changes
Fraud is the mortgage industry’s #1 issue still today. Fraud is defined as a material misrepresentation, misstatement, or omission that is relied upon by an underwriter or lender to fund, purchase, or insure a loan. With fraud bombs falling everywhere and lenders going under every day, there is heightened sensitivity to anything that smells like an early-payment default. Certain states and regions of the country may experience more fraud, but, underwriting standards are established nationally, not individual markets.
Reason 4: Seasonal Factors
Summer is peak buying time. Add to this employee vacations and you have less workforce to get the loans through the system. Thanksgiving, Christmas, New Years, and July 4th holidays all punch holes in the work week. People leverage time off by combining vacation days and holidays, causing further staffing shortfalls during these peak times.
Reason 5: Declining Values and Appraisal Problems
Declining property values over the last few years have created more work for the appraisers and those who review them. This extra work is required to make sure the lender has a sound investment. Lower values can mean higher LTVs and more challenge structuring a loan that will work. Agency guidelines sometimes call for desk or field reviews of an appraisal, adding extra time to the process.
Reason 6: Bad Lenders
When we save loans from falling apart it’s usually because another lender did not ask all the appropriate questions or understand the buyer’s needs and how to structure the loan. Or, perhaps they did not properly explain the requirements in today’s lending environment. It could be someone inexperienced, incompetent, unprofessional, dishonest, uncommunicative, or otherwise unable or unwilling to do the job.
Reason 7: Changes and Restructuring a Loan
Changing a loan program because of restrictive guidelines, conditions or buyer qualification can delay a closing many weeks. When a buyer cannot, or refuses to provide a loan approval condition it will create more delays. And, if the loan had already been underwritten and the original request denied, or a condition substituted, it must then go back through the underwriting process as a new loan. Remember, it’s not one item that an underwriter reviews; it’s the combination of many factors that assist the underwriter with their decision and risk assessment.
What can you do about potential delays? PK: There are some things that you can do to minimize the disruption, delays and buyer/seller anxiety. First, work with a knowledgeable and experienced lender. This is no time to hand your buyers over to someone who just got into the business. Second, be flexible. Write your contracts with 45 or 60 days to closing. And last, educate buyers and sellers about potential problems, expect delays, and you won’t be disappointed. Most buyers have not been through this new process and don’t know what to expect.