A version of this post originally appeared in the Scotsman Guide.
A new year often brings new opportunities, but it also can bring new challenges. With the impacts of the COVID-19 pandemic still rippling throughout the industry, there are still pandemic-related underwriting concerns that must be addressed. Some concerns like income and employment are not so new, while credit and other concerns may prompt underwriters to make new considerations. Regardless, underwriters must be vigilant when writing loans during this time, as being extra careful now ultimately helps the industry stabilize in the midst of what has been an unstable time.
Income & Employment
Underwriters are always looking out for gaps in employment history and inconsistencies in line of work. Post-pandemic, this is even more critical, as furloughs, layoffs and business closures will have a significant impact on many borrowers’ 2020 income. This impact creates challenges in documenting and determining a reasonable qualifying figure once things return to normal, if they ever do. Additionally, many borrowers will be working for new employers in 2021 out of necessity, as and these jobs may not align with their historical line or level of work.
Given the challenges many businesses are facing, the pandemic also has caused significant reductions in 2020’s variable compensation, such as overtime, commission, bonuses and other incentive-based incomes. Due to individual company circumstances, many borrowers will not have a variable income that matches with their historical experience. Underwriters must be diligent in reviewing additional information and using their best judgement to project what is reasonable going forward.
Another employment verification challenge for underwriters comes in the form of accounting for temporary closures when assessing business returns for self-employed borrowers. With the year almost behind us, originators are still working to implement various investors’ guidance on the documentation requirements needed to supplement 2019 tax returns; yet qualifying self-employed borrowers will become even more challenging once 2020 tax returns have been filed. Many businesses were not open for the full calendar year, so underwriters need to determine how to put 2020 into a larger context of earnings, while also considering any impacts that might be more permanent.
Underwriters also must consider how to handle previously successful entrepreneurs with new businesses that don’t have a lengthy track record. The fact of the matter is, some businesses won’t survive, or will have to reinvent themselves in response to the pandemic. Think about how those business owners will be considered from an income perspective.
On the other hand, consider borrowers who were in lines of work where hours or pay increased specifically due to circumstances caused by the pandemic, but may not continue. This inflates their 2020 income and will makes it tricky to assess. Some borrowers will have substantial overtime, commission or even second job income as a result of the pandemic, but many of those also are unlikely to continue. Underwriters need to assess what level of income is reasonable to project once circumstances return to a state of normalcy. Will borrowers continue to work heavy hours when restrictions are lifted? Ironically, this includes mortgage professionals, particularly those brought into companies at inflated pay rates due to the surge of applications.
Credit is another area that has been shaken up by the pandemic. Assessing the willingness to pay will require putting recent credit performance in the appropriate context, without losing focus on traditionally reliable indicators. Underwriters have a host of new factors to consider when looking at a borrower’s credit in 2021. Non-mortgage delinquencies, possibly resulting from COVID illness or ancillary problems, have spiked, as well as non-mortgage forbearance or partial payments, again, possibly resulting from COVID illness or ancillary problems.
Underwriters should expect that many individuals will cite the pandemic as a cause of payment disruptions, which will include some situations where that does not appear supported by income or asset history. This is when underwriters must assess willingness to pay, by looking at how employment was or was not impacted or if the borrower had significant savings to rely on. This will include both the non-mortgage scenarios previously mentioned, as well as mortgage forbearances that the GSEs have provided guidance on.
Renters also may have similar difficulties with consistent payments through the pandemic, in some cases because of proactive offers from landlords. Underwriters must again decide how much scrutiny should be applied to these borrowers given the unusual circumstances.
Also, underwriters must be sure to take a strong look at borrowers with a history of delinquencies, but clean payments during the pandemic. They could have benefited from lockdowns in a way that is unlikely to repeat in 2021.
Other Factors to Consider in 2021
The risk of fraud also increases considerably in heavy purchase markets, which we may be returning to in 2021. Given the strain on operations staffs in the past year, will they be as diligent about identifying red flags and other fraud indicators when they start to reappear? This is particularly concerning given how benign the fraud environment has been over the past year’s refinance boom. Given the employment, income and credit issues previously discussed, new types of misrepresentation could crop up in loan packages. Underwriters and originators will need to be diligent in looking for inconsistencies, including those not seen in recent years.
There also will be an increased focus on technology and automation that has been largely neglected over the past year. Most companies have been too busy just getting volume through to properly focus on implementing some of the tools that would have helped manage through 2020’s volume surges.
Similarly, 2021 will likely see renewed focus on training, development and certification programs. If 2020 taught the industry anything, it is that it is important to be prepared. After a year that has consisted mostly of fighting to keep their heads above water, mortgage professionals will need to focus on training and make up for lost time and missed educational opportunities.
Moving Forward in the New Year
Though it is clear that we do not know all that 2021 will bring, there are plenty of new challenges and opportunities that underwriters must be prepared for. From verifying income to assessing collateral, underwriters have new factors to consider and must ultimately develop a new way to work.
Adjusting to what the new year will bring can be challenging, but nothing can be more challenging than what underwriters have endured over the past year. Making these adjustments ultimately keeps the industry moving forward toward the brighter days that should lie ahead in 2021.
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