|
|
The Illusion of Precision
In addition to financial records, mortgage applicants bring to the table their view of the world. Some of those philosophies are more useful than others, and a few can be downright painful.
Consider the engineer.
The process of getting a mortgage looks precise, with lots of formulae, ratios, and encyclopedia-length rulebooks evidently present nearby. Surely, it seems to many a technical person, this process can be analyzed, completely understood, and reduced to equations with predictable results. Plug in the variables, and buzz, whir, click -- out come the solutions.
The average engineer, while shopping for a loan and lender, does just fine until the lender answers the last question in a seven-question sequence with...."Maybe."
The engineer tries again, elegant compound question rephrased, and the response is .... "Most of the time."
A dark look crosses the technical visage, the head turns from side to side, eyes looking into office corners for inspiration, or perhaps a weapon.
At that moment, many lenders have learned to smile reassuringly, and say, "You know, this business is designed to torture engineers; it just looks precise."
Lenders get the best results from this line if the engineer's spouse is in the room. If so, just as a mixture of panic, despair, and frustration washes through the engineer, his or her spouse bursts into hysterical laughter, cackling madly while poking a finger in the engineering shoulder.
It seems that many a brilliant technical mind applies unnecessarily linear thinking to day-to-day ambiguity, or so say their husbands and wives.
Some loans have no ambiguity at all. Borrowers with big incomes, lifetime jobs, big down payments, no debt, investment accounts larger than the amount to be borrowed, and who are buying routine houses simply have nothing to worry about.
Most people buying houses have a more all-American mixture of finances: some debt, a job change, self-employment, and perhaps a divorce or credit adventure. Their chances of ultimate approval are excellent, but some work will need to be done along the way.
Achieving approval is a managerial process, not a mechanical one.
When an underwriter confronts a marginal deal, she has to find a place for it in the rulebook. The Fannie and Freddie rulebooks have accreted to large size over 20 years, and are internally inconsistent. The FHA and VA rules are in relatively short manuals confused by 60 and 35 years of accumulated memoranda, respectively.
At the edges of all underwriting criteria is latitude granted to the underwriter to make exceptions based on "compensating factors." It's an art to determine how much compensation is required for certain deficiencies, and whether there is any possible compensation for other weaknesses. Art varies from person to person, and minute to minute.
Examples.
By the book, 90% loans require a mortgage payment no larger than 25% of gross income, and all indebtedness must fall within 33% of income. In practice, if your deal has other strengths, the "real" ratios are 30% and 36%, the latter stretchable to 38%.
Back to the engineer. She says, "So we have to pay off credit cards to get down to 38%, and then we're fine, right?"
"Maybe" is the answer, and the borrower looks at you like you just told her that mass times velocity "usually" equals energy.
Key variables in this one little case include: how much cash will be left over after closing? How did the credit card debt get so high in the first place? How much bigger will the new house payment be than the old one? Weird house, or routine one? Jobs? Credit?
Underwriting is a matrix of solutions, not a series of binary questions. Often there is a price/reliability tradeoff. Most often, the poor engineer must leave the application carrying in his head a loosely connected group of contingency plans, which though almost certain to work in some way are not a rigid path. ("If the underwriter won't buy off on the ratio, maybe you can get a gift to pay off some more debt, or refinance two cars to reduce the monthly nut, or do a weird loan and to get the house payment down, or we can try another underwriter....").
We won't know which one is the best one until we try.
Once in a while the mortgage practitioner can make even a strong candidate uneasy. I once told a borrower that his chance of being turned down for his loan was "about like being hit by a comet," forgetting that the borrower, my old schoolmate Tom Ayres, is an astrophysicist. Tom began to run probability math in his head, and looked worried for the first time.
|
