As I have evaluated the lending process, the pervasiveness of adversarial relationships has always surprised me. Over the years, I have heard many rants from originators about how a loan didn’t get closed because the appraiser’s valuation, or the underwriter’s excessive scrutiny over irrelevant details, killed the loan.
After reviewing the files, more often than not, I would find the reasons that the file failed to close was not due to the efforts of those providing services or processing the file, but were the direct result of the originator’s failure to properly evaluate the file and available supporting data in accordance with underwriting standards. In other words, the originator would ignore information that put their deal at risk in the hopes that others would too, because the rest of the file was “clean.”
I refer to this as a Policy of Wishful Thinking. The policy takes a hold of a person who, for one reason or another, wants to get a deal done even though they are aware of issues that would likely prevent it from being possible. In some cases, it is related to a personal need, such as needing that commission this month, and in others it is more noble, such as wanting to help a client with a dire need. However, the result is the same; important details get overlooked in the hope that others will see the need and move the file along.
This has nothing to do with the originator’s ability to evaluate the available information. For example, I have conducted trainings with originators where they are provided with details of a subject property and a list of sales that occurred in the subject’s area. The originators are tasked with reviewing the comparable data, selecting what they determine to be the most supportive, and then estimating a value of the subject property. It goes without saying that this is not an exact science, but an exercise in estimation. A vast percentage of originators succeed in providing a reasonable estimation that falls in line with the actual appraised value.
In practice, however, some of these same originators then base their quotes on exaggerations of value estimation and then become frustrated when the appraisal comes in much lower. By ignoring the data, they are wishing for a different result, a Policy of Wishful Thinking. This also disrespects the responsibilities of appraisers who are dealing with increased scrutiny on the strength of their valuations.
Underwriters face an even greater challenge because too many originators fail to truly understand what the underwriters’ responsibilities truly are. Since everyone in the lending process, from the originator up to the investor, receives revenue from closed loan volumes, underwriters do have a vested interest in helping loans to get closed. However, at the same time, they must serve as risk manager for their companies and make sure that files are complete and salable. They do not make the rules or establish the investor guidelines, but they are tasked with diligence to ensure that each file meets the requirements.
Originators will express frustration because an underwriter called for additional information, be it to support occupancy, or further review of a property condition issue. However, just like with valuation, originators are often aware of these situations, or they conveniently do not ask their clients about them in the hopes that they will not come up during underwriting.
Additionally, a point of contention between underwriters and originators can stem from differences between regulatory guidelines and investor guidelines. The investors that a lender sells their loans to often will have more stringent guidelines than the regulators based upon the risk profiles that are acceptable to the sources of capital. In cases where an underwriter rejects a file due to an investor guideline, originators may argue that it goes beyond the regulatory requirement, but investors do have the right to establish standards of loans they are willing to purchase.
With a government insured product, such as the HECM, underwriters have the added responsibility of ensuring that the file will be acceptable for FHA insurance. A whole new source of problems occurs if the FHA rejects a file for the government-backed insurance.
Originators are generally well versed in the guidelines of the lenders they work with and know how to compile a complete and insurable file. Skipping over certain details may drive a certain exuberance over having another loan in the pipeline.
A former colleague used to tell me that “the mortgage business is the only business where you can go from the heights of ecstasy to the depths of despair on the same day, on the same file.”
I never bought into that philosophy because to me it stemmed from the Policy of Wishful Thinking. Undoubtedly, there are occasionally situations that come up that an originator could not have foreseen or expected. At the same time, I have always been confident that the vast majority of problems could be identified and addressed early in the process if the originator was asking the right questions and looking into potential red flags.
The question I always ask has been, “if a problem with a file is insurmountable, when would you want to know?” By overlooking issues, not only does a group of people work on a file that isn’t going anywhere, but the borrower is also getting their hopes up. It is a situation where no one wins and ultimately is disrespectful to everyone involved.
Conversely, if there is a problem that can be addressed, wouldn’t it be better to know about it early in the process? This provides the opportunity to find a solution during the normal processing of the file without adding unnecessary delays if the problem came to light later on.
I think most originators would admit to being influenced by the Policy of Wishful Thinking. The most successful are able to quell the impulse most of the time and acknowledge challenges that a file faces. This is due to a strong respect for their time and the time of others who work on a file during its processing.
The secret to success lies within this respect for time. By understanding and respecting the roles and responsibilities of each person in the loan origination process, along with the rules and guidelines that define those responsibilities, originators can cultivate more respect in return. Striving to make sure that a file is complete and prepared to move on to the next stage streamlines the process and earns the appreciation of those along the way. Creating a track record of overlooked details bogs down the system and frustrates everyone.
Originators are, in essence, the quarterbacks of the origination process. Everything starts with them and how they create and prepare a file to be processed. It is a simple scenario that the higher quality of the file going in, the higher the likelihood that it will proceed relatively smoothly through the process. Granted, these days, it does seem that every file faces significant challenges along the way, but the more originators avoid the trap of a Policy of Wishful Thinking, the better the process will be for all, and most importantly, the borrower.