Shoring up the mortgage underwriter shortfall

Recruiting talent, streamlining processes, standardizing data and integrating new technologies all can play a role in fixing the industry-wide shortage

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The mortgage industry is contending with a loan-underwriter shortage that has acted like a governor on an engine — slowing the pace of a fast-growing private-label securitization market.

The shortage stems from the imbalance created by the robust demand for underwriters in the private-label market set against the relatively stagnant supply of available underwriters — who also are in high demand in the booming mortgage-origination sector.

The imbalance has been particularly acute for third-party due diligence (TPR) firms that employ underwriters to review and assess the quality of loan pools used as collateral in private-label securitization deals.

Executives with TPR firms and the bond-rating agencies that make use of their due-diligence reviews agree the problem is a big challenge. It is complex, with multiple, varied causes. They also point out that it is, in large measure, a byproduct of a healthy, expanding mortgage industry marked by a resurgent residential mortgage-backed securities (RMBS) market. 

Despite the challenge, these industry executives remain resolute in their efforts to find a fix, largely because the long-term growth of the housing industry depends on it. To that end, they offer some possible, if imperfect, solutions that may help to address the underwriter shortage in the months and years ahead to ensure a smoother-functioning, more efficient private-label market.

One solution advanced is to simply develop and recruit more underwriters for the private-label market. To that end, John Levonick, CEO of Canopy, a startup TPR firm, said his company is “looking to establish employment conduits by working with local universities.” He also said his firm is working to “modularize” its approach to due-diligence reviews in the private-label space.

“Due diligence normally requires a single person to have credit, income, collateral and compliance expertise,” Levonick explained. “Our approach … has been to hire people that have individual skill sets but not necessarily the comprehensive skill set that most firms look for. 

“[We have] the agility from a technology perspective to permit multiple people to work on a loan file, to segment it and break it out.”

Roelof Slump, managing director of U.S. RMBS for the bond-rating agency Fitch Ratings, said that adopting a modular, or segmented, approach to conducting due diligence reviews is a strategy that is gaining some traction among TPR firms. (It’s already common among mortgage originators.)

“[The] approach is to bifurcate the [loan] file and say this area’s going to handle this aspect, and this other group is going to handle the other aspect, in order to best parse it,” he explained. “You focus the expertise and enable faster decision-making.

“Ultimately, however, you still need someone to look at the whole loan [process] to ensure it makes sense.”

On another front, natural market forces could come into play and help to rebalance the demand for underwriters, freeing more of them up for the private-label market.

“We would anticipate that headed into 2022 some of the pressures are going to unwind a little bit,” said Michael Franco, CEO of SitusAMC, a major TPR firm operating in the private-label space. “I think everybody’s expecting there to be lower origination volume in 2022 and 2023 than there was in 2020 and 2021.”

John Toohig, managing director of whole loan trading at Raymond James, adds that “if rates go up, like several economists are predicting, that could be a headwind” for mortgage originations, particularly refinancing. 

If that happens as predicted, it might open the door for more underwriters to move away from mortgage originations and to the securitization side of the business, according to Chris Guidici, managing director of business development at Wipro Opus Risk Solutions.

“Perhaps we can look at that as an opportunity to create a soft-landing spot for some of those individuals,” Guidici said. “We’ll still have to train them to do secondary market due-diligence versus what origination underwriting is, but it is certainly a benefit If that happens.”

Bill Shuey, director of securitization operations at Wipro Opus, added, however, that even in an environment dominated by purchase loans, “I think we’re going to be pretty steady as far as volume and being busy.” 

A big question for the private-label market next year that will affect underwriting, he said, is “what will the [mortgage] products look like, [and] what will people try to do in that purchase environment?”

Another strategy for dealing with the market uncertainty ahead is to invest more in automation and technology, which also would involve a shift in the private-label market toward more standardization and big data.

“Some of them [the TPR firms] may have better technology, which may mean the work is more efficient, and they can handle more loans per reviewer,” Slump said. “And it remains to be seen how well that plays out over time.”

For Joseph Mayhew, chief credit officer at TPR firm Evolve Mortgage Services, technology does offer an achievable solution to the underwriter shortage. In particular, he said the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac have had a lot of successes on the technology front and consequently have a lot to offer the private-label market.

“A lot of folks who do private-label business tend not to be big fans of the agency [GSE] world, but I do think if you can’t beat them, join them,” Mayhew said. “There’s a lot of good ideas to be had in what the agencies have done.

”They’ve automated the appraisal-review process; they’ve automated closing data; they’ve automated delivery data, and they have AUS [an automated underwriting system]. … I think we have to subscribe to technology in a big way.”

Mayhew is not alone in seeing the potential in adopting for the private-label market some of the technology successes that the GSEs have pioneered. Ed DeMarco, president of the Housing Policy Council and acting director of the Federal Housing Finance Agency from 2009 to 2014, said it is long past time for Congress to pursue housing-finance reform that clearly defines the lines between the GSEs and the private-label market. 

“Greater clarity on those parameters going forward would create more clarity for mortgage market participants, so they can better invest and build out infrastructure,” he said. “It also would define how the [GSE] tools that are in the marketplace today get to be leverage by private markets.

“The securitization platform, disclosure rules, data definitions … there’s a whole range of potential tools that have been developed [by the GSEs] that have the potential to benefit or to be leveraged by the private-label market.”

Putting too much faith in technology to replace humans in the private-label space, however, is not without some risk as well, according to Toohig, of Raymond James. Toohig said underwriting and conducting due diligence is not so much a science as it is an art that still requires a high degree of human touch. 

“As we move more toward big data, and we move toward automation, and we move away from the human element … all in the spirit of efficiency due to a lack of personnel, well, I’d watch that quite closely,” he warned.

This is the final story in our three-part series that explores the repercussions of a shortage of underwriters in the mortgage industry. Part I can be read here and part II here. Share your thoughts by emailing Senior Mortgage Reporter Bill Conroy at [email protected].

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