Digital Risk In The News

Bids for loans face tighter scrutiny
By Lew Sichelman
United Feature Syndicate
Published December 23, 2007

WASHINGTON -- And so it has come to this: forensic underwriting.

No, lenders are not taking potential borrowers' fingerprints, though some are talking about the possibility. But they are once again going over applications as though they were part of a crime-scene investigation.

Lenders are more cautious than ever because they have been burned so seriously by fraud. Many loans that go bad are often riddled with lies and fake documentation.

Lenders are being especially careful when borrowers don't fit the mold as dictated by secondary-market giants Fannie Mae and Freddie Mac. To sell nonconforming loans that are above $417,000 (the current limit on loans that Fannie and Freddie can buy) or that don't meet the two companies' rigid standards, the mortgages have to be underwritten with a fine-toothed comb or there will be no takers.

"There never has been so little demand for product on the secondary market that is outside the Fannie-Freddie guidelines," said Jeffrey Taylor, managing director of Digital Risk, an Orlando, Fla., company that provides special data-authentication tools that limit financial-services firms' exposure to fraud and loss.

Whodunit?

The term "forensic underwriting" refers to the investigations that companies undertake to determine what went wrong with mortgages that have already been funded. "It's like a murder," said Rachel Jones, vice president, due diligence services at Digital Risk. "We try to figure who did it and why."

But, Taylor said, scrutiny by underwriters before they commit to would-be borrowers is "at the highest level it's ever been." He found that out just last month when he tried to refinance his own home. He got the loan, but he had to jump through hoops to get it.

"The difference between now and two years ago is like night and day," he said. "In 2005, all I had to do was fax in my pay stubs and tax returns and the loan was done in four days. This time, it took six weeks, and the level of verification and documentation was unbelievable."

In a sense, the science of loan approvals has moved back to pre-2000, before the days of fancy interest-only mortgages, pay-option loans and other dangerous products. Before the mortgage market tanked, practically anyone who could breathe on a mirror was eligible for a loan.

But Taylor, for one, said it's even more difficult now than it was in the 1990s. And although forensic underwriting is an "after the fact" event, Jones said the information gleaned from those investigations is captured and reviewed by lenders, and eventually, the effort "will change the way originating mortgages is done."

Her advice: Be careful. Make sure what you and your broker tell the funding lender is absolutely true. No fudging.

An issue that should be addressed in the sales contract -- but usually isn't -- is what happens if a problem is found with the property during the pre-closing walk-through.

Keep an eye out

Whether you are buying a new house or an existing one, you should require a final inspection of the property. As you know, this is your last chance to make sure there aren't problems you can't live with.

If yours is a new home, you'll be looking for construction flaws and defects that need to be addressed by the builder.

If you are purchasing a previously owned house, you'll be looking for things you didn't notice when you first toured the place, items such as broken or sticky windows, missing screens, dripping faucets, stained carpeting that may have been covered by strategically placed furniture or throw rugs, or cracks in the basement wall that might have been shielded from view.

For the most part, the walk-through probably won't uncover anything of major consequence. But if it does, you'll want to make sure the seller sets aside, in escrow with the closing agent, a share of the proceeds until the problem can be resolved.

Most builders won't agree to a set-aside, largely because they provide their buyers with warranties. But individual sellers offer no such guarantee; existing-home buyers are usually proceeding at their own risk. Once they close, the place is theirs, warts and all.