COVID-19 presents novel issues for underwriters, who are grappling with the need to support their clients accessing funding and also maintain disclosure standards and manage their risk when the typical tools / processes that they use to do so may not be available in the same way. Between changes in borrowers’ employment, delays in tax filing, and ensuring all information is up to date, underwriting has become more of a “real-time” process.
A “business as usual” approach based on largely manual processes, expert judgement and existing underwriting criteria will not work. It cannot cope operationally and it cannot be relied on to consistently deliver the best decisions. Many client requests will be triggered by rapidly declining revenues and a poor financial outlook, which would fail normal underwriting criteria at the first hurdle. Underwriting criteria will therefore need to be adjusted to enable lending to companies that are viable and should return to health after the effects of COVID-19 have dissipated.
For lenders, it is vital to proactively and regularly gauge changes in the status of the borrower and to ensure all things are in place to make for easy and successful closing. For servicers, it is just as important to stay abreast of information on any type of leniency to assist borrowers that may be facing hardship.
In this crisis time a loose underwriting process may put both the lender and borrower in a tough position that causes the mortgage to fall through, go into default, and ultimately create a difficult and stressful situation for both parties.
While navigating this new landscape, what underwriting tips should be taken into consideration to ensure a smooth closing?
Underwriting Tips to lenders
More frequent credit check: The underwriting process consists of many moving parts and 30 days can go by rather quickly. It is the lender’s duty to make sure all origination documents are current and meet guidelines. In order to do so, lend-ers should check borrowers’ credit profiles and utilization more frequently. Significant changes in credit can be good indicators that there may be changes in employment or financial circumstance.
Clear understanding of borrower’s unique financial situation: One other key part of navigating the underwriting process during COVID-19 is taking into consideration those unique circumstances to ensure the business continues as expected. For a lender it is important to investigate the previous or status of loans from other lenders to make sure there isn’t any alarming activity. For instance, if the borrower currently has forbearance on their previous mortgage and is seeking a new loan, that will impact the new loan indefinitely.
Seeking Flexibility for Borrowers: For a lender, while they need to continue the business of providing loans, they also must make sure the loans show no signs of going into default. The lender must also look out for the borrower and make sure they do not get into a situation that could cause financial ruin later. Lenders also should remain up to date on the latest guidelines that have been adjusted due to COVID-19.
Conclusion
Since the imposition of public health restrictions across much of the world due to COVID-19, many issuers are facing profound challenges. Here we have attempted to highlight some of the specific impacts on underwriting and what additional underwriting tips Lenders should follow to overcome. For lenders, it is now part of their job to look more closely at the borrower’s eligibility and go the extra mile to confirm that the borrower’s status hasn’t changed during the closing process. It also is important to make sure that there are options to be able to facilitate loans under these different circumstances. While delays and challenges will persist, it remains possible to navigate these complex challenges while maintaining disclosure standards and adequately managing risk.
