Red or Blue?

Written by Ralph Rosynek Friday, 30 April 2010 19:05

Articles - Underwriting

User Rating: / 0
PoorBest 

On a recent vacation, I visited a Florida theme park and was confronted with a very interesting decision – “red or blue”?

I was advised “red” was the pathway to my destiny, so, acknowledging the health warnings, I joined a procession of thrill seekers inching their way into a cavern of excitement to board the ride of my life.

Heart throbbing, thoughts of common sense and caution being overruled by the lure of the experience of a lifetime, I stepped forward in confidence, girded myself into the dragon’s transport device, feet dangling, and held on for dear life. In four or five minutes, I was delivered back to the cavern after what seemed to be a mental eternity of ups and downs, bends and turns, thrills and chills, and an occasional obscenity.

Upon exiting, the red decision was questioned by my accompanying support crowd, leading me to confirm that I had, in fact, experienced the ride of my life. Foolishly, I gave way to public opinion by mindlessly following the pack back into an alternate inching line headed for the “blue”. Was I a glutton for punishment or returning to face yet another fear with a renewed sense of strength?

Actually, in the end I realized I would survive “blue”. I needed to survive “blue”, as, after all, “red” had educated me to a confidence and I felt “blue” would ultimately prepare me to undertake the “green” one, which I am sure is out there being built somewhere! What a thought process!

So, are you feeling like you have been on the “red and blue” roller coaster of late? Could it be that more revised HUD Guidelines, new pricing, revitalized products, enhanced forms, increasing state legislation and greater disclosure are begging to question if you are a “glutton for punishment?”

I had the opportunity to speak with a good friend, who, like many of us, has been part of our industry for many years. His company, a mortgage brokerage firm, consistently places statistically in the top HECM 100 lender listings. I noted nervousness during our conversation, wherein he came out and asked me, “Will I be here tomorrow - should I be underwriting my own loans?”

I couldn’t resist to answer his question with one of my own – “red or blue?”

The choice to underwrite your own loans is a very complex strategy to overcome fears, resulting preparedness and recognizing challenges yet to come. I commented that many more of us are underwriters than we give ourselves credit for, but that in itself is only the beginning and should not be the sole criteria to get into the next line.

The foundation of “handbook and regulation” knowledge and skills is probably the first bend and turn on the underwriting ride which we all will agree is a key component to answering the question.
 
However, reconfiguring your company to compete in the current and future HECM market requires consideration of the supporting checklist of questions. The final decision to underwrite is part of a body of skills and knowledge, which must be attended to on a continual basis:

• Do you have the necessary capital and cash to support the process change?
• Do you have the ability to undertake the increased HUD authority requirements?
• Do you have an adequate source of warehouse funding?
• Do you have a backup source of funding for impaired or uninsured loans – or the reserves to effect indemnification?
• Do you have the requisite insurance coverages and bonding?
• Do you understand the state mortgage banking requirements for this change?
• Do you have the appropriate compliance and documentation resources to effect this process change as well as resources to monitor the process for changes going forward?
• Do you have a secondary marketing plan and the ability to meet the representations and warrants your “investors” may additionally require?
• Do you have enhanced internal controls – i.e. augmented policies and procedures?
• Do you have a quality control program designed to evaluate the underwriting and approval process as well as determine the quality of your production?
• Do you understand the increased scope of audit and exam requirements?
• Do you understand the additional reporting requirements and to whom you report?
• Do you have a servicing or subservicing plan?
• Do you have accounting and settlement procedures which recognize the process?
• Do you understand the additional training and monitoring requirements?
• Do you understand the need to employ experienced personnel to effect the change?

Given the material evidence that is necessary to move to a “banking” strategy, and newly promulgated tightening of some of the requirements, business as usual does not appear to be a debate that will gather much steam going forward or perhaps provide for your long term survival.

In fact, one might conclude the HECM product will probably become a specialty product represented by a select few lenders in the market. There are also those who believe the current market will soon be replaced by a new wave of eager investors who will provide the additional products and competitive capital to enhance the HECM value to seniors. Obviously, we will rule out those few who believe that this latest ride we are on is a diabolical governmental plot, atonement for decades of subprime, or safer than healthcare as a reform platform for politicians to gain re-election!
 
I believe that for those who have made the decision, the choice to take on underwriting does not in itself guarantee a measure of success. As we have seen with the number of lenders that have exited or consolidated recently, the business plan must be flexible, scalable, and measurable…and the market, to some degree, must work hand in hand.

Regardless, there needs to be a long and serious effort made to evaluate where you are today and perhaps the all important question - are you and your company ready to take the ride of your life? The risks and the rewards are both large.

Red or blue?...been there, done that, bring on the green one!