http://www.nytimes.com/2007/03/23/business/23speed.html?pagewanted=print

“Automated underwriting is now used to generate as much as 40 percent of all subprime loans, according to Pat McCoy, a law professor at the University of Connecticut who has written on real estate lending.

The software itself, of course, cannot be blamed for lowered lending standards or lax controls. But critics say the push for speed influenced some lenders to take shortcuts, ignore warning signs or focus entirely on credit scores.

“Used properly, automated underwriting is a wonderful thing,” Professor McCoy said. The problem, she said, comes when lenders customize it to approve the wrong borrowers.”

Also Tanta, over at Calculated Risk discusses in extreme detail subprime AUS’s, their history and their potential pitfalls:

http://calculatedrisk.blogspot.com/2007/03/ficos-and-aus-we-will-add-your.html

Just a taste:

”
The history and development of AUS is fascinating (really, it is, my UberNerds). It is, however, beyond today’s scope. Let me just note that a few years ago, the general situation in the industry was that the systems of the GSEs (Freddie Mac’s Loan Prospector (LP) and Fannie Mae’s Desktop Underwriter (DU), both of which could also handle FHA loans via additional technology called FHA TOTAL Scorecard), were the gold standard for AUS in the conforming-balance prime loan world. But they were never designed to underwrite loans that are not eligible for delivery to the GSEs, including jumbos, no docs, subprime (outside of the A- stuff the agencies have special AUS capabilities for), and a lot of exotic product structures (like the Option ARM). So there was parallel development by large private investors of their own AUS, the two best-known and most reliable of which are Countrywide’s CLUES and GMAC-RFC’s AssetWise, both of which specialize in jumbo loan balances, Alt-A and subprime.

But while just about every lender, correspondent, and broker in the country could have access to LP or DU for very low cost, and needed to anyway for its GSE loans, you had to be a correspondent of Countrywide or RFC to get access to CLUES or AssetWise, and like anyone else Countrywide and RFC tended to expect you to sell them the loan if you used their systems to underwrite it. Other buyers of jumbo and Alt-A whole loans might appeal to these smaller loan originators, but those other buyers didn’t offer an AUS, which are very expensive to develop. There became a habit of originators using the ones everyone had access to and were familiar with, LP and DU, to underwrite loans that neither system was designed to accommodate. What happened is that the whole-loan buyers would create an “overlay” of rules that a jumbo or Alt loan had to meet, in addition to approval of the loan by LP or DU. A very odd hybrid of traditional and automated underwriting was born; Star Trek fans are free to imagine Borg drones (half organic, half machine creatures) invading the mortgage world. Resistance sure seemed futile there for a while.”

This is the only mortgage company I work for, so I can’t speak for every type of lender (big banks, credit unions, mortgage brokers or other correspondent lenders). We have live underwriters because we close in our own credit line (we are a Correspondent Lender) and we since we are taking on the risk (vs. brokering a mortgage) we need to make sure the transaction makes sense.

At our company, the AUS is a preapproval (when backed up with supporting documentation from the borrower). Then it is reviewed by u/w.

We’re not a huge bank, we’re a family owned mortgage company who has been around about 30 years. AUS has allowed us to save TIME. And it COSTS the company quite a bit to have these systems, to be a direct lender, etc.

I’m going to kiss our u/w’s when I go into the office today. Oh wait, you can’t do that any more without a lawsuit…I think I’ll bring them Starbucks instead!

Automation increases the ability for a corporation to make more profit if you can replace a human with a machine. But you know this. So, that means corporations know this, too, and build the risk in with the pricing. I use to underwrite mortgage loans. I’ll bet that only the most sorry-looking loan files pass through human hands, and then they’re only looking at photocopies, scanned, or faxed documents instead of original documents. I will also bet that this is already starting to change.

I didn’t realize they would allow just anyone access to those sorts of things.

I am skeptical of any attempt to automate subprime, however. There are just too many possible variables in any subprime borrower’s situation to make automation anything more than something to game, imho.

Many subprime lenders have their own proprietary automated underwriting systems. Here is an example from one company based in the Northwest, MILA. They specialized in subprime and built their business on this model. As I understand it, now they’re just doing A and Alt-A loans.

http://www.mila.com/main/