Earlier this month, I learned that a big bank is no longer accepting “third party underwriting”. Third party or contract underwriting is “private mortgage insurance”. Private mortgage insurance is often used when a borrower has less than 20% equity (or down payment) in a property. When a private mortgage insurance company is issuing mortgage insurance to the the lender, they are underwriting the transaction. Sometimes mortgage companies may use private mortgage insurance companies to underwrite files even when no private mortgage insurance is required.
From the memo:
“The clerical and support duty exemption to licensing under the SAFE Act (and other proposed regulations) for loan processors or underwriters who are employees taking direction and subject to supervision and instruction of licensed persons, does not apply to contract underwriters.
For all underwriters who do not qualify for exemption to licensing, including contract underwriters, compliance requires that anyone who is performing credit underwriting in connection with a residential mortgage be licensed as a mortgage loan originator….to perform credit underwriting tasks, each individual independent underwriter must have the applicable state license.”
It will be interesting to see if private mortgage insurance companies move forward with having their underwriters become licensed mortgage originators. If other banks follow and pmi companies do not license their underwriters, it would appear they’re toast. This bank is no longer accepting loans underwritten by pmi companies effective July 5, 2011.
Borrowers would need 20% down payment to obtain conventional financing, if pmi ceases to exist or consider FHA, USDA, VA financing or a combo mortgage (yes, second mortgages are starting to come back).
Update: Some lenders may still underwrite the loans with higher loan to values – some banks are are firing warning shots that they will not accept loans only underwritten by a private mortgage insurance company if their underwriters are not MLO licensed. It’s going to be interesting to watch this evolve.
Photo credit: John McClumpha via Flickr
Another great move by Frank-Dodd act. Can’t believe this bill. Unintended negatives consequences out-way the positives of this bill
I think it has something to do with how the SAFE act defines loan originators and the licensing. Banks can’t verify (or don’t want to incur the expense) if the contract underwriter meets the SAFE act requirements, so rather than expose themselves to the risk they don’t, they just wont use contract underwriters. Contract underwriters aren’t necessarily “employees” but almost like independent contractors if am not mistaken.
None of these rules and regs the politicians keep coming up with do a damn thing to help consumers or will prevent new bubbles, etc. It is just creating regulations to show that politicians are doing something even if that something is just going to make matters worse.
Sounds like they want the contract underwriters to pass the SAFE ACT test and become supervised….just like independent contract loan processors.
Not a bad idea.
I see no negative or unintended consequences.
Guys, we’re in the middle of a massive mortgage meltdown. MANY LOs on this blog BLAME THE BANKS: “They underwrite the loans, not us mortgage brokers, not us originators.”
So why not ask the banks to make sure their contract underwriters are licensed and put into the NMLS System? If indeed the banks were part of the problem I see this move as a good thing.
I also anticipate that these folks will have very little problem passing the exam.
I highly doubt PMI will cease to exist.
Jillayne,
I think this is a stand-off and it’s too bad some of the banks had to do this and that, if this is required per the SAFE Act and/or Frank-Dodd, that the pmi companies did not take the initiative to do this themselves.
I don’t think we’re in the “middle” of the meltdown…I do think this is the end…and I do blame banks for creating and underwriting the products…it’s really simple. But with that said, finger wagging needs to stop (although Jamie Dimon of Chase was bashing mortgage brokers again just a week or so ago…pathetic).
It does seem that the timing of this aligns with those in power wanting to have 20% down for conventional loans as the status quo… wonder if this is what is causing pmi companies to waiver on the expense of having their employees become licensed MLOs?
Why can’t the PMI companies just give the underwriters a choice: Become licensed and stay contracted or become a W-2 employee?
Sounds like the banks want to force the PMI companies to comply with The Act so that the banks are in compliance. Again, I don’t see a problem with that decision.
Regarding QRMs and 20 percent down….the rule has yet to be written. PMI companies have found many ways to continue to make money over many meltdowns. Me thinks they will survive this one.
Jillayne, Are pmi underwriters contract (1099) or W2?
From what I understand, some originating mortgage lenders will still allow pmi but they’ll be underwriting while the pmi company is only issuing the insurance…if they’re issuing insurance, they’re still having to underwrite the loan for their own purposes. Borrowers may wind up paying for double underwriting when pmi is required…
…still need to see how this pans out…right now, pmi is often times more affordable than FHA…and consumers should have as many options as possible.