Question:

What are the pros and cons of automatic underwriting?

Answer:

Freddie Mac's Loan Prospector and Fannie Mae's Desktop Underwriter are the most commonly used automatic underwriting software packages. Beside using databases to collect and store data, these software packages and the like use statistical models, loan success history and other mortgage lending factors to predict whether a loan can be sold successfully to the secondary market, if the loan should be approved and the repaying ability of the customer.

Pros of Automatic Underwriting

Automatic underwriting contributes the following benefits to both customers and loan officers

  • Application to approval to closing is reduced to 2 business days to a week.
  • Closing costs are reduced in the hundreds.
  • Borrowers that could not be previously approved will have a much better chance, as debt to ratio allowed by automatic underwriting is raised from 45 to 70.
  • Personal prejudice is avoided.
  • Better tailored loan products are located and offered to customers.

Cons of Automatic Underwriting

The greatest disadvantage automatic underwriting has is exactly the great turnover of processed loans. As many lending institutions have adopted the Freddie Mac's Loan Prospector, Fannie Mae's Desktop Underwriter, and other software to automate underwriting, home loan turnover has tripled. Since the greatest milestone in automatic underwriting has become the credit score, often the factual ability of some borrowers to repay the loan has been overestimated and they soon default. Hence the great amount of loan failures that led to drastic negative impact over the mortgage industry.

Certainly, some mortgage factors should be balanced differently in the automatic underwriting software workings to avoid extending costly loans to unqualifying borrowers.

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