Do you need a Direct Lender Approval?

Ok, so I have dealt with this enough at this point that I will finally put my thoughts on paper.

Do you need a Direct Lender Approval?

Well at this point of time there are a lot of listings in the market that are requiring that you get pre-approved through a direct lender. Now for sake of the argument the question then would be:

What do direct lenders do differently than we as Brokers do?

The answer is absolutely nothing. They take the application, gather the documents, pull the credit and run your file through the exact same automated engine that we use. Desktop Originator or Loan Prospector are the two engines that are used to determine whether or not your loan can be done and sold on the secondary market. Many of the direct lenders still sell the loans on the secondary market. They are not all in the game and business of servicing. If you go directly to Wells Fargo or you come to me both the Loan Officer and I will run the file through Direct Express. This is Wells Fargo’s engine which issues an LP approval. LP is the engine for Freddie Mac Investor’s.

If we are doing the exact same thing for the approval, what is the difference?

Essentially a direct lender approval is straight from the source. They will be funding the loan Directly from their own warehouse line. A broker will then send the loan to a wholesale conduit to fund the loan on the conduit’s warehouse line. We do not have the underwriters in house. However, the majority of the wholesalers follow the automated findings that have been produced when ran through the engine. The main trick on the wholesale side is that each wholesaler may impose their own set of criteria that will Overlay criteria produced by the investor or in this case Fannie Mae or Freddie Mac. As a broker we get a bad rep because the Loan Officer does not understand or know the overlays which in the end could cause delays in the process.

If you have an automated approval from the same engine as the Direct Lender what then could go wrong?

Again this is a case where it is the Loan Officer not the bank or the underwriter than will make the difference. You see the automated engines are only as good as the information that is submitted. Therefore if you submit incorrect information or do not verify the income, assets, and credit of the borrower you could get an approval that will later cause problemns for the closing. An underwriter may not agree with the income that you calculated for the consumer and this could decrease the qualification amount or turn an approval into a denial. Whether you are with a Broker or a Direct Lender this can happen.

Why then are they requiring a Direct Lender approval on certain properties then?

The answer to this seems real trivial if you take a step back. The bank who owns the property wants you to get pre-approved through their bank because they want to earn some money on a project that they are already taking a loss on. If they retain your loan then at least they will still be earning interest on a portion of the loss plus the fees to do the loan. It affects the bottom line. They also have control over the deal and can check the progress. If only the righ half knew what the left half was doing this would make complete sense. Wells Fargo is arguably one of the largest banks remaining and they are one of the largest wholesale channels today. If they see the value in taking in Brokered loans then I would suggest that there is value in a Broker. I have discussed my thoughts on this in another article before.

REO agents saying that they will not entertain and offer without a Direct Lender Letter.

I will reserve my opinion on this because it does not hold true for all the REO agents that I know. However I have been informed through some of the parties that I work with that there are agents that are big in the REO business that want Direct Lender Letter or your offer floats to the bottom. I simply think that I would do the same for my employer. Yes they get all their listings from the bank so naturally my agreement would be to reciprocate the referral business. It is networking 101. You have to give to receive.

In Conclusion, although a direct lender letter may or may not give your more leverage for your offer they are being required. On the listings that they are required I assist my clientele in getting them. It has been rather easy until the late where one certain bank does not want to cooperate. Our money and our approvals come from the very same place and the loans are packaged and sold the same way. While there are subtle differences a loan is a loan is a loan. Do not be suckered into compromising the comfort and relationship you have made with a Broker because the public is saying that you need a Direct Lender Approval. For all intensive purposes you are repeating the process we did for a second time.

Related Articles:

• 5 Perceived differences between a Broker and a Banker
• Third Party Origination

Risk Assessment Tools: DU and LP Automated Underwriting Definitions

In today’s market, the need for an automated underwriting approval prior to submitting an offer has become common practice. To be competitive the Listing agent or the bank that owns the property would like to know that you have been ran through our automated underwriting engines. Yes, they are computer programs that assess the risk of the file and determine the viability of the loan. It is only as good as the inputter and that is why in most cases brokers and loan officers are asking that you provide a backpack of information. In continuing our trend of Mortgage Definition Monday I have defined these terms below:

Hud has defined Automated Underwriting in their terms and glossary section as follows.

Automated Underwriting - loan processing completed through a computer-based system that evaluates past credit history to determine if a loan should be approved. This system removes the possibility of personal bias against the buyer.

Additionally, I will add that the computer is assessing the total credit risk of the buyer. The loan can still be declined even if it receives an automated approval for multiple reasons. Some of which may include but are not limited to: unacceptable collateral, unacceptable income documentation, drop in the borrowers credit, unacceptable asset documentation and wholesaler overlays that would override the automated approval for the specific wholesaler.

Automated Underwriting Systems has been defined well on Mortgage Professor’s website.

This definition is as follows:

Automated Underwriting Systems -A particular computerized system for doing automated underwriting.  Mortgage insurers and some large lenders have developed such systems, but the most widely used are Fannie Mae’s “Desktop Underwriter” and Freddie Mac’s “Loan Prospector”.

I will add that the systems are very accurate however again each of the approvals will be reevaluated manually by an underwriter to determine the completeness of the documentation. The underwriting systems are constantly being tweaked to include the newest guidelines however it would be appropriate to double check prior to issuing an approval letter. DU Refi Plus is one of the new programs that took a minute before it was available in the system. When this is the case you make get feedback that is not consistent.

I will continue to bring Mortgage Definitions to you each and every Monday. Until then have a great week.

God Bless,

Matt Freeman

Definitions taken from the HUD glossary and Mortgage Professor glossary. I have added to these definitons and included links to their sites for further verifications.