Episode Transcript
[00:00:00] Speaker A: Hello and welcome again to season four of the Mic'd up show, where every mortgage has a story.
We are the ultimate hub where the hidden stories behind the mortgage industry come to life.
I'm here snowed, stacked high in Boston, Massachusetts.
[00:00:18] Speaker B: I'm not so snowed in, but I'm not in San Diego. I'm in Chicago o' Hare Airport at the moment.
[00:00:23] Speaker A: And we're always available to our audience and in every episode we dive deep into the entrepreneurial spirit, the strategic insights and the breakthrough innovations that have built the world's greatest mortgage companies. So whether you're advancing your career, scouting for industry leaders or exploring opportunities in fintech and prop tech, you're in the right place. Get ready to unlock the story behind every mortgage. Let's dive in today with a new interesting option for our listeners. If you're beyond the mortgage industry, this one is not just about leadership characteristics and how to grow within your company.
This is going to actually give advice on how to bring better operational efficiencies, recommend better head of the curve ways that some of our leaders are doing it. And just from a consumer perspective, you'll actually get some behind the scenes view or lens of what goes into underwriting. And maybe if you better understand underwriting, maybe you can shop for a mortgage better. This one will be interactive and it will be a specific, fun, cutting edge topic. So we're not going to get too deep into underwriting that it's a 300 level class. But you'll get to learn what operational leaders behind the mortgage companies that you apply are always trying to find and tinker with and deal with. Not just the fact that people who give a mortgage make money. There's a lot of risk that they take on by lending the money and how they weigh risk and how risk then correlates with rate and the way they're able to determine the risk is by underwriting.
And one of the ones, one of the factors they underwrite on is your income or your debt to income ratio. DTI for all our acronym haters out there.
So we have a returning guest. Mike and I always love to point out just what an amazing show. If you want to know, Jim's background will provide a link to his past show but Jim, Carol, welcome back to the show. We appreciate you having us on. I think from where we left off or maybe a cliff note from where we left off. If you could tell us again how you got into the industry and during that part of the story where you were, you were put in a position to really Learn that underwriting background.
[00:02:43] Speaker C: Yeah. Well, thank you. Yeah. Essentially back in the 90s, my father had been running southeast regional mortgage operations for banks and decided with the oncoming of DU that a small independent mortgage banker would be able to thrive.
So he started his own mortgage operation. I came on board to be his assistant to help him start it, then grew into becoming a loan officer, became top producing loan officer. And then one day my dad called me into his office and said, so I'm sending you to Seattle, Seattle for some underwriting training. And I went, but I'm, I'm a loan officer. And he said, son, you told me you want to, you want to buy into this company one day. I said yeah, because try walking into an underwriter's office and tell them they're wrong on their interpretation of a guideline. When you don't have a license to do it, you're going to Seattle. So I went to Seattle, got the underwriter license, which is probably the best thing I ever did because that does make a difference. You're able to talk amongst underwriters and have their respect because of that.
And we did grow that company, did real well with it for about 23 years, then merged it into the banking world and grown from there.
[00:03:53] Speaker A: That's excellent. And you're on here to tell us about how you're on the cutting edge because of that underwriting background. Technology has come to you and you yourself have sort of explored it yourself. You're in the, the, you're in the government, the gse, the Fannie, the Freddie, the FHA guidelines, more than probably most leaders, because you have that underwriting knack for it. Can you talk about how you had this aha moment about Danny Mae and the DU as desktop underwriter for those?
[00:04:26] Speaker C: Yeah, yeah. The big thing about DU was it was they were approving a file or loan prospector lp. They're approving the file. That was the big deal.
The problem was though, it was still approving what income you entered into the file and you calculated which in 2024, the fourth quarter, Fannie Mae came out with what's called income analyzer where they're going to calculate the borrower's self employment income. They're about to start doing W2 wage earners, which is going to be a game changer too, but with that female Fannie Mae, as you enter all the information of the borrower's tax return, whether it's pertinent or not, and you can even click on an icon and it'll say, is this going to calculate or count in the calculation of my borrower's income and it'll say no, but it's going to calculate into our total risk calculation of the income.
So essentially they then will take the tax returns and they come back with findings to tell you what they believe the income calculation you should use and they give you findings. And that's kind of a game changer because for example, I had one that essentially was decline in income. The borrower went from $72,000 to $68,000. Well, that's decline.
Well and most people would then most underwriters at that point would take the most recent year, the 68 divided by 12 and use that calculation.
When I ran it through income analyzer, Fannie Mae said to use the two year average and more importantly in the findings it said we believe the income is level and no stability of income is required.
So essentially that made that file go from. I had a 49 point, I think it was like 49.11 DTI when the that file, if you would have gone with the 12 month average, the most recent year it would have gone over 50 and it would not have been approved because it's a Fannie Mae loan. Well, that borrower, I closed the loan, delivered it to an investor and this was in the first quarter of 2025.
And they come back and they say we're ready to purchase. We were going to buy the loan. But we see that the most recent year is declining and most underwriters would take the most recent year. Divide that by 12. When you do that you go over 50% and hence the file won't be approved and we can't purchase the loan. I said, I totally agree with you as an underwriter. That's how I would have calculated. I said, but you didn't see my income analyzer findings. Fannie Mae calculated it and Fannie Mae said to use the two year average and Fannie Mae said the income is level and that I don't need to document stability of income.
They actually came back and said we don't even know what you're talking about. We're gonna have to get with our Fannie Mae rep.
They came back and said Mr. Carroll's correct, purchased the loan because Fannie Mae calculated in Fannie Mae has made the risk analysis and Fannie is calculating that income. And that's huge because then you got your reps and warrants.
And what was the problem though was you had to manually enter all that information, which was time consuming, probably around five minutes or so but more importantly, when you're manually entering it, you could fat finger it and then your reps and warrants is off the table.
And that's why I've been working with Friday harbor for a very long time as a consultant. And I told them, I said you guys need to get with fan Anime and interface with them to be able to send the tax returns and have it calculate the income and they got with them and as of January they're, they're now able to do that. And it you shoot the and where I told you it takes about five minutes manually to do it. I did one this week.
It took me about, let's see here. I think you go into Friday harbor, you click on Fanny Mae or income analyzer and, and Fannie Mace, you validate three different things, one of which is like the start date of the borrower's business since they're self employed and two other things and then you click and within three seconds you got your findings and your reps and warrants which is, it's huge.
And there was another file where, like I said, where if it's a declining year, unless it's 20% or greater, most people will, most underwriters, a lot of times will go ahead and just use the most recent year and divide it by 12.
Well, I had one where the borrower had 11% declining income.
Fannie Mae dinged it, they flagged it and said that's declining income and they required stability of income to be reestablished. Hence you're going to have to get an audited P and L from the borrower to prove up to move forward. Whereas most underwriters would have gone ahead and used the most recent year divided by 12. Close the loan. Then if you sell it to Fannie, Fannie's going to run that file through their income analyzer and go hand you the findings. They hand you your file and say why didn't you use our income analyzer? It's free. Here's your loan. Buy it back.
[00:09:21] Speaker B: So do you think that it matters, Jim, who's going to be buying?
Doesn't even matter which, which correspondent you're going to be selling to as long as you have your reps and warrants with Fannie.
[00:09:34] Speaker C: I, I, I, I, I believe so. I just had one recently where the investor, I locked it with the investor as a, because I can't sell direct to the agencies yet because we're so small. I mean I just started the mor but, but I locked it as a Fanny. My AUS findings were du Fanny, they sold it to Fred and Freddie came back and didn't like my documentation on gift on largest deposits. I said well I underwrote it towards Fanny's guideline selling guide and Fanny's a U.S. findings. And they said oh that's fine, okay, we'll buy it. But I hadn't replied to it. So I believe yeah. That, that the investors should take it because you're, it's Fannie that's making the income call on that.
Like I said, the investor I sold was selling the loan to wasn't going to buy it until they talked to Fannie Mae and they said Mr. Carroll's correct. Buy the loan.
[00:10:28] Speaker B: I'm going to ask you a question.
I don't know if it's appropriate or not, but is there some kind of cost overlay when that happens?
[00:10:36] Speaker C: Not to my knowledge. I mean Fannie Mae doesn't charge you anything to use their income analyzer. And that's why when, when, when they came out with income analyzer and they said it's free to use, you don't have to use it but you can use it. I knew what that meant. Fannie Mae is going to eventually run it through there and if they've determined that the income they don't like it, they're going to make you buy that loan back.
But they don't have a charge to run it and I don't know of any investors charging anything if you, if you're going through it like an LLPA or anything for it.
[00:11:03] Speaker B: So there is a, there is an investor charge. What it is, is it sounds like a little bit more time consuming on an on the ops. But it looks like though that it's
[00:11:12] Speaker C: not time consuming because if you first off your underwriter is going to have to use an income calculating web web sheet or web form like you know, MGIC or so on like that Here in Friday harbor, my borrower's tax returns are there. I click and validate three different things and then I hit send and within three seconds I got my findings, I'm done.
[00:11:36] Speaker B: And actually you brought up, and you just brought up something because you said that you know whether you're going to. That's what other it's MGIC or PMI or whoever. So if Fanny, Fannie or Freddie, they might be able to buy the loan under this. But is the, is the MI still insurable under this as well should be.
[00:11:55] Speaker C: I don't know why I haven't validated that with them because of the only ones I've that I'VE done.
I think I have to check to see if any of them had mi. But the majority of them, they were borrowers with cash chunking down to skip the mi.
But I don't see why they would. I mean typically they say if the agents allow for it, they'd allow for it.
[00:12:14] Speaker B: Yeah, I would think so.
[00:12:17] Speaker A: Can you talk about the fat finger part as an analytical person?
[00:12:21] Speaker C: And that's the big thing because the fact that Fannie's approving it and you've interfaced and they've gone through the, they've used the tax returns and the transcripts to calculate it. That's huge. Because when you were talking about when I was saying if the underwriter uses an MGIC calculation worksheet, they could still fat finger it there. Basically, they may accidentally enter the wrong number and if they enter the wrong number, your reps and warrants is off the. You, you, you, you've got a problem there.
That's why it's key to interface because, well, speed because it's quicker, because like I said, it's about five minutes to manually enter it. But then you got the reps and warrants, which is key because I can't see how Fannie would come back to you on the income calculation when they calculated it and they approved it.
[00:13:06] Speaker A: I guess my. Just a quick follow up. So the consequence of fat fingering, right? Like you lose the weapon warrant. Why?
What's like once you lose it, you don't get it back. Can you just talk about like the, what the risk would be of using this and losing it or chancing fat, figuring it versus waiting later in the process. What's the mindset of, of how that losing the rep and warrant.
[00:13:33] Speaker C: Well, the main thing is because when you lose the reps and warrants, if, if there's something that goes, if the borrower goes in foreclosure or for whatever reason they want you to buy back a reforming loan, well then you, the reps, if you don't have that reps and warrants and they disagree with your income calculation, you're at a loss.
I mean you just, there's nothing. You can't fight back on that.
[00:13:55] Speaker A: I guess what I'm asking is like can you add more income like from another source and try and get the rep again in this calculator or is it once you run it if, if you don't loan.
[00:14:04] Speaker C: I wouldn't see how you could because you've already closed it.
[00:14:08] Speaker A: But you can run the income calculator way up front if you're trying to like multiple times to see if you can get different.
[00:14:16] Speaker C: You can run it as many times as you want, change it.
Yeah. And then, and when you're in one of the things you're doing when you're entering the income into Fannie Mae's income analyzer, even in Friday harbor, you can tie the DU case number to it which once you do that, that flags it and it's, it ties in with your reps and warrants to that the case number or the findings.
[00:14:39] Speaker B: So to say this is interesting to me because on the example you just showed us, Jim, you had declining income. But I think I read in the seller's guide one time that when you have declining income, you have to take the lower of the, of the. Rather than in the example you just gave us, we could actually use the higher of the two.
[00:14:59] Speaker C: Well, they did tell me to use the higher of the two because they did a whole overall risk analysis of the borrower's tax return and said because it was, it went from 72 to 68. That's really not declining. I mean it's is declining by definition, but it's four grand.
So. But Fanny said to use the 24 month average. And so when you used it, we're under 50 and we got the approved eligible.
[00:15:24] Speaker B: Was that a W2 employee or a 1099 or 1099 K1 bottom line type?
[00:15:29] Speaker C: Yeah, it was self employed schedule C.
[00:15:32] Speaker B: Okay, well that's even better because for the originators that are trying to figure out, hey, you know what, this is good, this is not so good. You know, if you were a realtor and you know, it wasn't so hot in 2024 or 2025, but 2024 was even better surprisingly then you could sit here and go, yeah, but the, the reps, we still have reps and warrants even though we had, you know, maybe the same amount of unit transactions, but the dollars were a little bit different. So the commission was like three or four thousand dollars less. So that, that's actually a big win.
[00:16:02] Speaker C: Yeah, I mean I, it's a game changer and I'm really excited because Fannie Mae, they do rental income, they're about to start doing wage ear W2, which is great because when if you got a borrower that's an hourly employee and you got variable hours, that's always where an underwriter is kind of on a fence because there's several different ways you can look at the income. Well, if you're in Fannie Mae is going to be Looking at the borrower's W2 wage earner, that's hourly and it's variable and they're calculating it. So be it. You're done.
[00:16:34] Speaker B: Wow. Do you think that's also going to work for, for non owner occupied loans where you know, you might have declining rental income causing the entire 40 to decline. But it was a, you know, you had that one bad tenant for the one unit and as a result the income declined and all of a sudden boom. Or is it only on wage earner income?
[00:16:55] Speaker C: But no, no, they're not. They do rental income. They do look at rental. You can calculate the rental income through income analyzer. The wager hasn't been done yet. I'm, I'm, I'll have to check and see when they're going to be doing it. I think it's supposed to be rolled out sometime this year.
[00:17:09] Speaker B: Got it.
[00:17:10] Speaker C: Which, that, that'll be great because like I said, that was the one thing as an underwriter, you're just on a fence when you got an hourly employee there. It's variable. You're just kind of like, well, there's a lot of different ways I can look at this income and that's where you, you don't. It makes you lose sleep enough.
[00:17:26] Speaker B: I want a lot of Facebook chat groups and they're like how, you know, the AUS says this but my, but I calculate the, my income to be this and so on and so forth.
How many originators do you think are uninformed currently to, to actually utilizing this way of calculating income?
[00:17:46] Speaker C: That's a very good question.
I think probably a lot because a
[00:17:50] Speaker B: lot of, I think so too.
[00:17:52] Speaker C: At a lot of shops, for whatever reason, management and underwriting try to want to make it a, like a cloak. Like they don't want them to see behind the lines. For whatever reason, a lot of them wouldn't, wouldn't probably want them to go to Fanny Mason, come out, analyze her website and calculate it, which it's free to the public. You just Google Fannie Mae income analyzer and it's right there and you just start entering the borrower's tax return information and it'll calculate it. But that's, that's what I think is very good for the originator. It's putting power in the originator's hand. Because Fannie Mae has already calculated the income. There's no argument your income is what it is.
[00:18:30] Speaker B: Oh yeah. I think what's really powerful about this is that you have an originator that may not know about this. Their Leader may be telling them, but, you know, sometimes originators just go.
All they're concerned about is marketing and getting deals. And then maybe they rely on, on a, on a loan origination assistant or some. Or somebody else order to help them calculate income. And this could be the difference between doing an agency loan versus a DSCR loan.
[00:18:58] Speaker C: Yeah. And that's the one thing I like about with. And you guys know how AI has just exploded. That's one of the things I like about with the software I'm using Friday Harbor, I can be in the borrower's file and they have this thing called Loan File Companion. And I'm able to go, hey, why did you flag this borrower's account for a large deposit? And it'll give you the guideline of the. Whether it's Fannie Mae's guideline or Freddie or if it's fha. And it's also, what's real slick is this AI stuff's gotten so smart, I'll ask Friday Harbor. I'll go, hey, why does.
What does Fannie Mae think about X, Y and Z on Mr. Smith's file logo? It'll give you what Fannie Mae's finding is. But then it'll say, but it's not pertinent to your file because it's an FHA file.
I mean, this stuff is with AI has gotten so slick, it's spooky.
[00:19:52] Speaker B: Do you think that it's important also for, for those who are in, in the buying and selling in cap markets for some of these mortgage loans that I'll be looking at some of these mortgage loans, I got the higher coupon. I can resell this as, you know, once I recalculate under the Fannie Mae income guideline calculation here. And this is. I could literally make an extra 10, 10, 10 to 12 bips in profitability on that loan.
[00:20:18] Speaker C: Yeah, yeah, totally. I mean, like I said, it's going to change things. Things are. This is a very interesting time in our business with all the changes that are coming on and the things that are happening.
Like, what was real funny is since on with Friday Harbor, I'm a consultant. I told them, I said, you need to review appraisals for me. They said, why is that? And I said, have a program or review it. Watch me review an appraisal. And they went, hold on, you're having to check off all this stuff? And I said, well, yeah, I said three different places in the appraisal. It references room count, bedroom count, bathroom count, square footage, which have to be manually entered by the appraiser. And I said, sometimes they're wrong. And sure enough, the second one I beta test form, it came back and said, we see a discrepancy between the description of the room count and the sketch. And sure enough, you go to page one of the appraisal. Description said six rooms. You go to the sketch and photos, it's seven.
And I call. The appraiser goes, oops, my bad. I got to correct that. Guess what? If that, that could have been a loan, I would have had to buy back. It's something because they could call that a deficiency. But the fact it caught that, and then the fact that it caught on another one, it said, we see that your 1003 has the property as a pud.
However, the appraisal is not marked a pud. So sure enough, the appraiser said, oops, my bad. And they corrected it.
I think you're going to see less buybacks because of the technology that we're starting to have access to now.
Because it's hard to f. Because when you got cleaner files, there's less things to balk. I had one file, I remember in Friday, Harvard, I went into it, I'd already underwrote the file and went, well, I forgot to use this software. I went and looked at it and went, you have three disputed accounts. I went, well, hold on, I only know of one derogatory disputed account because I don't care about non derogatory unless AUS flags. And sure enough, there was two non derogatory accounts that were flagged.
One was closed, paid like clockwork, one was open.
Now what happens when you get an audit? You need to have a letter addressing all three disputed accounts. So it just makes for a cleaner file, which means you're going to go through audits. Better. It's little things like that with the technology we have now that helps you sleep at night as a mortgage lender because we were under attack for so long because there was too many moving parts. And Michael, I think you, you said you're an underwriter too, right?
Yeah. So you know what I'm talking about. There's too much for us for one person to catch. There's way too much, way too many moving parts.
I mean, the technology that we have now, I've seen where with the AI it goes. You got an expired driver's license. I saw one where it said, we see on both, both pay stubs a garnishment that's labeled garnishment and another garnishment that's labeled Child support.
But neither. This is how high tech this stuff is. It said neither pay stub reflects a current garnishment which may indicate the garnishment is no longer in place. But you need the documentation to back that up. Sure enough, the borrower had a child that turned 18 in June of last year. I had the court document stating that the child support is no longer required because of that. And then but the fact that it was that smart to pick up that there's no current garnishment so it may be gone and you may, you got to have the documentation to back that up.
[00:23:48] Speaker B: Wow. I think that it's a tremendous help that we can have this type of accessibility. I'm going to have to hop off here. But speaking of help and accessibility, of course we have all of our sponsors and as we and as we move into the second half of our show, we can't do anything to help our community and lending without our sponsors. Jim, we're going to come right back to you and finish this conversation with Michael Kelleher.
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You know very interesting talk there in the first half Jim and I think you really pointed out some of the difficulties the industry has faced over the last year. Like if you were on the outside you would think technology's made everything efficient but what it has added is extra nomenclature around field names and from different software going into an LOS for different use cases.
One that comes to mind and you just talked about just the auditing.
You know banks having to submit a law which is for HMDA reporting, basically a sheet that an overall sheet that the auditors come in and if they see discrepancies they go audit. And once they audit, then, then you're just, you might as well get them a hotel room. And it just becomes a, a longer week, a longer month. And I think what I'm hearing, I'm doing some consulting on that side now.
You know, a lot of it comes from the nomenclature problem of. And I'll give you a perfect example.
So application started.
The LOS is.
It's very difficult for them to match application started with what the LAR wants. Because the nomenclature at the, at the office is, you know, if I hit click new application, that's what I think is an application start started. And then, you know, then they might have six fields of RESPA that they need to get and there might be a personal relationship where somebody doesn't know yet what the purchase address is. So the application has started, but we are going further into the application without it being started according to the six fields. And that might be what Larcal's application started. And so I don't think the LOS can even change to make it that happy because then they'd have to change names in there and then the loan officers would be like, I don't get what this system does. So, you know, you can't be everything to everybody. I think that's a big tech problem.
And, you know, it's all those little pieces that are pulling from somewhere someone's got to look at. I think you just gave like the biggest lift for AI is going to be handling that, that a human can't be clicking and out of screens. But if it just knows repetitively this is where, you know, map it together, provide the extra letters of explanation. So when they read the law, like it's okay, they find things if you have all the documentation to go with it. And that sounds where, you know, AI is a huge lift. Huge lift.
[00:28:01] Speaker C: Yeah. And that, that was like where I've seen that it is.
I had an auditor come in and was asking goes, do you think the technology software, do you allow it to underwrite the file? I said, absolutely not. And I said, you'd be an idiot if you did because it doesn't have a license to do it. I said, now, however, from a safety and soundness, it helps me underwrite a file because it's essentially like having 100 super underwriters underwrite the exact same file because every one of them is going to find something different.
I mean, it. I think that that is why I'm so excited about that technology, because I feel like it's a, a Backstop I've seen where I don't know if you have seen. One of the biggest things that senior underwriter at HUD told me has become a nightmare is the buy now pay later loans when you're like on Amazon or anything through Klarna or affirm because they're not on the borrower's credit report, but it's a monthly payment that you may have to count against the borrower and you'll see it on the bank statement and then the technology flags it and says this may be an undisclosed debt you need to investigate. And then sure enough, you got to go and get. And I found out, like a firm does not report to the credit bureaus, they said, unless it's over 12 months or if the borrower's gone delinquent.
So if those are on your bank statement and the underwriter doesn't flag it, you've got a problem because you just closed the loan and you got debts you didn't. Undisclosed debts you didn't document.
[00:29:33] Speaker A: Yeah, I was gonna say, I can imagine after like Thanksgiving, Black Friday, there's probably 11, 11 affirms that all of a sudden popped up. Right.
And yeah, that's, that's a. Yeah, it's
[00:29:45] Speaker C: got like, I've seen tons of those in just the past year on bank statements that I'd never seen before for a firm in Klarnus. And you're like, what in the world is all this stuff? And then the borrower has to go get the documentation, which is not great documentation, but it's something you gotta have in order to document that bot and that debt.
[00:30:03] Speaker A: So let's, let's add this document to the stage. And I think, you know, one place this could be just like a firm adding, you know, I think the gig economy is well over 80 million people now in this country.
[00:30:15] Speaker C: Sure.
[00:30:15] Speaker A: It depends on what type of gig you're doing, how you report income.
And this seems like it will be a great place to help people calculate and tap into those hard workers across America that help us get to where we need to go or help us, you know, eat. I think they see the biggest threat to finance for Gen Z right now, or maybe it's just anybody, but it's people not realizing the impact of using Uber Eats every day because it's so easy. It comes off your credit card. You don't really notice all these fees and delivery and next thing you know you, you're not paying your. It down to zero. And it's a snowball in itself. So all this New tech that consumers are using are popping into the world.
It's easy to just refinance your old book of business. But if you want to go out there and tap new avenues, you got to know how to, you know how that's working and how to underwrite it. Can you dive into maybe the sheet a little bit for us here? I know it's.
[00:31:22] Speaker C: Yeah, yeah. Basically what it is is like on that, this document here, this is the one I told you about, where it's declining. I said it was 82,000, but obviously was 83 the most recent year because this was in early last year. This was the first quarter last year. The borrower hadn't filed their 2024 yet.
So I had 22, 23, as you can see, 23 is at 78. Now, what that's going to be is most people would take that number divided by 12.
Most underwriters.
But Fannie Mae saw that, saw those two and all the other information that was in the tax return and said to take 22 and 23 divided by 24.
And it said, use that income. And then like I said, the main thing is it said it's level. And I didn't have to prove the stability of income, meaning I didn't need to get an audited P l showing that 2020 or because we were in 2025 is. Yeah, right there. That's where I highlight. Yeah, right down there. It says income is considered level. And then it goes on that last sentence, no additional documentation is required to support stability.
That to me is a game changer. Because when I told, when I'm earlier in the. On this, when I told you I had one, was 11% declining. As Michael said, most people, Fannie Mae says to use the most recent year and divided by 12, Fannie Mae saw both years, deemed it as declining, and wanted stability of income to be re. Re established.
Now that, to me, yeah, that hurt that file. But I could sleep at night knowing that Fannie Mae made that decision. I didn't close with 12 months divided by 12. Fannie Mae saw it, made the calculation, said, hold on, we got a problem here.
I'm totally fine with that because I would have, if you divided it by 12, closed it, delivered it to Fannie and something goes wrong and Fannie runs it through their income analyzer, go, we think it's declining and you should reestablish stability of income. Here's your loan. I mean, that to me, I mean, it's just, it's going to make you sleep better at Night because they're making the decision because that was the big deal. Like I said, DU came out in the mid-90s. The big thing was Fannie Mae and Freddie. They're approving the file based on the data you put in it. Now they're approving the income they're calculating. And I have no problem with that because that is off. That's the one thing you'll find with an underwriter that they'll especially, like I said, if it's a wage earner and they're variable hours, you can calculate their income so many different ways. You're just kind of like, which way do I go with this? And that's when they start looking at compensating factors to figure out if they want to get a little more aggressive on the income calculation.
[00:34:00] Speaker A: Yeah, it almost seems like it's like ways for underwriting where you're not going down roads you don't need to go to. The most efficient way to get there, most transparent way to. And I'm talking about ways, the driving app. But even when I look at observation 11 a year to date, profit and loss is not required. Then it lets you know, if you do collect one and put it in the file, all of a sudden number 10's out the window. And it sounds like you just opened yourself up.
[00:34:29] Speaker C: Yeah, you just opened yourself up. You just shot yourself in the foot because you put that in the file. That's why I always tell people, I want you to give me X, Y and Z. I don't want anything else unless I need it, because once I see it, I can't unsee it. And once it's in my file, I can't get it out. That's why I only ask for what's
[00:34:45] Speaker A: required and just to read it. For our audio listeners, we're available on 17 different podcasts.
Year to date, profit and loss is not required. Again, this is coming from the anime calculator.
The lender may choose to use a profit and loss, audited or unaudited, to support the documentation of the stability or continuance of the borrower's income. But if, and this is the part I was pointing out, if the profit and loss statement is provided in the loan file, the lender must consider the information when determining the stability and continuance of the income. The lender may need to collect additional documentation to support this qualifying income. So it almost contra. You know, if you do that, it's saying, you know, throw out number 10, which was.
No additional documentation is needed to correct it's.
[00:35:40] Speaker C: Kind of like saying you, we can't unsee it. Once you put it in there, you've opened. You open Pandora's box.
That's why, like I said, as an underwriter, I always say, don't give me something because I can't unsee it. Just give me what I, what I need.
[00:35:55] Speaker A: Yeah. And, you know, it also gives some risk eligibility. It gives some verification and conditions there.
So it to me puts, like everybody's trying to do, it puts action items left, you know, further up funnel. Because the number one frustration of a customer is, and when I originated, well, if you just told me about this two weeks ago, it wouldn't have been a problem. Now you know why. Why is it taking so long? They love to tell you that whether they would have been nice two weeks ago or not, they have the excuse to be able to say that.
[00:36:25] Speaker C: And it's, it's funny you say that with the technology. Now, one of the things I said when I was consulting with Friday Harbor, I said, well, hold on. You're telling me your thing can see numbers and calculate things? They said, yes. I said, well, then you could take a, let's say a borrower makes $1,000 a month and you got the June 30 pay stub year to date should be $6,000.
They said, well, I said, then you could flag it as a condition if it's not $6,000, because we need to know why it doesn't. It's not 6,000. I said, I can already tell you a loan officer is not going to look at the year to date. Some will. 99% aren't. You're lucky if a processor does. But it's even definitely an underwriter is going to look at it. And now it's got to be explained, which means that that's usually right before closing and all heck breaks loose because everyone's saying, why are you just now asking me for it? Because it's usually easily explained, Michael. It's usually because there was either a medical leave of app of work or if it's higher, they got a raise. But now you got to document it so that it's just the technology now is making it to where it's empowering the underwriter to be able to make a decision and efficiently and move on to another file. They'll be able to do more units and get more loans closed because they know they've got the technology backing them. Because, like I said, there's too many things for one singular underwriter to catch that we have to look at it.
[00:37:52] Speaker A: Yeah, because it's not just looking at the file the way it was when you first started in a manila envelope. There are softwares that the underwriter doesn't even use. It almost has to oversee and make sure the processor used it correctly.
[00:38:04] Speaker C: It's like I said, I mean the investor I was selling this loan to in first quarter of 2025 didn't even know about Income Analyzer. And they were going, well we don't even know what this is. We got to ask our fanny rep. They went, oh wow. I mean, and there's so many new technologies are coming on so quick. It's just, it's crazy right now. I mean, you know it, I mean you go to all the conferences, you've seen all the, the influx of all the technology now.
[00:38:30] Speaker A: Yeah, it's, it's everywhere. Don't get paralyzed by it. But it certainly is, it's a lot, a lot of it overlaps and it's, I was telling somebody the other day it's okay to use used two solutions actually they were a Friday harbor user and talking with them about silver work and I was, you know, it's, it's okay to have and it's okay that some of the stuff overlaps. I mean it's going to be easier for the vendors to overlap each other anyway with AI there's some that are
[00:38:58] Speaker C: better niche for what you want. You know, I mean if you want that's just only ops based or one you want that sales based. I mean there's so much that there that can be. It's almost like a boutique on technology now what you want, they can customize pretty much any way you want it.
[00:39:14] Speaker A: Yeah. I have an interesting question for you here. I've been reading this.
How do you interpret this one? Very interesting. So the I'll, I'll sum it up it. It says one of the verification conditions has to do with maybe you could find it and read it but has to do with the fact that IRS looks at meals and entertainment differently in different years. It wants you to review the how they did it and how they have that number.
Now is that something where if they deducted $2,500 for meals and you don't need that extra 2,500, is it easier to just say well we'll take it down 2,500 so we don't have to look?
[00:39:57] Speaker C: Yeah. I mean when you're calculating the income. Yeah. When you're using the income calculator sheets, they'll want you to Back that out for the meals, which is, it's kind of funny, but it's funny you mentioned that, because there was one.
I had a post close audit on a file and they came back and said, we see that there was meals that was not deducted in. I think it was. There was. Because there was two different meals declaration sections. One, don't hold me to this. I think one was called M1, one was M2, but.
But it was an M2. And so I, I called my accountant. I said, I've never, I had personally never seen anyone put it down in that box. It's always in the upper box, which I have to deduct.
And so since the, the, the form, the income calculation form drives you to that, I think it was M1 and not M2. I didn't deduct M2. Post closing was ha. Stipping me for it. And I called my accountant. I asked him what it was. He goes, oh, no, that box, you're just declaring you incur these expenses, but you're not deducting them from your income and getting the benefit. I went, oh, okay. And so I went back to the post close QC department and I said, hey, I didn't have to deduct that because of X, Y and Z. And their supervisor came back and said, Mr. Carroll's correct on that.
So. But that's one of the things you would deduct. Yes.
[00:41:16] Speaker A: When you're factoring in the tax code and you're factoring in an industry that already has outliers left and right, and edge cases, we call them in tech, it'd be unfair to say that somebody has seen the exact type alone before, you know, to the T. Or if they have to say they've seen every type alone, it's, it's impossible. So to have some of these helpers is something I think people should embrace. And I think if you're an underwriter, this isn't replacing your job. Look at all the different variation and conditions.
[00:41:49] Speaker C: Like I said, it, it's helping the underwriter underwrite the file. And once again, it's helping the underwriter underwrite the file with confidence to be able to go ahead and approve a file and move on. Because sometimes you'll find an underwriter on a fence and taking their time on a file. Well, if when you got cut and dry and Fannie Mae's calculated the income, you're done, move on. I mean, there's, there's nothing to, there's nothing to him and haul over.
[00:42:12] Speaker A: And now does Fannie and Freddie have something similar here for appraisals yet or valuations or is that just when you run it, you get waivers?
[00:42:22] Speaker C: Yeah, yeah, I'm, I'm not aware of anything like that on the appraisal side. But that's why I started having Friday harbor review appraisals forming because I, I'm on a member of Lenders one and one of the community.
I'm a community bank. One of the group, Community bank meetings that we do with other members, people would talk about having to buy back performing loans from Fannie and Freddie because of appraisal deficiencies. And I, and I'm, I said, so I told them to start looking at that because I wasn't aware of software, but it may be out there that, that could review appraisals. Because there's. Like I said, it took me about. Takes you about 30 minutes to review an appraisal for a lot of stuff that a computer can check and catch. Like I said, where the pud wasn't marked, the room count.
I think I've seen it where it flagged. It said your file has a flood search showing you're in a flood zone, but the appraiser didn't market it in a flood. Just little things like that. Because Fannie and Freddie are making people buy back loans that for appraisal deficiencies. I'm not a rocket scientist, but I have a feeling that they may be trying to make people buyback, reforming loans all of a sudden in 2025.
Because coincidentally they're also trying to get back into privatization, which means you need to raise capital. What's a quick way to raise capital?
And people buy back some loans. Wow, good point.
[00:43:45] Speaker A: Yeah, good point.
[00:43:48] Speaker C: Because if they're going to go back to privatization, they're not going to have Uncle Sam's checkbook anymore.
[00:43:53] Speaker A: Yeah, they're going to need that capital.
Very interesting. And I do think having a software solution and leadership that understands Fannie and Freddie findings. Right. And maybe even fha, like able to do all three provides kind of. We were talking earlier, it's okay to have multiple vendors. So you might have a AMC appraisal company that says, yeah, we review a. That we do that for you. But you don't do it in the way you just described the flood cert. And because you don't have access to that part of it, you wouldn't know that part even you know.
[00:44:26] Speaker C: And that's my AMC didn't catch those things that this software caught. By the way, my MC didn't catch Those.
[00:44:33] Speaker A: Right. Because they don't know the, the, they don't cover all of, all of that.
[00:44:37] Speaker C: Nor should they. Like I said, unless they're having a software do it, it's a person that's doing it. And guess what happens when a person's going to do something, they're going to miss it. Don't give me a problem. Software is not the greatest thing since sliced bread. It does make mistakes. That's why it's not going to replace an underwriter. But it's going to help the underwriter to underwrite files. I think you're going to see cleaner files. And when you mention on fha, what's, what's funny? Fha. I remember one time I had an audit by FHA and they wanted to know why I approved these files that went into fault. And I went and they were talking about 21 loans and I went, you do realize that 20 of those 21 loans, total scorecard approved.
I said, was I supposed to deny those files that were in under certain areas? And, and they were. Minorities are like, no, you're good, you're good.
I mean, yeah, it's the machines run
[00:45:30] Speaker A: it through parts that maybe people don't because they don't, you know, they, they've run through five types of loans and they get a no. So they stop doing it. And the sixth one would have been an lmi, you know, opportunity.
It definitely opens that door. I, I think also that's what I
[00:45:48] Speaker C: think what's going to be great about technology, I think the technology is going to be such, it'll be able to review your file and be able to help the loan officer to know, hey you, you're, you're structuring this loan to be a FHA loan. But the borrower would probably benefit a lot more if you take them through one of the like one of Fannie or Freddy's like home, what is it? Home ready I think is there for their first time home buyer or low income.
The technology is just, I think it's helping the mortgage lender more than anything else because for so long we were beat up left and right so bad on things because of the subprime meltdown.
[00:46:23] Speaker A: Yeah, I, I, I couldn't agree more. And I think like you said, it's going to get to better. This is the tipping point, a better new customer service world. Like you run that income calculation and eventually just being able to reach out to the accountant up funnel and say hey, for your client, this is what I need.
And it's not just I think today you get a list of what you need. This is almost. I'm going to give you a list of what I need and what I don't need.
[00:46:50] Speaker C: Right. And what's going to be great for a loan officer. Typically a lot of loan officers, some of them are very good and will calculate self employment income. But this way if they're in Friday harbor, they got the borrower, they just click the button and within three seconds they got the income calculation. They hadn't even. They're not at the mercy of waiting for the underwriter to calculate income. I mean it's a great time to be in the mortgage business because we are starting to have strives to where we we're going to be able to do. Because you know this and you've heard from everybody right now it's about being able to produce more units with less cost. And the way to do that is to streamline how many hands are touching a file.
[00:47:29] Speaker A: Yeah. And not having the most expensive person working on things that.
[00:47:34] Speaker C: Oh the things they don't need to because yeah, an appraiser needs to review the appraisal. But there's a lot of things that they could already be caught for. Like I said, hey, this is not in a flood, you know, just little things like that. It just, it from a safety and soundness perspective that technology is helping everybody.
Yeah.
[00:47:53] Speaker A: I think a lot of people also look at it from like the past, like pipelines of the past. So an underwriter that has this results and then can go through these findings faster with tax returns.
It should signal to the mortgage company, let's go out and advertise more self employment borrowers and get more of these tax return decisions with this technology into our underwriters hands.
Because we can, we can close more of these, we can be more aggressive on our marketing, our advertising versus looking in the past and saying well even if we free up these underwriters, we don't have that much extra work for them. It, you know, go, go make work like go make hard work because you have more skilled underwriters available.
[00:48:41] Speaker C: That's why I've always cross trained people because that way you, if you cross train somebody, they're not a widget maker. If you get efficiency and you're freeing some people up, then you can have them more things. And I think that's going to make for better all around community at work. It's also going to make better cleaner files because you're going to have more people have more time to do other things than just I'm going to make this widget move on. You're waiting for the next widget.
[00:49:07] Speaker A: And we appreciate all this time talk about high profile person, you know, best use of time. So we, we appreciate you getting on here and really educating. I think Fanny's going to owe you a big thank you.
Educating everybody. When you came to me, you know, it really stood out. This is very, very important.
[00:49:24] Speaker C: Anyway, I told you we need to talk about this because I think it's a game changer and the more people that know about it, the more it's going to help because overall it's going to help the borrower and the consumer. That way they know they're not getting a surprise at the last minute because it's finally hit an underwriter's desk. It was underwritten by Fannie the income calculation on day one because the loan officer had the file click the button and got got the finance.
[00:49:47] Speaker A: And if anybody has any questions on this, how can they reach you?
[00:49:52] Speaker C: You know, you can, you can either get my email address or you can hit me up on my cell. Either way, my cell number is 501-940-9797. I love talking with people about mortgage. In fact, I'm, I'm kind of a mortgage dork. I actually had somebody tell me one time I said, wow, I wish I had a hobby. And they said, jim, you do have a hobby. Mortgages.
[00:50:13] Speaker A: Yeah, I think that's me too. So I appreciate, I appreciate you always willing to put it out there. Want to thank you for coming on and obviously thank you for joining us on this journey into the heart of mortgage innovation.
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