As the numbers of applicants for mortgages continues to rise, the need for sharp underwriting has taken on a new importance in the mortgage loan sector – especially with memories of the 2008 market crash still fresh in lenders’ minds.
“When assessing cash value of the collateral backing up our loans, location is king,” says John Odegard, the CEO of Seattle Funding Group. “For this reason we typically stay in core locations within the metro markets we service and in markets we know well.”
That represents an increasingly key underwriting point for lenders across the country, with originators also identifying the role location plays in getting more complex files approved.
Securing the property’s location is the primary component that ignites market demand, adds Odegard, should it be offered for sale on the open market.
Another underwriting issue revolves around property type and fit. Specifically, condition and function are the second key to the screening process.
“Certain property types have a larger audience of prospective buyers than others,” says Odegard. “On the highly marketable end of the scale are properties securing SFG loans, such as single family homes, buildable lots in matured neighborhoods and well-located apartments, office buildings, retail and light industrial that meet general market demand.”
These property types not only have the largest audience for resale, but they are also the easiest properties for incoming buyers to get financing. For this reason they are more sellable and maintain higher degrees of value stability.
The third key is borrower quality, which must be appropriate for the property/project, including credit, character, skills and liquidity.
“This analysis may differ widely,” says Odegard. “For example, between a stabilized retail center with long-term national tenants to a ground-up construction project.”
Securing a client is important, but so is their release from the loan.
A fourth priority for underwriters is that borrowers must have an achievable financial plan for loan approval, including a transparent and sensible strategy to exit our loan prior to its maturity.
The fifth key is something that SFG employees take great pride in, something they call the “value debate.”
After all the data is in, SFG fund managers and underwriters grind through spirited “what ifs” to arrive at a value we can count on to protect investor capital, says Odegard.
Last but not least is the all-important loan to value ratio.
“Only after all elements above have been thoroughly vetted – location, property type and fit, borrower quality, exit strategy and value debate,” says Odegard, “can an appropriate Loan to Value (LTV) ratio be established.”
The rookie mistake is to simply order an appraisal and buy into it, he says, or believe one can avoid the disciplines of vigilant underwriting simply by lowering the LTV.