Poor underwriting works more than 85% of the time, when the market is rising, says Odegard. “In fact, it is so easy, even a caveman could do it. Mistakes are masked, ignorance forgiven and laziness is concealed… until the market changes and all these errors are not only exposed, but magnified.”
With the recent decision by the U.S. Federal Reserve to keep interest rates lower, average fixed mortgage rates have declined – which has boosted applications for new loans.
High level underwriters understand that markets do not continue to rise forever, says Odegard, and at some point there will be a sea-change.
“Perhaps that change will be a small drop, or perhaps something more dramatic,” he says. “Whichever way it goes, the best underwriters underwrite deals today for tomorrow’s eventual anemic conditions.”
Odegard argues that lenders need to be on guard.
“It is important to watch leverage levels and location when everything feels good and seems to work, so you avoid the harsh financial hangover of tomorrow,” he says. “Some locations are better able to weather a downdraft than others. Some sponsors will work with a lender during difficult markets, some sponsors will compound the problem.”
“Underwriting needs to stand the test of time, not the test of the moment,” says John Odegard, president and senior partner with Seattle Funding Group. “It is so easy to loosen the reins on underwriting; you have to keep a firm grip on the quality.”