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Chase: Overlays are to Protect Loans, Not Avoid Repurchases

Two Chase executives hosted a webinar earlier this week to share with NAR members how their bank’s loan processing works. They talked about the documents they require borrowers to submit, the common application problems they’ve identified, and what some of their underwriting considerations are.

For banks, underwriting standards are proprietary, so there’s only so much executives can say about what their bank looks for in loan applications. But they addressed an issue critical to real estate professionals, and that’s the credit overlays that Chase, like all of the big national banks, impose on borrowers.

Kevin Watters

Credit overlays are bank underwriting standards that go beyond what’s required by FHA, Fannie Mae, and Freddie Mac, and they can constitute an unexpected roadblock to borrowers who think they’re in good shape in applying for a loan only to learn the bank has its own set of standards on top of those of the secondary market agency.

These overlays differ by bank, but an example might be a bank requiring borrowers to have a credit score of, say, 100 points higher than what the federal agencies require.

In the webinar, we asked the executives if Chase’s credit overlays are in response to the repurchase risk they face from Fannie and the other agencies. Under agencies’ repurchase requirements, banks must buy back loans they’ve sold to an agency if the loan goes bad and the agency determines it wasn’t underwritten in conformance with their requirements.

Repurchase risk has been a big issue for banks since the mortgage crisis hit, and earlier this year it became such an issue for Bank of America (which took over the troubled loans of now-defunct Countrywide Home Loans), that the bank opted to stop selling loans to Fannie Mae.

In the webinar, Kevin Watters, a Chase senior vice president who heads up the bank’s retail lending operations, said the bank sets its standards above what the agencies require based on their internal default modeling for a particular program. It’s “less about repurchase risk and more about borrower ability to repay,” Watters said. “We look at payment history on a specific program, so even though agencies say, ‘Here’s our credit box; it’s okay for you to sell to us,’ if our data indicates that the default rate is high for a borrower with a particular credit profile, we won’t make that loan. Even if the agencies’ credit box is a little wider than ours, we want to make sure we’re comfortable with it.”

Chase is one of the country’s most active home loan originators today. It made $46 billion in home loans in the second quarter of 2012, or 11.5 percent of all home purchase originations, and it’s made almost 800,000 home loans since 2009, not counting refinances. In refis, it’s made about 1.4 million loans since 2010.

Watters says any loan that’s turned down goes through automatic review by another underwriter to see if the first underwriter overlooked anything, including compensating factors that could allow an otherwise unqualified applicant to get a loan. For example, the applicant might be asking for a loan with a low loan-to-value ratio or have substantial assets even if their income isn’t that high. Applicants are also encouraged to seek an additional review any time their application is denied.

Watters said there are some advantages to Chase banking customers applying for a Chase loan. These include more flexibility in underwriting for borrowers to get a higher LTV loan. “There are some benefits to banking and getting a mortgage in the same place,” he said.

Although the bank’s loan programs differ widely, the bank will accept in some cases applicants with a credit score as low as 620, but the more typical minimum credit score for most loans is 680, said Jack Rubin, Chase’s national underwriting manager.

The bank has a specialty group of underwriters who look carefully at applicants exhibiting wide fluctuations in income, which is not uncommon with real estate agents and others who earn commissions. As a rule of thumb, the bank prefers to see income fluctuations stay within a 30-percent band, year-over-year. “If something fluctuates 30 percent or more over a year, we need to really understand that, and understand how to best calculate income,” Rubin said.

For these applicants, as well as any applicants that have an unusual credit or income issue, the bank encourages the addition of a cover letter to the application to explain what’s behind the issue. “Anything they can explain to us, the more information we have, the better credit decision we’re going to make,” said Watters.

Like banks generally, Chase encourages home buyers to get a pre-approval before they make an offer on a house. A pre-approval is issued by a bank underwriter, so it has a relatively strong correlation to the loan the applicant can actually get approval for. As long as the applicant follows up that pre-approval with documents that validate the income and other assumptions made in the application, it’s typically a smooth process to loan approval. A prequalification letter is a more informal estimate of what the borrower can afford and isn’t issued by an underwriter.

Chase has a separate underwriting division for condo loans, and in its condo loan programs it mainly follows FHA, Fannie Mae, and Freddie Mac underwriting requirements. That means if the condo building itself doesn’t meet the agencies’ requirements (for example, too many units are being rented out compared to those that are owner-occupied), then the applicant might have trouble getting approval. That said, depending on the circumstances, the bank will sometimes work with the owner of the condo building to see if there are things that can be done to bring the building into conformance with agency requirements.

In other cases, if the building doesn’t meet requirements but the applicant would nevertheless make a strong borrower, the bank might make a loan for its own portfolio. We’ll “look at making the loan, knowing it won’t be salable,” said Watters. We’ll “look for their overall relationship with Chase, assets and income, look at it on a case-by-case basis.”

The webinar was held Sept. 4. Access it now.

Robert Freedman

Robert Freedman is manager of multimedia communications for the NATIONAL ASSOCIATION OF REALTORS®. He can be reached at rfreedman@realtors.org.

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