Lenders will be able to give would-be borrowers a better explanation of why they've been turned down for a mortgage in the latest version of one of the most widely used automated underwriting programs.

With the release next month of Desktop Underwriter 5.0, Fannie Mae will provide lenders with application-specific details that explain the system's underwriting decision. Lenders can then share that information with borrowers.

If a loan does not receive an approval recommendation, for example, the lender will receive a detailed explanation of why it was referred to a human underwriter for further review. And if the reason was credit-related, the system will offer specific messages on the information in the borrower's credit report that affected the recommendation.

A federally chartered financial institution, Fannie Mae does not make loans directly to consumers. Rather, it buys mortgages from local lenders and packages them into securities for sale to investors world-wide. And since lenders depend on the company to replenish their money supplies, they tend to follow Fannie Mae's rules.

According to Pamela Johnson, vice president for single-family mortgages, four out of every five loans submitted to Fannie Mae electronically are approved for purchase. In addition, 5 percent are referred to an underwriter, who eventually approves them after checking such details as debt-to-income ratios or wether the borrower has enough cash on hand and in reserve.

But 15 percent of the loans apps are "referred with caution," meaning they don't meet Fannie Mae's guidelines. Fannie Mae says lenders shouldn't reject loans just because they don't conform to its dictates. But in actuality, few underwriters are willing to go up against the machine, so they usually do.

Under DU 5.0, which is being tested by 16 major lenders now for a national rollout in August, at least lenders will be given the information they need to help borrowers understand why they've been turned away and what they can do to have a better shot at the brass ring the next time around.

"Consumers are entitled to know" what went into the underwriting decision, Johnson said. "We're committed to making sure they have the information they need to better understand our decision."

Lenders also will get messages on loans recommended for approval because often they are cleared electronically when they would have been turned down by a human underwriter. But it is on the more challenging applications where the new tool will really pay off.

"DU 5.0 helps us provide more point-of-sale decisions to consumers and gives us more information to provide to consumers so they can better understand the mortgage decision," said Mark Braden of Irwin Mortgage Corp., one of the 16 test pilots.

About 1,250 lenders currently use Desktop Underwriter. Together, they run some 300,000 loan applications a month through the program. Not all close or are sold to Fannie Mae. But the company says that about 55 percent of the loans it currently buys are processed through DU. Last year, 1 million of the 2.5 million loans purchased by the company went through the system.

With the release of the latest version, Fannie Mae also is replacing credit scores as a measure of credit worthiness with specific characteristics taken directly from borrowers' credit reports, including, among other things, delinquencies, bankruptcies, foreclosures, credit card limits and credit inquiries.

"We continue to believe (credit scores) are a power predictive tools, and we still want lenders to use them when they process loans manually," Johnson said. "But we want to make the automated underwriting process more transparent and get underneath" a mere number.

DU 5.0 also will give lenders and their customers point-of-sale loan decisions on a wider variety of mortgages and offer an enhanced risk analysis and review process that could cut the cost of appraisals for borrowers.

Published: July 19, 2000

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When Lew Sichelman first started writing about housing in 1969, he was the youngest real estate writer in the country. Now, 37 years later, he's one of the oldest -- and most decorated. He has been rated the top housing columnist in the country by the National Association of Realtors as well as by his peers in the National Association of Real Estate Editors. Indeed, NAREE has recognized his work on numerous occasions. One year - due to his advancing age, he can't recall which one - he earned top honors in the annual NAREE Journalism Contest in three out of the four major writing categories. It was the first time one writer has won so many NAREE awards in a single year. Known for his ability to make even the most difficult topics understandable, Sichelman also has been honored by the National Association of Home Builders and the Mortgage Bankers Association. He began providing in-depth coverage of and consumer-oriented information about housing and housing finance at the Washington Daily News, where he was real estate editor. He held that same position for nine more years at the Washington Star, which purchased the News in 1972. The Star, a so-called "writer's newspaper" which also had the misfortune of being an evening paper, was put out of its misery in 1981, and Sichelman, who had begun self-syndicating his column in 1978, decided to become a full-time columnist. Today, his column, "The Housing Scene," is distributed by United Media to newspapers throughout the country. He also is on the staff of National Mortgage News, an independent newspaper which is considered the bible of the mortgage business. And he writes for numerous other publications, including MarketWatch.com, where he answers readers questions once a week, Sports Illustrated (don't ask), RealtyTimes.com, BigBuilder and others. Sichelman is married, the father of five and grandfather of eleven.