It's Long Overdue

[Secret!]

It's Long Overdue

The origination side of the industry needs to get back to the basics, like what is a good loan? Not simply who can be found that is aggressive/foolish enough to fund this puppy. This sort of enlightened thinking will help keep the industry strong and moving forward.

There was once a time when most LO's and Brokers were former portfolio lender employees, so that kind of an attitude was common in that, they wouldn't put a 'loan on the books' simply because they could. They would think about the consequences of approving and getting a loan funded(not only to their pocketbook and the customer but to the funding source).

Sound credit decisions are based upon the 3 Legged Stool custom. Character, Capacity & Collateral - it is just that simple, yet that complex. As in a three legged stool, the stronger each leg is, the more solid and reliable it will be.

In a nutshell ...

Acceptable 'Character' is basically a detailed analysis of the credit report of an applicant, along with their stability of residence and employment/income. On balance, there is a scale here - from top-notch gold plated all the way down to lousy. The further away from lousy, the stronger that leg of the stool is. This is considered the most important leg by many long experienced credit grantors. This is but a quick definition.

An applicant 'Capacity' to good lending decisions is critical, as it is essential that any customer has the ability to repay their debts. The Character leg's strength tells us their willingness to take care of their obligations in an acceptable manner. This Capacity leg however, measures their capacity - their ability - can they afford it? This leg of the stool needs the support of a likely reliable and steady available future income stream so the customer has the funds to make timely payment.

The 'Collateral' which secures the transaction is the third leg of this three legged stool. Obviously, the more security which collateralizes the loan the better, and the stronger the stool will be. This is thought of by many however, as the least important leg of the stool, as it can lose value and is not always of satisfactory quality, or sometimes even accessible upon default.

With two sturdy legs for our stool, with only one weaker, even though not ideal, is still an adequate formula. Two of the legs weakened is generally a recipe for disaster. Having all three of the legs fragile at origination, barring a miracle, is most certainly a future loss.

An ingredient missing from the training regimen of most employers in our industry these days, is teaching this concept to all personnel. Sure, processors may get a small bit of it via osmosis; naturally underwriters and institutional investors should all be intimately familiar with this sort of thinking; yet it is our observation even many of them are not. Unfortunately mainstream Loan Officers don't have the first clue what it's all about, all too regularly. They see themselves as sales experts, closers, and regrettably not loan/borrower analysts. Yet, in most cases, those very LOs are the face of our industry to nearly everybody outside the business! Shouldn't they know what a good loan looked like?