Mortgage underwriting is an incredibly important role that is unfortunately looked down upon by many mortgage brokers and other people involved in the mortgage sales channel.
The role of the mortgage underwriter, who is generally employed by the mortgage product manufacturer, is twofold.
Firstly the underwriter must protect the product manufacturer’s interests. They must ensure that the borrower is fit to take out such a mortgage. To do this there are a number of criteria which we will cover off later.
Secondly, the underwriter must protect the borrower from committing themselves to a loan advance that they may not be able to afford. Just because a servicing calculator and a mortgage broker things a person can borrow a certain amount doesn’t necessarily mean that they’ll be able to repay the full advance.
There is also a third function, which is arguably the most important of all. By taking care of the first two factors above, the underwriter is helping to protect Australia’s entire economy from trouble.
Without advanced underwriting by the mortgage product manufacturers and lenders, we’d have a huge percentage of the population who could not repay their mortgages, and a banking industry that would face enormous difficulties with bad debts. Another obvious side effect of this situation would be rapidly declining house prices, as we saw in the US market thanks to the sub-prime debacle.
As we can see, underwriting in the mortgage industry is very important not just for the industry itself, but for the Australian economy as a whole.
Unfortunately, mortgage brokers and other industry participants in the sales channel are conflicted when it comes to good underwriting. Of course they don’t want to lend out money to people who can’t afford it and create bad debts for the banks and product manufacturers, but at the same time it is in their best financial interest to facilitate as many mortgage as possible for the most amount of money possible.
This situation is brought about by the commissions that product manufacturers pay to the sales channels, be they brokers or in-house staff.
The use of commissions to remunerate sales staff in the Australian mortgage industry is unlikely to cease any time soon, so the industry as whole must work to ensure that underwriting starts at the more advanced stages of the mortgage process, and that can only occur through greater training and education of the mortgage brokers and other front line sale staff.
