The Stockdale Paradox

It just occurred to me as I was doing a very normal thing, that it might not actually be "normal".

I have a client that was referred to me by an Agent.

We met last week. I took the loan application and promptly went to an Automated Underwriting Engine. This is a lenders computer program that will determine if a loan is approved or declined. After running 15 different scenarios, calling and discussing the loan with various lenders, I found what I thought was the best loan program for this clients situation. I submitted and received an "Accept". In lay terms that's an Approval. I could have stopped there, issued a Pre-Approval Letter and moved on to the next project.

Computer Underwriting vs. Human Underwriting

There's a tech term "Garbage In - Garbage Out", which means if I put incorrect information into a program, I'll get a faulty answer. The same goes with AU decisions. Any Monkey could get a scenario to approve initially. But that loan may be declined when a real human looks at it for final approval.

I've been doing this for a while (14 yrs) and I know how to compute income, reserves, and other pertinent factors that go into a loan approval. In today's rapidly changing market, the guidelines that lenders fund loans by is changing daily. I trust myself, I don't trust a computer program. So I took an extra couple of days and had the loan file looked at by a human underwriter. They concurred with me just now and issued a Conditional Loan Approval.

Facing Facts, the Truth and the complete picture

As soon as the approval cleared the fax machine I called and talked to the Agent and left a message for the Buyer. I also completed a lengthy email to both detailing exactly how the approval was structured, what conditions we have prior to docs, what conditions prior to funding, and any and all possible bumps in the road I foresee. I included the bad news as well as the good news.

This took an extra half hour of my time. Yes, I could have just told them that we were Pre-Approved and left it at that. The road that many loan officers take is called the path of lease resistance. I could have left out some of the simple conditions. I could have withheld certain questions the underwriter had with the file. In classic cars we have a saying, "That's a 20 foot paint job". That means the car has great looking paint if you are far away, but get closer and you see a different story. While the "Half Truth" may look pretty as the car passes you on the road, the full truth is what your parking in your own garage. The "Full Truth" is what I pass along to the people who trust me. The "Half Truth" is what a loan officer passes off to "make the sale". That's not how I've ever done it.

Volatility in the marketplace

Strange as it sounds, a Pre-Approval means less today than it did a month ago. Why? Due to the Volatility in the marketplace that Pre-Approval is not guaranteed to hold. I'll relax and exhale only when I see the funds have wired to Title. Until then - anything can happen. AHM left the building with what $450,000,000 in loans ready to be funded? And they were a top ten Alt-A lender! News abounds about the possible Countrywide doom. They' re #1. That means nobody is safe.

BTW: If anyone tells you different, run away! They are either Liars or Knuckleheads and don't know any better.

Vice Admiral James Bond Stockdale

This isn't a case of pessimism, certainly not optimism, and I'm not so sure it's realism. But it's something I do daily and I think I may be "Abnormal". Is it Stockdale-ism?

Said the Admiral, "You must never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be."

There's a great explanation of The Stockdale Paradox at the Mortgage Cicerone.

In this challenging time, I wholeheartedly embrace the idea of being a "Stockdale". Shouldn't you?