Quality Comprehension

Recently the president of a small mortgage company posted that his staff had successfully processed loans from origination to closing in just over 16 days. He included in his posting a picture of the measurements he used to track the production process. While I applauded his company’s achievement in completing loans in 16 days, I asked, well-intentioned, where his quality measures were and pointed out what I thought was self-evident, that speed does not automatically equate to good loans.

The response was immediate and derogatory. How dare I question the quality of his loans and besmirch the good name of his company. Other staff members responded in kind and blasted me for even implying that they did not produce good quality loans. But really, how do I or any investor know if these loans met the guidelines for origination, underwriting or closing based on the fact that they were done in 16 days?

Since 1985 when Fannie Mae first began requiring that companies have a quality control program, the industry has failed to comprehend what quality is all about. Oh, we use the word incessantly with every piece of the operation from “quality” loan officers to “quality” delivery, yet management appears to have a very poor understanding of what it is all about. I continue to hear from friends and colleagues regarding their frustrations about the lack of any useful information coming from the process and the continuing rising costs associated with it. Even with the more recent shift of Fannie Mae, Freddie Mac and FHA’s Quality Control programs to incorporate a “manufacturing” approach to testing for quality, the underlying program remains the same.

It is all about the checkers checking the checkers who already checked the checkers. How else can you describe a requirement for pre-funding review immediately before closing, a post-closing audit with lots of discretionary reviews and a 100% review of these same loans that are sold to the agencies? Based on what is required today, the output of QC is not to ensure the process is working properly but to CURE the bad loans found so that the customer can’t force repurchase. Of course, this doesn’t do anything for the bad loans that aren’t found, stop more bad loans from being made or really stop a repurchase.

Today’s process reminds me of the executive of a flashlight manufacturing company whose product was very pricy because it was highly rated for quality. When asked how he did it the CEO replied that he inspected every flashlight that came off the assembly line and if it had a problem it was sent back to be fixed. “How many have to be sent back?” inquired the reporter. “About 50%,” the CEO replied. “Why do you think I have to charge so much for the darn things?”

While many mortgage executives will continue to “curse the darkness” that is today’s QC, some CEOs will hopefully begin to light some candles. The agencies have gone on record, saying for the first time, that the program they prescribe is not the only way and are encouraging lenders to find methods that work for them. A good start to that would be to recognize that quality control is not about the loans but about the process. If the process works correctly then loans produced in 6 days, 26 days or 60 days will be quality, and there will no longer be the need to spend money “curing” the problems. Once people begin to comprehend what quality is really about, there will be no need to ask for quality measures.  They will be front and center of every good lender.

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