What’s Old Is New Again

August is here and so are the summer doldrums. The industry reflects this state of nothing new and nothing much to get excited about. In fact, even the news is a rehash of everything that has come before. Take for example, the “latest” fraud news-squatters. In 1996 I attended a session at the California Mortgage Bankers Quality and Compliance Committee in which the district attorney of Los Angeles County was dealing with squatters. If you don’t know how squatters operate, it is fairly simple.

First, find an empty house for which a foreclosure has taken place, get the locks changed and move in. Of course, you have to be prepared to move out rather quickly once the real owner of the property, in most cases a bank, finds out and gets you evicted. A somewhat new twist is that the individuals who take over the house, actually rent it out to someone else. When eventually an ownership dispute occurs, it takes much longer to get the squatters out since they have a valid rental agreement. The question is, if the servicers are following requirements, why aren’t the property preservation companies finding this problem instead of allowing these squatters to live there? Beats me!

And since things are rather slow I have to go back to one of my favorite targets – Quality Control requirements. Fannie Mae, in its description of quality control requirements says that the Quality Control Program “defines the lender’s standards for loan quality, establishes processes designed to achieve those standards, and mitigates risks associated with the lender’s origination processes.” And here I thought it was management’s job to define standards for quality and establish processes. FHFA has also come out with new requirements for Mortgage Insurance companies. Included in this is a requirement for a “robust” Quality Control program. Unfortunately it follows the lead of the agencies and requires the establishment of a “defect” rate. Can anyone spell TQM? But what I want to know is what a “defect” is. When used in a true quality management program it means something that is likely to cause a failure of the product and as far as I can see there is no such correlation here that accomplishes that, so every company may be testing for “defects” that don’t have anything to do with how the loans perform. Yet the work has been done and the relationships have been established.

Why not employ this information? On top of this insanity plans now require a “scorecard” that compares “defects” to EPDs. Really? Has no ever experienced a “life event” default? I will give FHFA credit for requiring a true random sample with some statistical validity attached to it. As a result, the MI companies may actually have a chance of identifying some real process issues (since QC is supposed to test processes, not individual loans) instead of finding mistakes and pointing fingers.

Look, I know I have only been asking for 20 years, but can we please allow lenders, servicers and MI companies to establish a real quality control program that really does what it is supposed to do? Can we afford another comprehensive QC failure that resulted in the 2008 financial crisis?

About The Author

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Rebecca Walzak
rjbWalzak Consulting, Inc. was founded and is led by Rebecca Walzak, a leader in operational risk management programs in all areas of the consumer lending industry. In addition to consulting experience in mortgage banking, student lending and other types of consumer lending, she has hands on practical experience in these organizations as well as having held numerous positions from top to bottom of the consumer lending industry over the past 25 years.