In February I attended the Eastern Secondary Conference hosted by the Florida MBA. While there I took the time to visit the Fannie Mae booth that was part of the vendor exhibits. Now, anyone who knows me acknowledges that I am a very strong supporter of Quality Control and that I have obtained a Certification in Quality Management in order to support quality initiatives in the industry. Quality Management discipline is focused on educating its disciples on the hows and whys of “manufacturing quality.” Manufacturing Quality is of course what Fannie Mae has been expounding as they tout the virtues of their new Quality Control programs. The problem is however, they have it wrong!
Manufacturing quality is based on the concept that the process must be controlled in order to produce a product that meets customer specifications. It also recognizes that there will be random variations in the results, but as long as they are just that, random, it is too costly to try and eliminate them. In other words, a process under control provides reliable results. This program abhors rework, which is seen as evidence that the process is in fact, not under control and is an expense that should not occur if the process is working correctly. The resulting products are not necessarily “perfect.” However products that meet manufacturing quality standards don’t have variations that impact how the product performs. Knowing the difference between variations that don’t impact performance and those that do is critical.
Fannie Mae’s program on the other hand requires excessive inspections and rework based on loan level inspections (i.e. pre-funding reviews). They also require a classification of every variance which are at best artificial “defect” designations without a validated correlation to product performance. In addition their sampling program is based on the risk they perceive in loan files. As a result lenders review these issues rather than the ones they may have identified in their organizations. The fact that Fannie Mae labels variations from guidelines as “defects” when they have no idea whether or not these issues are related to loan performance is an example of their overweening belief that whether or not they are correct, they are, as so eloquently stated “the ones with the gold so they make the rules.”
This attitude is out of line for a government bureaucracy. These entities are supposed to be focused on ensuring that what they do benefits the American people. For years, as a Government Sponsored Enterprise (GSE) Fannie Mae and Freddie Mac established a preferred methodology for how they expected quality control to be done. Now it seems that Fannie Mae has taken the position of the CFPB and is dictating a program that is erroneous at its core and further drives up the cost of QC without validating how it will benefit lenders or the American consumer.
Interestingly enough another speaker at the conference, Alex Pollock, a Resident Fellow at the American Enterprise Institute discussed the fact that between 2007-2011 Fannie Mae and Freddie Mac suffered $256 Billion in losses. It doesn’t take a genius to figure out that these losses were primarily due to the poor performance of the loans they purchased. And that leads to the question Did they ever know how a quality control program was supposed to be conducted. The fact is that Fannie Mae is just another government bureaucracy that needs to get its own act together before dictating to the industry about what to do and how to do it or for that matter before losing more of the American taxpayers’ money.
About The Author
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.