Defect Trends Indicate Continued Lender Downsizing

ACES Risk Management (ARMCO), a provider of enterprise financial risk management solutions, released its quarterly ARMCO Mortgage QC Trends Report. The latest report provides loan quality findings for mortgages reviewed by ACES Audit Technology during the second quarter (Q2) of 2018.

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The report’s noteworthy findings for Q2 2018 include:

Continuation of several defect trends:

>>A significant quarter-over-quarter increase (23.8% over Q1 2018) in defects related to Loan Package Documentation, which are often associated with downsizing and understaffing, a trend that began in the previous quarter, Q1 2018

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>>The majority of defects were attributed to the Income/Employment category, a trend that began in the previous quarter, Q1 2018

>>Core underwriting and eligibility issues were the most frequent cause of critical defects, a trend that has continued since the Q1 2017

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>>The critical defect rate decreased slightly, from 1.72% in Q1 2018 to 1.71%.

>>Defects attributed to Borrower and Mortgage Eligibility increased by roughly 70%, from 6.57% in Q1 2018 to 11.36%

“In Q2 2018, we saw continued increases in defects typically resulting from downsizing and understaffing,” said Phil McCall, president and COO of ARMCO. “This seems to indicate that many lenders are still responding to the reduction in business and compressed margins with personnel changes, even in a purchase-dominated market.” 

Although defects associated with loan package documentation do not usually result in non-saleable loans, they can still have a detrimental impact on profitability. They often result in investors and insurers suspending loan purchases, which can reduce warehouse line capacity and result in price adjustments.

“The market’s current fluctuation demonstrates the financial reasons lenders need QC technologies that are dynamic and adaptable enough to respond quickly when the market shifts,” said McCall. “Sacrificing quality is a costly but unnecessary consequence of revenue reductions. In reality, no lender needs to accept less than the highest quality, regardless of contracting volumes or margins.”

The Q2 2018 ARMCO Mortgage QC Industry Trends Report is based on nationwide post-closing quality control loan data from over 90,000 unique loans selected for random full-file reviews, as was captured by the company’s ACES Analytics benchmarking software. Defects listed in the report are categorized using the Fannie Mae loan defect taxonomy. Each ARMCO Mortgage QC Industry Trends report includes easy-to-read charts and graphs, a summary that outlines ARMCO’s overall findings, a breakdown of defect rates for each Fannie Mae loan defect category, and a short conclusion. ARMCO issues a one-year analysis for the calendar year with each fourth quarter Mortgage QC Industry Trends Report.

ARMCO Mortgage QC Industry Trends Reports are available for download, free of charge, at

About The Author

Fight It Out


Many have been dismayed by the level of consolidation in the loan origination space. What will it mean that there are fewer LOS players? Will innovation slow? In my view, it just means that we’ll have larger, more professional companies battling it out even more fiercely.

This is actually not uncommon. A great article in CNN Money profiled a similar battle that we are now seeing between Microsoft and Apple. They put it this way:

“Three Microsoft commercials, which are meant to evoke Apple’s famous Mac vs. PC spots from a decade ago, compare Microsoft’s Surface Pro 3 tablet to the MacBook.

“In each of the ads, the MacBook owner is amazed at how the Surface is as powerful, fast and capable as the Mac, while having tablet-like features, including a touchscreen.

“This isn’t the first time Microsoft tried to give Apple a taste of its own medicine.

“Earlier this year, Microsoft launched a similar commercial poking fun at Siri. The ad showed a person asking Microsoft’s “personal assistant” app Cortana to do tasks like set location-based reminders. Siri quipped, “Now, that is a smart phone.”

“After Windows 8 launched in 2012, Microsoft showed side-by-side comparisons of the iPad and a Windows 8 tablet. After seeing all the things the Windows tablet could do that the iPad couldn’t, an exasperated Siri wondered, “Should we just play Chopsticks?”

“When Windows 7 debuted in 2009, Microsoft ran commercials of people proudly saying, “I’m a PC.”

“Still, even if Microsoft is winning the clever commercial battle, its products haven’t made a dent in the MacBook, iPad and iPhone sales.”

So, why do I bring this up? I bring it up to get all of you reading this to understand that just because there has been a lot of consolidation, that doesn’t mean that competition and innovation are dead. Major companies can be challenged and taken down. Now is the time for all companies, regardless of their size or market share, to innovate and help lenders move forward and prosper. In the end, those companies that can help their lender clients achieve prosperity will be tomorrow’s mortgage technology leaders.

About The Author


Magazine Feature: Managing People During Change

*Managing People During Change*
**By Barbara Perino and Rebecca Walzak**

shutterstock_89543446***Change is natural and necessary for companies and organizations to survive. And I daresay, the mortgage space has dealt with a continuous process around change for nearly five years. Now there are new rules, regulations, government implementation of policies and procedures, mergers and acquisitions. During periods of significant change, people experience very high levels of uncertainty, negativity, anxiety, stress, and fear. Their behavior can become unpredictable, sometimes a bit irrational and their morale, motivation and productivity can be affected.

****When change is being implemented, leaders and managers typically focus on the systems, processes and outcomes of the business but fail to understand the emotional impact on the people/staff. If employees are equipped both emotionally and physically to deal with change effectively, negative impact is reduced significantly. When people are supported and well prepared properly, they are more adaptable, resilient and able to stay more positive and proactive when it comes to doing something differently.

****For example,a large bank was downsizing an entire division including shutting down the facility. Management and leadership was relocated to a more central location in another state and the division being downsized, (hundreds of people) were literally on their own except for a couple of line managers and email and telephone communication being sent from the out of state office. Fear, frustration, anger, sadness, stress were feelings that were present for a lot of people, many of whom had been with the bank for 25+ years. The downsizing process was done over a period of six months, department by department. The people, who stayed to the end, did so to be able to leave with a compensation plan offered them. At the end, they simply finished their day and left. How could this transition have been handled differently? The existing managers could have been instructed to hold weekly short meetings with their staff for updates, check-ins and to be there as support for them allowing people to vent and make the transition a bit more tolerable. Upper management could have flown in for the last day to acknowledge those who were left, thank them for their service and wish them well.

****In another case an organization was going through major changes in leadership and processes. The mid-level managers (11), many of whom had been with the organization for 10+ years were not given any guidance on changes being implemented or notices that people were leaving or being transferred to different parts of the organization. The feelings of lack of trust, fear, frustration, anger were very present and it trickled down to the staff. Communication was severely lacking at all levels, which impacted the effectiveness of the organization. The new CEO knew something had to change and brought in coaching for her management team. This allowed for the company to offer clarity as to what needed to change, the definition of what their roles were and through brainstorming, the coach offer a way for the company to create ways to improve the culture, communication and buy-in of the organization’s mission.

****In the start-up phase of new companies, it’s common practice for everyone on board to gather together regularly and celebrate victories, talk about challenges and focus on the future. When companies start growing, increasing staff and expanding, often times leadership and management get so busy that they forget the importance of communicating, getting to know people, allowing others to offer suggestions and new ideas, etc.

****Managers play a key role in helping people deal with change. If the people feel listened to, valued, and empowered they are more motivated to produce, engage and be effective. The end result is less stress, less absenteeism, better job performance and the company’s service levels are maintained, despite the worries and upheavals that change creates.  So how can managers engage staff during change?

****Self-Management. Managers have to be managing their own feelings, thoughts and actions first before they can help others. Managers need to ask themselves how they deal with change; do they have any concerns about the changes; and how positive are they during transitions? Are they angry or upset; a target for blame and criticism from others? It’s essential that management is able to understand and manager their own emotions so that they don’t cause a negative impact on the people around them they influence.

****This doesn’t mean they are denying their feelings or are being superficial. By managing their emotions, they are behaving in such a way that they can put their own feelings aside so that they don’t cause damage to others. This is very hard for some people but important to understand and practice. How they manage this determines how they affect others.

****People will need to feel that they can trust management and rely on management as the steady rock during the change process. Management needs to manage their own thoughts, feelings, behavior so that they are cool, calm, collected and objective.

****Understanding Others. It’s vital that management understand and acknowledge people’s emotions. It’s important to learn to listen to people and take time to understand their specific fears: What are they concerned about? How strongly do they feel about what is happening? What is their perspective of the change—is it a good or bad thing?

****Everyone is different, so management cannot judge people by their own reactions to change. Things they don’t consider stressful or worrisome may be really scary for others. Empathy and understanding to the feeling and perspectives of others is really important. Management can really help people by being open to conversations on concerns, fears and allowing people to articulate their reasons for these. Not being critical or disagreeing is something to practice. Simply listening, acknowledging and asking open-ended questions is sometimes what people need the most.

****Range of Emotions. People follow an emotional path when dealing with significant change very similar to many life issues. The more managers understand this, the easier it will be for them to relate to how people feel. The feelings range from shock, denial, anger, frustration, depression, to bargaining, acceptance, moving on. It’s important that people know management cares; keep giving them information and updates that can be shared.

****And most importantly, managers need to be the guides and navigate people safely through the changes into the future. Involve people as much as possible so that they feel they have some control over change, which in turn will help reduce their stress, frustration and resistance to change. Managers need to be very clear and honest about the limitations of their own roles and influences. Get comfortable standing firm on what can and can’t be changed but communicate clearly to people, and it should be done in a non-confrontational style of conversation.

****Management needs to share with people what is not changing. This gives people one less thing to worry and stress over and it also gives them an anchor, something to hold on to in the face of uncertainty and change.

****Communicate, communicate, and communicate. Management has an essential role in helping people to understand. People want to know what changes are happening, when it will happen, how it will impact them and why (why is it happening now? why can’t things stay the same? Why is this happening to me?)

****As early as possible, define the change to staff in as much detail as you are allowed. Keep providing updates as things develop and become clearer and tell people what is going on. Rumors and innuendo can proliferate and can be extremely harmful, effecting morale. Being proactive in seeking or clarifying information for yourself is very important so that you can correct misleading information (misinformation) and address rumors before they blossom.

****Self-Care. Change is stressful for everyone, including managers. Management is probably struggling to accept the changes themselves and because they bear a huge responsibility to help implement the changes, they could feel torn between supporting staff and implementing directions from above. They may feel anger and criticism directed at them, and because of this, experience high levels of stress. It is therefore essential that they look after themselves. Managers need to figure out how to be mentally strong, emotionally resilient and physically healthy. Eating healthy, drinking lots of water, reducing alcohol and caffeine intake, getting proper sleep, exercising and using simple relaxation techniques make a big difference. They also need a support system possibly from a peer, a leader, colleague, friends and family.

****Harvard Business Review published an article by Rosabeth Moss Kanter – “Ten Reasons People Resist Change.” The article states that leaders need to understand the predictable, universal sources of resistance in each situation and then strategize around them. Her list of the most common resistance types are:


  • Loss of control – allow choices; invite others into planning and ownership
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  • Excess uncertainty – fear of the unknown needs to be dispelled
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  • Surprise, surprise – it’s better to plant seeds, sprinkle hints of what might be coming and seek input
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  • Everything seems different – wherever possible keep things familiar
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  • Loss of face – celebrate those elements of the past that are worth worry around skills being obsolete honoring but the world has changed
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  • Concerns about competence – over-invest in structural reassurance, providing abundant information, education, training, mentors, support systems
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  • More work – reward and recognize participants if there is more work
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  • Ripple effects – must consider all affected parties and work to minimize disruption
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  • Past resentments – heal the past before sailing into the future
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  • Sometimes the threat is real – be honest, transparent, fast and fair

****Diagnosing the sources of resistance is the first step toward good solutions. And feedback from resistors can even be helpful in improving the process of gaining acceptance for change.

****We win half the battle when we make up our minds to take the world as we find it, including the thorns,” said Orison S. Marden.

****Managers can’t waste time and energy wishing people were more predictable, rational, positive, etc. Instead they need to focus on opening and maintaining clear channels of communication with staff, so that they themselves understand what is coming; what it means to them as managers and how it will impact them as managers. Staff will appreciate management for it and will thus be more productive before and after the change(s).

Our Point Of View: We’ve Been Through This Before

*We’ve Been Through This Before*
**By Ted Hicks**

***Yes, we’re in a downturn. Origination volume is predicted to fall again this year. However, at a time when you have fewer players and industry consolidation, the 15-year low volume prediction makes sense. Nothing I hear would lead me to believe otherwise. Why? Credit is still tight and foreclosures continue to be on the rise because there are still a tremendous number of people underwater on the value of their home now as compared to when they bought it. But with adversity comes opportunity. The good lenders will survive because they are able to offer superior service. How will the good technology vendors survive? Here’s my take:

There are certainly fewer opportunities for technology vendors today. So how do stay viable? Easy, you create new products to sell to existing or new clients. You could also enter a new market vertical. Lastly, you can grow by acquisition. Public companies are under constant pressure from investors to increase profits, even in a depressed market where it is extremely difficult to do. We at Calyx Software are in a good place because we are privately held and we have one owner/shareholder. Public companies are under the gun to grow, and if they don’t the investors exit.

Philosophically, this makes sense. When there are industry pressures and increased competition you will see public companies acquire other companies because that is the fastest way to grow, and if that doesn’t work, they’ll shed that acquisition.  There is a natural process of elimination. So, are we going to see more of these types of deals? Yes and no.  Yes, because we’ll most likely see those types of deals coming from the public sector and no, because private companies may do things a little differently.

Private companies will buckle down and invest in themselves more heavily.  They’ll improve their product line and create new complementary products for their clients.  And, only if it makes business sense, they’ll approach companies looking to get acquired.  Private companies have the luxury of being able to make important business decisions without the pressure of investors to grow fast— sometimes too fast.  Their acquisition process tends to be more strategic and more customer focused, without the urgency public companies experience.

The bottom line is that today’s technology vendor has to be just as creative and innovative as today’s lender in order to thrive. But have no fear, we’ve been here before. The long-term future of the space is cyclical. You see four- to seven-year cycles all the time. This could be a 10-year cycle, but I’m more optimistic. The market is turning and the best companies will survive

Life-Cycle Lending: Provide A Competitive Edge

*Provide A Competitive Edge*
**By Joe Dombrowski**

***Technology that separates loans into distinct silos can be a barrier to driving down operational costs. With today’s fierce competition, deploying a more efficient servicing software strategy can mean the difference between growing the portfolio and just surviving. In fact, Fiserv has seen several financial institutions reduce up to 60 percent of their loan servicing-related software by replacing disparate technology with a consolidated servicing solution.

****One very large servicer had a vision several years ago to consolidate its debt utility technology on a system that could support all mortgage and consumer loans. The first step was migrating several million mortgage loans onto LoanServ. After this initial migration, the company purchased and converted additional portfolios consisting of another million-plus mortgage and home equity lines. Today, it supports all mortgage, consumer and outsourced loans on the Fiserv servicing solution.

****Because the system enables one workflow and one workforce for all its retail loan portfolios, the institution was able to reduce its cost of servicing by 37 percent and increased loans serviced per FTE by 36 percent. The integrated default management functionality also enabled the institution to reduce the overall timeline to qualify borrowers and set them up for loan modifications. By using the system’s embedded workflow automation, the servicer is handling 1,200 files a day and has cut the work time per file by 50 percent.

****Consolidated servicing provides a distinct advantage and allows you to do much more than “maintain the current situation.” No matter what loan products look like in the future or how many loans are being serviced, forward-thinking servicers can implement a consolidated model that will reduce costs, increase productivity and create opportunity.

Life-Cycle Lending: The Cost Of Change

*The Cost Of Change*
**By Joe Dombrowski**

***Organizations looking to improve their lending operations essentially have three options:

****1. Do nothing – continue to maintain existing technology with limited ability to add functionality.

****2. Attempt to build an in-house solution with possible staff additions and increased technology costs.

****3. Invest in a platform that provides an efficient, consolidated technology solution for all loan products.

****Many institutions have grown accustomed to supporting outdated technology or a stratified operating environment. But cost and risk pressures prevent others from updating technology, even though the risk of failure increases and the cost to maintain the status quo escalates rapidly. This situation may jeopardize the entire lending infrastructure.

****For example, having to apply regulatory changes to multiple technology systems is laden with risk. Applying regulatory changes to a consolidated platform provides consistent compliance across product lines, with just one source of data to maintain. Financial institutions opting to retain multiple software systems may regret that decision down the road. Policy, process and procedure costs will continue to stress budgets, regulatory compliance initiatives and personnel. On the other hand, proprietary systems developed and supported in-house can be equally expensive and pose the same staff and compliance challenges.

****Regardless of the option, it is important to understand that there is more to consider than the hard costs. One full-service, regional bank with 60 branch offices and loan centers, replaced multiple servicing systems with LoanServ to manage both its mortgage and consumer loans. Prior to the conversion, the bank was handling first-mortgage servicing and secondary market securitization on one system and HELOCs and consumer loans on in-house platforms. Using this combination of software limited which products the bank could offer. For instance, prior to using LoanServ, the bank could not offer rate locks and credit card access on HELOCs. The consumer lending systems just could not provide those capabilities.

****By consolidating its consumer and mortgage loans, the bank was able to redeploy FTEs to other areas of the bank and is laying the groundwork for future growth.

Life-Cycle Lending: The Consumer-Centric Perspective

*The Customer-Centric Perspective*
**By Joe Dombrowski**

***Having a customer-centric perspective to mortgage servicing is critical in terms of both profitability and borrower experience and plays out with essential differences, depending on a financial institution’s servicing environment. In the Multi-platform Scenario, a borrower might have a mortgage loan and a boat loan with the financial institution. Because the two loans are serviced on separate platforms, customer data is stored two places. If the platforms do not communicate with each other, customer data-sharing is minimal, if not impossible. Each platform generates its own loan information, and the institution is faced with the time- and resource consuming task of synchronizing and delivering the data in a timely manner. If the customer adds a revolving credit instrument, yet another software application may enter the picture, and that system may not be able to “see” all the borrower’s current loan transactions. This approach doesn’t work. Here’s a better answer:

****The Consolidated Scenario

****In this scenario, the institution utilizes a single platform such as LoanServ from Fiserv to administer the borrower’s mortgage, boat and revolving-credit loans. The customer information is stored on one system, eliminating the need to share data between different platforms. This eliminates data integrity issues, and as cross-sell opportunities materialize, the lender has a holistic snapshot of the borrower’s entire portfolio to assist in making prudent short- and long-term decisions.

****The User Perspective

****Operational efficiency is directly tied to how servicing staff is able to utilize technology resources.

****The Multi-Platform Scenario: For institutions utilizing different platforms for different loan products, there is no common look and feel between systems. The Consumer Loan Department may have to deal with one platform for equity loans and another for mortgage loans. The user experience suffers because staff members must create work-arounds or use manual processes to manage transactions.

****The Consolidated Scenario: Browser-based platforms leverage the Internet as a single point of access to real-time data and enable a lender to access information from virtually any application across full- or self-service channels or from third parties. This flexibility provides the framework to integrate ancillary interfaces and applications so that they work as one interoperable system instead of as inconvenient wrap-arounds. By consolidating all retail loans, an institution derives benefits from process, cost-to-service, and efficiency perspectives. It is able to standardize processes and procedures, and staff is trained once and empowered to work efficiently between lending verticals.

****In one case, a full-service bank with a mortgage banking focus recognized the opportunity to improve efficiency and drive down cost using LoanServ, the Fiserv solution that helps eliminate back-office redundancies. Prior to conversion, the bank supported its first-mortgage servicing operation within a different division from its home equity operation. By converting its second mortgage portfolio to LoanServ, the bank realized not only an 18 percent reduction in loan servicing FTEs, but also a reduction in resources outside of the Loan Servicing department charged with supporting overall operations such as IT and Accounting.

****The consolidation to one servicing platform also paved the way for consolidation of vendors in areas such as billing statement, lockbox, insurance and tax service outsourcing, resulting in a 15 percent reduction in cost to service almost immediately after conversion. In addition, the automation available within the platform’s default management functionality has allowed the bank to dedicate more of its resources to working with customers to find best-option solutions. As a result, the bank recognizes a default rate that ranks consistently below the industry average.