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Is QC Now Officially Dead?

In 1995, with the advent of automated underwriting systems, I co-authored an article entitled “Is Quality Control Dead?” that appeared in the Mortgage Banking magazine. At that time there was a strong belief that QC was only used to find underwriting errors and with automation taking over the underwriting process there was no need to review these loans. At the time, the agencies, Fannie Mae, Freddie Mac and HUD must have been part of that trend because they made no changes to the existing antiquated QC programs they required for seller servicers.

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Unfortunately, as we all have learned to our great regret Quality Control was needed more than ever. From the turn of the century through 2007 lenders rode roughhouse over the underwriting requirements and triggered the greatest financial crisis since the Great Depression. Even as the QC Committee of the MBA meet with agencies, Congress members and consumer groups asking that they support stronger QC requirements, less and less attention was paid to QC. Despite the white papers developed showing the extent of fraud and documenting proof of what the lack of support for QC was conjuring up in the “magic elixir” that were the subprime ingredients of the collapse, QC was so weak there was no hope that the industry would listen. None of these warnings were heeded. Since then of course, QC has been revived and strengthened and the economists say we are fully recovered.

Yet once again we are hearing and reading about the latest and greatest mortgage program; the digital mortgage. According to the developers and purveyors of these programs, we have once again eliminated the need for Quality Control. These programs and their supporters claim that by using these programs have the capability of electronically validating the information entered by the consumer, running the data through an AUS and providing an approval within minutes. It is only if the loan cannot be electronically approved does it go to a loan officer to amend and approve.

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However, just as in the initiation of the automated underwriting systems, there are opportunities for mistakes inadvertent or otherwise. One of the biggest concerns is the inability to validate the information. While it sounds good, how many consumers are willing to give bank account information on-line, or those who work for small companies that don’t report the information to these on-line employment services. Sure, we can get tax returns, but they are at least a year old and not helpful in giving current income information. How is that validated?

Furthermore, despite the restrictions placed on lenders regarding DTI limitations, product and document types, non-QM loans are thriving. Just today I saw an advertisement for a “new” mortgage type, “No Income, No Employment”. There has also been a myriad of statements from the current political administration that the controls put in place to prevent another crisis will be loosened and/or eliminated in the near future.

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The question then is, can this alternative QC process that leaves numerous loopholes for bad loans to slip through and provides little incentive to do things right, stop another housing crisis. More than likely the answer is no, and because of that, it is likely that Quality Control really is dead. May it rest in peace because the rest of the industry surely won’t.

About The Author

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.

QC: Now Officially Dead?

In 1995, with the advent of automated underwriting systems, I co-authored an article entitled “Is Quality Control Dead?” that appeared in the Mortgage Banking magazine. At that time there was a strong belief that QC was only used to find underwriting errors and with automation taking over the underwriting process there was no need to review these loans. At the time, the agencies, Fannie Mae, Freddie Mac and HUD must have been part of that trend because they made no changes to the existing antiquated QC programs they required for seller servicers.

Featured Sponsors:

 

 
Unfortunately, as we all have learned to our great regret Quality Control was needed more than ever. From the turn of the century through 2007 lenders rode roughhouse over the underwriting requirements and triggered the greatest financial crisis since the Great Depression. Even as the QC Committee of the MBA meet with agencies, Congress members and consumer groups asking that they support stronger QC requirements, less and less attention was paid to QC. Despite the white papers developed showing the extent of fraud and documenting proof of what the lack of support for QC was conjuring up in the “magic elixir” that were the subprime ingredients of the collapse, QC was so weak there was no hope that the industry would listen. None of these warnings were heeded. Since then of course, QC has been revived and strengthened and the economists say we are fully recovered.

Yet once again we are hearing and reading about the latest and greatest mortgage program; the digital mortgage. According to the developers and purveyors of these programs, we have once again eliminated the need for Quality Control. These programs and their supporters claim that by using these programs have the capability of electronically validating the information entered by the consumer, running the data through an AUS and providing an approval within minutes. It is only if the loan cannot be electronically approved does it go to a loan officer to amend and approve.

Featured Sponsors:

 
However, just as in the initiation of the automated underwriting systems, there are opportunities for mistakes inadvertent or otherwise. One of the biggest concerns is the inability to validate the information. While it sounds good, how many consumers are willing to give bank account information on-line, or those who work for small companies that don’t report the information to these on-line employment services. Sure, we can get tax returns, but they are at least a year old and not helpful in giving current income information. How is that validated?

Furthermore, despite the restrictions placed on lenders regarding DTI limitations, product and document types, non-QM loans are thriving. Just today I saw an advertisement for a “new” mortgage type, “No Income, No Employment”. There has also been a myriad of statements from the current political administration that the controls put in place to prevent another crisis will be loosened and/or eliminated in the near future.

Featured Sponsors:

 
The question then is, can this alternative QC process that leaves numerous loopholes for bad loans to slip through and provides little incentive to do things right, stop another housing crisis. More than likely the answer is no, and because of that, it is likely that Quality Control really is dead. May it rest in peace because the rest of the industry surely won’t.

About The Author

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.

QC Player Is Ready For Day 1 Certainty

ACES Risk Management (ARMCO), a provider of financial quality control and compliance software, has updated its flagship ACES Audit Technology with new functionality that aligns with Fannie Mae’s Day 1 Certainty (D1C) initiative. With this update, ACES now includes additional fields for assessing asset, income, employment and collateral data according to Fannie Mae’s D1C initiative. The company also updated its rule-based technology to assist auditing these loans according to the D1C initiative.

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ACES users continue to use ACES Intelligent Questionnaire technology to customize questions and scripts according to their own unique needs and objectives. ACES’ direct import of D1C data enables users to preserve the integrity of their QC processes, while also aligning with D1C parameters.

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“Lenders can gain added protection under Fannie Mae’s Day 1 Certainty initiative, but they have to follow certain protocols,” says Phil McCall, COO of ARMCO. “We updated ACES so our clients can automate their auditing process to account for the different checkpoints associated with D1C. Our clients know that ARMCO’s mission is protecting their businesses. They know they can rely on us to stay on top of all guidelines, initiatives, regulations and trends, and they know we will continue providing the tools that help them grow and protect their businesses, not just for now, but also for the long haul.”

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The recent ACES software enhancement went into effect for all clients June 12, 2017.  Clients and interested parties can get further information on this update via the proprietary ACES Knowledge Center, or by visiting the ARMCO website (www.armco.us) for a demonstration of the latest software.

Fair, Unfair And Deceptive

With the announcement, earlier this year about the latest data additions to be included in all future HMDA reporting, the industry has been heavily focused on making sure that the necessary data is available within loan origination systems. Furthermore, the loan application form, commonly referred to as the 1003, has been updated to ensure that all this data can be collected from the borrower(s). This additional information, in conjunction with what is already collected, form the basis of regulators Fair Lending reviews.

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Fair Lending, is the federal regulation that requires all lenders to treat every applicant equally. For depository institutions, their lending patters must demonstrate that they offer mortgage opportunities in the communities in which they accept deposits. Additional analysis is also conducted on the areas in which a lender typically lends. This has traditionally been known as the lender’s footprint and is measured by racial population distributions within specific metropolitan statistical areas or MSAs. In other words, if an MSA is 50% Hispanic, regulators would expect to see that 50% of your applicants are Hispanic. This they believe demonstrates the “fairness” of your lending practices. There are however some very “unfair” issues associated with this analysis, many of which will more than likely be exacerbated by the collection of additional data and the scrutiny of the CFPB.

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The most obvious of these is the poor quality of the data. Although the submission process includes quality and validity checks, inaccurate and/or inconsistent data is rampant. While most lenders work diligently to ensure good data, there have been instances where manufactured and calculated data have been used. Furthermore, until this past week’s announcement, there has never been a way to identify if all required lenders have even submitted their data. If data is submitted late or corrected and resubmitted, the changes never make it into the overall HMDA database for the year. Imagine one lender’s surprise upon finding out that the entire LAR they submitted one year was not included at all.

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Unfortunately, even the bad and or missing data included in the HMDA database is used to analyze lenders. For example, not all applications have the monitoring data completed and since it is the borrowers’ prerogative to complete, few, if any lenders have all the race gender and ethnicity data for every application. This can lead to some very unfair conclusions. Recent comparisons of the number of loan applications compared to these completion of monitoring data found that these numbers just don’t add up. For example, if a lender has 10,000 applications but the breakdown by race shows that only 37% were minority, does that mean that 48% are white? If so, and the population is the MSA is 52% minority does this mean the lender is failing to meet regulatory standards? Without knowing the race of the remaining 15% of the applicants, it is impossible to tell. Yet this is a major part of the regulatory review. Isn’t this a bit deceptive on the part of the regulator?

Finally, regulators and lenders alike must reconsider the use of comparative footprints in conducting this analysis. When lenders and banks were primarily regionalized this may have made sense but with the expansion to nationwide lending and the use of electronic applications, this model is unreliable and in fact deceptive when reaching any conclusion. This must be changed if we are truly to identify any discrimination practices.

The issues identified here are clear indicators that the regulators are not accurately measuring a lender’s Fair Lending, but instead are conducting unfair and deceptive analytics themselves. To protect themselves, it in in every lender’s best interest to know more about their HMDA data then any regulator does.

About The Author

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.

Former Fannie Mae Exec Joins The StoneHill Group

The StoneHill Group has hired T. Gail Callueng as the company’s new quality control manager. In her new role, Callueng will be responsible for directing quality control services for The StoneHill Group as well as overseeing QC reviews on behalf of clients.

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Callueng has more than 25 years of experience in the mortgage industry and is skilled at servicing and subservicing reviews, managing large loan and servicing portfolios, leading operations and servicing teams, and conducting training and staff development. Prior to joining The StoneHill Group, she worked at Fannie Mae for eight years, most recently as the GSE’s senior relationship performance manager. Before joining Fannie Mae, Callueng served in a variety of executive and consulting roles in the banking industry, including assistant vice president at Fidelity Bank and vice president at Gainesville Bank & Trust. She graduated from Jacksonville University with a degree in Business Administration.

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“Quality has never been more important to the mortgage industry or to our clients, so we are delighted to have someone of Gail’s caliber leading our QC efforts,” said David Green, founder and president of The StoneHill Group. “Gail’s experience at Fannie Mae makes her a particularly valuable resource for our many clients who partner with the GSEs. As demand for loan quality continues to soar, we are confident Gail will deliver the results lenders and servicers need to excel.”

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“I am thrilled to join The StoneHill Group, one of the mortgage industry’s most trusted providers of QC services,” said Callueng. “Having worked on both the seller and purchasing sides of the mortgage industry, I know how challenging it can be for lenders to create and maintain quality throughout the loan cycle. I look forward to leveraging my knowledge and skills to help our clients and make The StoneHill Group the first name in the mortgage industry when it comes to loan quality.”

Guess What’s New

Hey, guess what’s new? According to Richard Parsons in his August 17th commentary, there is a boom in bank lending. Banks such as Suntrust and JPMorgan Chase are experiencing increases ranging from 15.5% to 23%. Likewise, real estate values are going up and up. The trifecta of this development is of course the re-emergence of loan products that we never thought we would see again.

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What in the world is driving these trends? Well for one thing the inventory of previously owned homes is still rather low while builders are introducing new community developments in all areas of the country. For another, there are now down payment assistance programs either already available or under discussion and banks and investors are hungry for more yield in this continuing low interest rate environment.

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The primary result of all this news is that banks and investors are expanding their risk appetites, and because they believe that loan quality is once again healthy, they are willing to add more risk to their portfolios. This is evidenced by the increasing volumes of lending activity. Of course, the lending activity reflected in the bank’s number do not necessarily include those loans originated and funded by non-bank lenders which would increase those numbers even more. So should lenders break out the streamers and champagne? Are we back to the early 2000s with another round of increased borrowing just around the corner?

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Whoa! Wait a minute. Aren’t we still suffering under the regulations that were piled on after the collapse of 2008? While the obvious answer to that is a qualified yes, in reality the industry is starting to realize the opportunities available from these reversals of fortune. The question is not should we take advantage of these opportunities, but have we learned enough to avoid the same cataclysmic result. Let’s take a look at the issues.

Credit risk, in the form of both underwriting policy and product development prior to the crash, was expanding to include some very hazardous policies. Stated income loans had been offered as early as 1988 to employees of companies that moved and were eligible for their relocation programs. In less than 12 months it became evident that even these stellar borrowers were having difficulty making payments on stated income loans. Yet any additional reviews of the potential for inaccurate income to be used in these loans was either never done or not published. Furthermore, credit criteria in the form of debt-to-income ratios were also pushed ever higher without any acknowledged analysis taking place. Now of course, the ATR and QRM requirements are in place for federally regulated institutions but what about those who are not?

Regardless of these issues, the most significant process failure prior to the meltdown was Quality Control. If nothing else was gained from this catastrophe we learned that the program dictated by the agencies was less than useless. Even though the steps were followed, lawsuits focused on this failure has run into the billions. Yet the agencies have done little to change the requirements despite the fanfare surrounding the new dictates.

So, now we find ourselves in an environment with rising home prices, low interest rates and banks taking on more risk. History tells us this does not look good. It would wise for all of us to remember, “those who fail to learn from history are doomed to repeat it.”

About The Author

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.

Good Headlines?

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Hey, guess what’s new? According to Richard Parsons in his August 17th commentary, there is a boom in bank lending. Banks such as Suntrust and JPMorgan Chase are experiencing increases ranging from 15.5% to 23%. Likewise, real estate values are going up and up. The trifecta of this development is of course the re-emergence of loan products that we never thought we would see again.

Featured Sponsors:

 

 
What in the world is driving these trends? Well for one thing the inventory of previously owned homes is still rather low while builders are introducing new community developments in all areas of the country. For another, there are now down payment assistance programs either already available or under discussion and banks and investors are hungry for more yield in this continuing low interest rate environment.

Featured Sponsors:

 
The primary result of all this news is that banks and investors are expanding their risk appetites, and because they believe that loan quality is once again healthy, they are willing to add more risk to their portfolios. This is evidenced by the increasing volumes of lending activity. Of course, the lending activity reflected in the bank’s number do not necessarily include those loans originated and funded by non-bank lenders which would increase those numbers even more. So should lenders break out the streamers and champagne? Are we back to the early 2000s with another round of increased borrowing just around the corner?

Featured Sponsors:

 
Whoa! Wait a minute. Aren’t we still suffering under the regulations that were piled on after the collapse of 2008? While the obvious answer to that is a qualified yes, in reality the industry is starting to realize the opportunities available from these reversals of fortune. The question is not should we take advantage of these opportunities, but have we learned enough to avoid the same cataclysmic result. Let’s take a look at the issues.

Credit risk, in the form of both underwriting policy and product development prior to the crash, was expanding to include some very hazardous policies. Stated income loans had been offered as early as 1988 to employees of companies that moved and were eligible for their relocation programs. In less than 12 months it became evident that even these stellar borrowers were having difficulty making payments on stated income loans. Yet any additional reviews of the potential for inaccurate income to be used in these loans was either never done or not published. Furthermore, credit criteria in the form of debt-to-income ratios were also pushed ever higher without any acknowledged analysis taking place. Now of course, the ATR and QRM requirements are in place for federally regulated institutions but what about those who are not?

Regardless of these issues, the most significant process failure prior to the meltdown was Quality Control. If nothing else was gained from this catastrophe we learned that the program dictated by the agencies was less than useless. Even though the steps were followed, lawsuits focused on this failure has run into the billions. Yet the agencies have done little to change the requirements despite the fanfare surrounding the new dictates.

So, now we find ourselves in an environment with rising home prices, low interest rates and banks taking on more risk. History tells us this does not look good. It would wise for all of us to remember, “those who fail to learn from history are doomed to repeat it.”

About The Author

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.

A New Way To Automate Quality Control

DocMagic, Inc. has launched its fully integrated ‘eQC’ solution that automates due diligence for investors and correspondent lenders. eQC provides a complete closed loan MISMO 3.3/UCD XML data file, an automated compliance report, and a detailed audit trail with a document integrity certification that certifies that the XML data provided and documents match prior to investor delivery.

The automated compliance component of eQC includes a complete electronic record of compliance that arms investors and correspondent lenders with a detailed audit trail that eliminates concerns over future TRID audits and violations.

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Moody’s Investor Services, Inc. compiled a report that revealed more than 90 percent of loans reviewed by third party due diligence firms were not TRID compliant.  Since that time, outstanding issues with TRID have been adversely affecting the secondary market’s appetite to purchase loans.  Concerns over potential assignee liability can result in loans remaining on warehouse lines for longer periods, extending lock periods, placing loans into suspension, and even potentially affecting the credit rating for mortgage bonds that are included in future RMBS pools.

“The CFPB requires all parties involved in the mortgage finance transaction to demonstrate evidence of TRID compliance,” asserts Tim Anderson, director of eServices at DocMagic.  “Our new eQC solution gives investors and correspondent lenders warranted electronic evidence of compliance with TRID and other critical regulations, and ensures that the audited data is exactly the same data that appears on the documents disclosed to the borrower. This is really the holy grail of automated due diligence compliance.”

eQC also provides compliance data on federal regulations like high cost, QM, ATR, as well as applicable state regulations. It works by leveraging DocMagic’s sophisticated audit engine, which determines if a condition is out of compliance.  The audit engine immediately flags the causes of any issues for the user, directs the user to a link with information on where and how to fix it, and then verifies that the error was corrected.  A full date and time stamped audit trail is created by following a consistent data validation process that runs over 10,000 compliance rules and edits designed to verify and validate legal compliance throughout the loan origination process.

This audit trail also provides full date and time stamp tracking of all borrower disclosures, a complete record of the compliance checks and conditions performed on the loan, and the complete MISMO 3.3/UCD XML data file.  The XML data file can be used to electronically board and re-verify compliance at any time in the futurethrough a tool set API that enables high speed access to this due diligence functionality.

“With over 8,000 originators running millions of closed loans through DocMagic’s compliance portal each year, eQC leverages the long-standing industry acceptance of our compliance solutions to bring our correspondent lenders and investors true automated proof of compliance,” said Dominic Iannitti, president and CEO of DocMagic.

About The Author

Tony Garritano

Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.

Making Appraisal QC Easier

Platinum Data Solutions, a provider of valuation data and analytics solutions, has launched RealView QB (Quality Bridge), an appraisal quality technology that allows users to authorize access and share information with third parties, including lenders, AMCs, appraisers and investors.

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RealView QB is a workflow feature in RealView, an appraisal quality technology. It enables a single, centralized system of record for appraisal quality control. With RealView QB, users can invite virtually any relevant party to access their appraisal quality and underwriting process on a limited, user-defined basis. These third parties simply log in to RealView, review appraisal QC results and immediate take action. Examples of these actions include resolving issues, providing explanations or revisions, asking questions, such as clarification on comp selection, and much more.

By sharing a single system of record, RealView QB can eliminate some of the most time consuming, error-prone activities in the mortgage process, such as rekeying appraisal information, communicating findings and requesting additional information.

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“The back-and-forth nature of the appraisal QC process slows the mortgage process and costs companies thousands of dollars each year. Plus, when lenders, AMCs, appraisers and investors operate in silos, it’s difficult to achieve transparency,” said Phil Huff, president and CEO of Platinum Data. “RealView QB’s real-time information sharing reduces mistakes and repetitive tasks while bringing transparency to appraisal QC. All parties benefit from lower costs and protected margins, and the industry as a whole gains the transparency it needs.”

About The Author

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Tony Garritano

Tony Garritano is chairman and founder at PROGRESS in Lending Association. As a speaker Tony has worked hard to inform executives about how technology should be a tool used to further business objectives. For over 10 years he has worked as a journalist, researcher and speaker in the mortgage technology space. Starting this association was the next step for someone like Tony, who has dedicated his career to providing mortgage executives with the information needed to make informed technology decisions. He can be reached via e-mail at tony@progressinlending.com.

A Cautionary Tale For Lenders

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becky-walzakOnce upon a time, long, long ago in a century past, there lived many, many people who wanted to buy a home for their family. However, they knew it would take more money than they had. Fortunately for them there also lived in the land, people who wanted to invest their money with people who wanted to own their homes. So to make this happen the good mortgage lenders of the land agreed that they would be the intermediary between these groups of people. But everyone wanted to know more before they agreed. “How will you protect us from buying a house that we cannot afford?” asked the people who wanted to buy houses. “How will you protect our money from going to people who won’t pay us back” ask the investor people. The good mortgage lenders answered the buyers this way: “We will only have loans that have consistent payments so you won’t be surprised when you get your bill. To make sure you can make those payments we will have guidelines that evaluate your ability to make the payments. Finally, to make sure we are doing this correctly, we will have a quality control review to ensure the reliability of our lending process.” Upon hearing this, the home-buying people cheered and rushed to find a home they wanted to buy. However, the investor people were still not happy since they could not see what the good mortgage lenders were going to do to protect them. So they said to the investor people, “When we told the home buying people about our QC that was also for you. You will know that the guidelines used to ensure they can make payments will be tested by QC as well and any problems that they find we will take action and make changes to ensure that the loans are good.” Once the investors heard this they were happy because they knew that having QC would protect them. And so all the home buying people in the land bought their houses and the investor people got loans that paid. Everyone was happy.

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Well, almost ever body. There was also in the land an evil sorcerer named Greedy that was very unhappy. He wanted to make lots of money from these good and happy people, but everything was working too well. So Greedy created some new loans that were very bad and caused the good home buying people to stop making their payments. He also infected the good mortgage lenders with his greed potion and whispered into their ears that QC was BAD for them. “Why”, they asked. “Well”, he answered, “They see how poorly you are following the credit guidelines and are stopping you from making all the loans and lots of money.” So he cast a spell on the good mortgage lenders which caused them to ignore what QC was telling them. This made Greedy very happy.

Unfortunately, the happy times didn’t last. The good home-buying people couldn’t pay these new loans and they lost their homes. The good investors lost their money and were very mad. Finally, the ruler of the land said “Enough already! We are going to change this and make our QC people very strong and make sure that lenders listen to them. This will give us back what we lost because of the evil sorcerer.” And so it happened and everyone was happy again. Or were they? The evil sorcerer is still out there. Does he have more devious ideas? Will he bring back those loans that caused all the problems? Will he stop QC from doing its job? What will happen next? Can we afford to find out or should we stop the problems before Greedy becomes too powerful again?

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A cautionary tale for sure, but this could happen again. During the past seven (7) years the industry has worked very hard to correct the problems that created the Great Recession. With guidance and/or dictates from new laws and regulators, changes have been made in our origination and servicing processes. Fannie Mae, Freddie Mac and FHA have made major improvements to their focus on ensuring quality loans are being produced and that QC departments are no longer ignored or dismissed when their testing shows problems. As a result, the agencies are pleased that the quality of the loans they are asked to purchase and/or insure is improving. A recent statement from Fitch also reflected that defaults are down to the lowest levels in many years. The loans being made are tested to ensure the borrower can pay and new requirements explaining the process is in place. Yet, there are signs that “Greedy” is still active.

Potential Warning Signs

Today lenders have adapted to the changes made in the aftermath of the Great Recession. Loans made are required to meet the “Ability to Repay” and “Qualified Residential Mortgage” if they are going to a federally insured entity. The secondary market is closely examining loans for TRID compliance and lenders are doing Pre-funding QC as well as using the agency taxonomies to establish the level of risk in the files. However, there are signs on the horizon that says this may not last.

Increasing number of homebuyers:

For several years now lenders have been waiting for the Millennial generation of 72 million to start buying homes. While there were many reasons for the delay it appears to be over. These individuals have now reached the age where they are getting married, having children and want a place to call their home. While the type of housing they are looking for may change, the sheer volume is bound to be good for lenders.

In addition, the largest generation, the Baby-boomers, are reaching retirement age and are looking to move away from large houses with lots of work to smaller homes that leave them more time to enjoy the fruits of their labors. Many more are looking for second homes in areas where they can get away from cold winters and relax or move away from the suburbs to larger cities with more cultural events and groups of people with common interests.

Also to be considered is the immigrant population that continues to grow. These individuals, whether brought here by companies seeking employees or by their own desire to make the move, they are increasing the population of people seeking to buy houses. All of these buyers are putting pressure on housing inventory and prices.

Increasing home values:

While anyone who already owns a home is aware of increasing values in their area, there are signs that values are steadily increasing. Zillow recently published the list of Top Ten Housing Markets with the highest increases in prices. The top five include Denver, Seattle, Dallas-Ft. Worth, Richmond and Boise with the highest have a 5.6% home appreciation rate.

New loan products:

While it has taken a while, private investors are reemerging in the marketplace. Just recently announcements were sent out from lenders offering products that are similar to those we saw prior to the mortgage meltdown. These product offerings include, DTIs up to 60%, LTVs as low as 10% for jumbos with no MI, alternative income offerings, non-warrantable condos, loans for borrowers with a bankruptcy or foreclosure within the past 24 months, loans with interest only options, investment property lending regardless of the number of properties owned, and the most concerning of all loans with credit scores to 580.

Government Pressure to increase homeownership

Despite all the accusations made by government officials during the last crisis, the political climate is once again focused on expanding home-ownership rates. Numerous articles have expounded on the fact that the homeownership rate is well below what was acceptable even before the crisis. A recent announcement from FHFA included a statement that they were directing Fannie Mae and Freddie Mac to determine what is preventing individuals from purchasing homes and to create programs to address those issues.

Degrading the importance of Quality Control

The new quality control requirements implemented by Fannie Mae, Freddie Mac and FHA are designed to ensure the adherence of loans to their guidelines and eligibility requirements. In fact, they require that any loan produced that is not eligible for sale to them or needs insurance provided by them be given the highest risk rating. However, other than that they allow lenders to determine how they define risk despite the fact that the two highest ratings are used to calculate the overall error rate. In other words, one lender can say that the second highest risk they identify are those loans where there is obvious fraud. Then all other issues, such as bad appraisals, inaccurate calculations of DTI, missed liabilities, title problems, regulatory faults and similar type problems are not considered significant enough to warrant being included in the overall error rate. Another lender may include these issues in their second tier rating and as a result have a higher error rate than a lender making numerous mistakes.

More discouraging is the fact that the very people who make the mistakes are the ones responsible for reviewing the findings and contradicting the issues so that they are wiped out of the reports. The pressure on QC staff has not abated at all.

Furthermore, none of the entities requiring these QC processes has the ability to test each lender to ensure they are complying with the guidelines. While it is bad enough for large lenders it is even worse for smaller ones. Here the QC reviews cannot show any problems since management is concerned that any investors they may have will terminate the relationship with them if the QC report is not perfect. This also applies to outsourcing firms as well.

Recently I was told about a loan where the appraisal had numerous flaws and the value of the property had increased from $120,000 to $190,000 in six months. When reported in the QC findings, the QC manager was told to remove that finding or they would be responsible for the company closing its doors since the loan had gone to their primary investor who wanted to see their QC report. This pressure on and intimidation of QC personnel is by far the most significant indicator of problems to come.

So while those of us still in the industry like to think we have progressed beyond the collapse of the industry and are once again living in the land of good mortgage lenders, the reality is that we are still susceptible to the enticements that caused the original problems. Maybe this time however, we will be smart enough and strong enough to resist the evil potion of greed and stay in the fairy tale land of good mortgage lenders. Otherwise we may very well end up with another Nightmare on Elm Street.

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.