When Your Buyer Is Your Loan Quality Control
Brian Fitzpatrick - CEO of Aklero Risk Analytics
It should go without saying that if you’re in business, it’s generally a good idea to make sure whatever you’re selling — whether a product or service — actually works. This concept transcends common sense; we shouldn’t even have to think about it. Yet anyone who has paid attention to our industry in recent years knows common sense has not exactly been a surplus commodity.
Many Lenders Are Not Properly Reviewing Loan Files
Perhaps there is no better example of this than the fact that many lenders — though not all — are not properly reviewing their loan files for accuracy or omissions before sending them to their investors. Worse, many lenders lack an existing post-closing operation of any kind, and are simply using their investors as their post-close review teams — essentially letting their partners tell them what is wrong with their own loan files. I refer to this strategy as “ship and hope,” because hope really is the only positive thing going for it. In a way, it’s like the petulant teenager who must always be reminded what he’s doing wrong, who never listens, and who still expects the keys to Dad’s BMW on Friday night.
It may be true that, during the real estate market’s heyday, there was reason for hope. Investors had such a hunger for mortgages that sellers did not need to provide perfect files in order to receive funding. If a pre-sale audit did exist, it was usually brief and superficial in nature, performed for the purpose of saving time and money. And if a particular loan was causing trouble and triggered a repurchase, this usually wasn’t a problem — because the lender would actually budget for such an event, rare as they were at the time.
Today, however, the industry environment is completely different, as capital markets have undergone a total transformation due to recent financial losses and loan nonperformance. The result has been skyrocketing scrutiny of purchased loans by investors and agencies that is not likely to slow down anytime soon. And at the center of this shifting paradigm lies the issue of trust—and more specifically, file integrity.
Just a few short years ago, a loan file would have had to be pretty bad in order to trigger a buyback. Today, every missing, unsigned or incomplete document is being identified and scrutinized by loan purchasers because the investor doesn’t want to be left holding the bag. Where lenders once were able to call the shots, today it is the investors who are in control. And they don’t exactly enjoy chasing down the folks who originated a loan when it is discovered that the 1003 isn’t signed or the data in the loan file doesn’t match the database of record.
Increased Oversight, Loan Quality Initiative from Fannie Mae and Regulators
Add to this picture the fact that mortgage lenders are subject to increased oversight by regulators, which include recent changes to the Real Estate Settlement Procedures Act (RESPA) and Fannie Mae’s Loan Quality Initiative (LQI). These factors make the current mortgage environment very challenging, to say the least.
We’ve all seen the growing pattern of investors tightening up on what they were buying, and lenders having a harder time selling their loans. On the buy side, all the major loan aggregators, as well as Fannie Mae and Freddie Mac, are looking at loans item-by-item. Simply put, trust is at a premium these days. It cannot be assumed and must be earned loan-by-loan, day-by-day, which means lenders will not be able to survive using the same processes and procedures they were using a few short years ago.
Besides the potential for buybacks, lenders that do not step up to the plate when it comes to providing their own loan quality reviews are facing increased costs in some fashion or another. Investors are no longer tolerating this practice, and are counting the number of times they must handle a loan file and penalizing sellers through punitive pricing or operational handling. They may also find their files sitting in queue on the warehouse line for unusually long periods of time, triggering potential buybacks and additional costs.
Another cost to bear is the risk to one’s reputation. When a lender relies on the investor to ensure the quality of the lender’s files, it does not exactly generate confidence; in fact, it has the opposite effect. More and more, lenders are being “shut off” by investors – temporarily or permanently – damaging the lender’s ability to secure funding from other investors or warehouse providers.
Today’s seller truly has to take a very, very proactive approach toward quality. And by conducting their own pre- and post-close reviews prior to shipping files — or outsourcing this function — many lenders are indeed stepping up to the plate, placing them a step ahead of organizations that lack a post-closing operation or quality oversight.
Yet lenders that perform their own reviews prior to shipping are not necessarily out of the woods. To avoid potential buybacks and their associated costs, they need to make absolutely sure their data are accurate and that all conditions, guidelines and regulations — federal-, state- and agency-related — are all being met.
Closing documents require thorough reviews for another reason: It is not unusual for information or circumstances to change prior to the closing table, and these items do not always make it back to the original database of record. Meanwhile, the vast majority of methods of checking files for inaccurate, incomplete and missing data are overly reliant on manual processes, which makes them prone to error and they are extremely expensive and inefficient. This can occur whether reviews are performed in-house or conducted by an external third party.
It’s my professional opinion that automation is a crucial and cost-efficient piece to creating quality loan files that investors and agencies can trust. The good news is that solutions already exist to handle nearly every pre-close or post-close loan audit task. Examples include the ability to scan and capture loan data straight from the file and verify its accuracy while ensuring consistency throughout the file, as well as ensure that all critical disclosures are filled out accurately and thoroughly.
Automation also delivers the ability to discover trends within the files of loan pools and quickly identify problems at their source. Even better, there are solutions that can find file deficiencies and automatically notify the individual responsible for fixing them, increasing efficiency. Through automation, each one of these tools is an improvement over the typical approach of having one or more staff members visually inspect and search electronic documents, which—while good for the environment—is nearly as time-consuming and mistake-prone as inspecting paper loan documents. For example, using automated tools, similar data files that don’t match – such as “Kensington Circle” instead of “Kensington Street” can be instantly flagged and viewed for anomalies.
The same goes for signatures, property and parcel data, or any piece of information in the file — all of it can be instantly pulled up for comparison and verification purposes. Performed manually, these same tasks on a single loan file could take up an entire day. Yet with technology, the same work can be accomplished in a fraction of time, and with greater accuracy. The resulting loans get out the door faster with less cost—and less nail-biting.
Loan Quality Control at Loan Underwriting?
There is even an argument to be made for lenders to push loan quality control all the way to the beginning of the loan life cycle, at the point of underwriting. For example, most analysis of loan files happens from a forensic standpoint, long after problems within the file were created. It would be a huge benefit if loans could not make it out of the underwriting stage unless certain key items in the file were validated as complete and accurate — in other words, underwriting loans from a quality perspective. Imagine the savings and efficiency if lenders were able to prevent problems from ever occurring in the first place.
Whether lenders initiate quality reviews at the birth of a loan or prior to shipping using technology, we really should bury this concept of “shipping and hoping”. Hope has no place in today’s bit-by-byte construction of quality loan files, and investors have much better things to do than repeatedly tell mortgage lenders what they’re doing wrong. Like our proverbial adolescent, it’s time for lenders to become mature, responsible players, embrace accountability and make sure that when they ask for their investor’s car keys, they’ve done everything to deserve that trust.
Brian Fitzpatrick is CEO of Aklero Risk Analytics, a provider of mortgage loan quality control and risk analytics for the mortgage lending industry. He can be reached at brian.fitzpatrick@aklero.com.
Adapted from Mortgage Banking magazine September 2010 issue.
