Detailing recent updates to the government-sponsored enterprises’ loan review and representation and warranties policies, speaker Susan Allen explained that while new policies provide rep-and-warrant relief after a loan has established a three-year history of current payments, there are many exceptions that can leave lenders exposed to buyback risk.
For example, defaulted mortgages with files that contain fraudulent or otherwise inaccurate data will still be subject to buyback, Allen, vice president of product management at CoreLogic, said. Third-party prefunding verifications of data like income/employment and property valuation can help lenders limit their exposure and Allen encouraged lenders to use “consortium-based” technologies and data services that rely on origination data shared across lenders to detect fraud. Such tools put lenders on the same page as their investors, she added.
“Your third-party source is going to be the same provider the GSEs will have at their disposal when they’re making these repurchase requests,” Allen said.
The new GSE rules include a provision that triggers an automatic repurchase review of all mortgages where the borrower misses the first three payments of the loan. But lenders can employ prefunding risk analytics that analyze both credit and collateral attributes to identify loans most at risk of early-payment default.
While these added steps do require additional resources, the cost of building a quality assurance process into lenders’ origination procedures is cheaper than the cost and risk of buybacks, said another speaker, Regina Lowrie, president of Vision Mortgage Capital and the former board chairwoman of the MBA.
Lowrie said there is a difference between quality assurance and quality control. While quality assurance focuses on the steps in the origination process that ensures that loans are manufactured soundly, quality control efforts validate the quality assurance process—and lenders need both to be successful.
While it may be impossible to have a zero-defect rate, lenders must set an acceptable defect rate, preferably as a range, and then use QA and QC processes to meet those targets. “We need to establish goal for loan quality,” Lowrie said.
But Lowrie added that technology is only part of those processes. The adage of “garbage in, garbage out,” applies to automated underwriting and other technology-driven processes and lenders must couple technology with the common sense of human processors who are trained to spot potential red flags.
“We were relying so much on an automated accept or exempt decision that we stopped underwriting loans the way we used to,” Lowrie said.
Correspondent lending executives from Wells Fargo and Citibank said better collaboration is needed between lenders and investors, particularly to improve communication and expectations on both sides correspondent channel.
Kevin Smith, a Wells Fargo vice president and the operational risk manager for the correspondent channel, said the bank hosts webinars and provides other resources to lenders to improve transparency. He also encouraged lenders to install a change management process that assigns an “owner” to new projects and sets timelines for making changes to processes.
Carol Toren, Citibank senior director of correspondent lending, added that paperless processing also helps meet quality assurance goals by providing better control of loan documents. And she, too, advocated for greater communication between investors and lenders, saying establish expectations and analysis of processes helps ensure quality originations.
“The more we work on this together, the better we’ll be off in the end,” she said.