Scorecards Open the Way to Transparency, Need For Standards

Tom Cronin, managing director, The Collingwood Group

Mortgage bank scorecards are changing an industry that has not yet found the right balance between efficient rating standards and regulated oversight.

Bank tests implemented by the Federal Reserve, Fannie Mae, Freddie Mac and the ratings agencies, to mention a few, are serving their purpose, says Tom Cronin, managing director, The Collingwood Group, a Washington-based business advisory firm that specializes in housing finance. Arguably, these efforts will provide more lending and servicing system transparency.The next question the industry will soon have to consider is whether there should there be a standard audit and rating procedure. 

“Every state is now auditing, the financial institutions’ bureaus are auditing, the Consumer Financial Protection Bureau is auditing, Fannie, Freddie and FHA are auditing,” Cronin says. “Is there more transparency? Yes. Are there things that can be done better, that hopefully we will learn as we get used to this? Yes.”

Thanks to these fairly recent assessments of operations’ efficiencies using scorecards such as the Fannie Mae STAR program, “there is a new level of transparency” in the marketplace, he says. “People may argue the results when they come out, but that’s what it’s all about. It really is sort of the transparency measure.”

Current examples, such as Fannie’s STAR program scorecard, still are works in progress. Fannie reported “significant improvements” in the performance of various servicers of Fannie loans, even though only six of the 11 largest servicers of Fannie Mae loans did not get satisfactory reviews.

CitiMortgage Inc., GMAC Mortgage LLC (Ally Bank), Wells Fargo Bank NA, EverBank and JPMorgan Chase received a three STAR rating on a five STAR scale, which indicates these servicers have accomplished “at least median performance” relative to the other Peer Group One, according to Fannie’s Servicer Total Achievement and Rewards program and scorecard results for yearend 2011.

While these servicers still are far from achieving excellence in servicing performance they are performing better than the top servicers who did not receive a STAR rating due to unsatisfactory results on operational assessments.

Fannie said it rates a total of 34 servicers parted in three peer groups based on the number of Fannie Mae loans they service. But Fannie prefers to not disclose to the public the full list of the servicers currently under review, according to a company spokesman who would not comment why Fannie is keeping under wraps the banks that are not passing the test.

Two opposite approaches to ratings and bank regulation that tend to go too far in one direction seem to prevail.

In Cronin’s view, “for better or worse,” the review process of individual banks is becoming quite intense, “but one can argue that there was no process at all, so anything is better than nothing at all.”

He tells the story of a midsize retail mortgage company, which within the first two months of 2012 had to work with seven different groups of auditors. Its executives expect many more auditors will show up at their doorstep through the course of the year.

All the auditors had different sets of rules. “They all required different types of data,” he said. One of the auditors would insist on receiving paper documents only even though they were auditing an Internet-based lender whose operations, with the exception of loan closing, are paperless and all the data are maintained electronically to make the lending and servicing process more efficient. The bank could perform fast data tracking and storing so they were capable to print all the required information. For that particular audit the midsize firm had to print 62,000 pages of documents.

Beyond the waste of paper, such random requests help auditors come up with a better view of the lenders’ operations and also create “tremendous inefficiencies in the auditing process,” he said.

Cronin supports the idea of standard templates for the audits “or at least some consistency in the process” since for mortgage banks that are active in multiple states and are reviewed by multiple regulators, auditing has become a burdensome and costly process. “Sometimes they may go too far one way or another,” he said.

Finding the right balance, however, will take some time. Meanwhile, contrary to popular belief, bank ratings are not just a slap on the wrist to bankers. They are associated with reputational risk and real financial consequences.

A bad rating is not a speeding ticket, he says, and mortgage banks may not get fines for it, but they face the risk of losing the business and “the risk of not being allowed to do certain things,” which has financial consequences. For example, banks that keep failing Fannie and Freddie ratings may suffer the consequence of not being allowed to participate in new GSE programs and lose business opportunities.

He argues that ratings are “very important in this new world order.” The market has changed, so lenders and servicers need do their best to achieve the best ratings possible because “financial consequences are imbedded” in the rating process.

“I do believe the ratings are making things better because people take auditing seriously today. It’s just a matter of improving the way banks are being audited,” he added.