Lenders Manage Risk by Trying to Avoid Buybacks
ST. LOUIS-Among the trends driving an increase in certain types of mortgage risk analysis has been the growing concern about loan buybacks.
"In the current environment originators are doing more fact checking prior to the delivery of a loan," Scott Stern, chief executive officer of industry cooperative Lenders One, St. Louis, told this publication. "Even the closing package is being monitored to make sure there's no risk of repurchase due to signing errors or data errors."
Mr. Stern said lenders are primarily, but not exclusively, using technology such as automated valuation models and income verification tools.
"There are multiple layers of fraud detection by both originators and investors," he added.
Lenders and originators today have often extended their quality control analysis efforts to 100% of pools they are selling, as compared to just 10% of the pool in the past.
Some of the analysis done currently is no longer optional for originators selling to investors as "they are becoming mandatory from the investors for loan delivery," Mr. Stern said.
Technology-assisted analysis is aimed at mitigating buyback risk in many ways, often by verifying not only income and collateral, but also assets and credit. Compliance checks also are being emphasized.
"You now can automate verification of all of [these] and do so in a fraction of the time you used to be able to do it," Mr. Stern said.
He cites as an example income checks done through services that support verification through a form that a borrower gives to a lender, authorizing the latter to pull the former's tax records directly from the Internal Revenue Service. Imaging and scanning also can be used to check a file's completeness, he noted.
So far most of these technologies are offered on a piecemeal basis. Mr. Stern added that users and vendors alike should be aware that there has been talk about potential concern related to "false positives," which can slow a loan's progress by requiring a manual review due to an apparent sign of risk that turns out to be innocuous. Given the combination of stricter underwriting guidelines overall and new QC systems, such a situation could "really frustrate the process," Mr. Stern said. However, he notes this is preferable to having the reverse problem of "false negatives," in which technology might mistakenly indicate there are no problems with loans when there are some.
"You'd rather make sure you're catching false positives than having to repurchase loans," he said.
"If people aren't running something upfront, that is a recipe for disaster," agrees John T. Walsh, founder and CEO of Total Mortgage Services, Milford, Conn. "In order to protect ourselves, we've got to run [loans] through these systems." Among the technologies his company his company uses is vendor automation that analyzes 50-100 data points for potential signs of fraud.
While automation has become unavoidable, Mr. Walsh told this publication manual analysis and company culture also are important in mitigating buyback risk. Any time there is a departure from agency guidelines or interpretations, TMS gets clarification from the investor and the company documents everything much more than it used to. In addition, the company works to keep its staff well informed about the importance of doing the analysis necessary to mitigate buyback risk.
"Every file is subject to human interpretation as to how to look at a particular condition," he said. In addition, "compliance has become paramount," Mr. Walsh said, noting that new loan origination technology the company purchased helps address this because it includes more compliance data points than its previous technology.
"It's getting more and more difficult to get a mortgage," he said. "Everything in the file is being questioned, and even with all that there's always going to be underwriter interpretation."
The buyback risk analysis can be hard work and involves spending the "appropriate amount of time on a file, not just signing off on conditions" but it's worth it, because of the damage a buyback could do, particularly given recent market conditions, said Mr. Walsh.
"You pay a bigger price for a mistake right now," he said. "You could be requested to repurchase a loan with a decreasing property value, and there's not much of a market for scratch and dent."
Lisa Schreiber, chief strategy officer at NetMore America Inc., Walla Walla, Wash., said her company is being proactive about avoiding this risk as well.
She cited as an example a disclosure the company decided to implement for its borrowers. It added the disclosure when it found that borrowers who were not disclosing certain debts they had were becoming more of a concern.
The company now has an "undisclosed debt" disclosure it has borrowers sign both upfront and at closing, testifying that they do not owe money outside of what they have already disclosed.
NetMore also uses vendor technology that helps manage brokers in an effort to analyze and mitigate risks in that loan channel, Ms. Schreiber said.
"Given SAFE (Secure and Fair Enforcement for Mortgage Licensing Act) regulations ... there's a lot more to monitor ... even in the retail group," she said.
"There's a continuous need for compliance," Ms. Schreiber added, noting that this has been having an effect on per-loan costs, causing the industry to search for ways to be efficient while remaining in compliance.
NetMore, like others mentioned in this article, uses technology to check on borrower income and verify other data, as well as to mitigate fraud risk and run automated valuation models, said Ms. Schreiber.
"We're getting great feedback from our investors and we want to keep it that way," she said.