There were five areas where Quality Mortgage Services found increased errors for Federal Housing Administration-insured mortgage applications between 2009 and 2010, and the reason for rise in adverse findings was due to poor loan processing and underwriting oversight.
Initial Truth-in-Lending/good-faith estimate disclosure errors increased to 16.7% last year from 11.3% in 2009. Appraisal errors went to 10.5% from 10.3% during the same period.
FHA Form 92900 (the HUD/VA addendum to the loan application) errors increased to 7.5% from 6.2%, credit errors increased to 6.2% from 5.7% and annual percentage rate violations increased to 5.4% from 3.9%.
Ironically among the areas of improvement include the initial and final loan applications and the HUD-1 Settlement Statement.
QMS executive vice president Tommy Duncan explained that on an across-the-board basis, it was hard for him to say what was behind the increase in errors. But when it comes to appraisals, the increase in errors is across every loan type, not just FHA, he added. The increase in TIL/GFE violations is in direct proportion to APR violations.
These increases are not just in one area; they are “scattered across the compliance board,” Duncan said. So there is no just one particular item that can be cited as the cause.
Loan risk rankings for QMS for 2010 were not as good as the previous year, as the bucket of loan applications graded excellent fell to 14% from nearly 19% in 2009; over the same period, the FHA loans that scored in the good category went to 63.8% from 65.2%. Those that scored fair, the ones that were considered potential repurchase candidates, went to 19% from 13.5%.
Meanwhile, the average credit score for FHA-insured loans increased in all three buckets by about 13 points. But a higher credit score did not mean the loan applications were free from defects, Duncan said. This is because the defects are because of a poor loan origination process.
High loan quality is a direct result of having strong loan processes while maintaining thorough underwriting, he continued.
It doesn’t do any good for lenders to keep increasing FHA credit scores through overlays if there are going to continue to be an increase in defects. Sloppy processing practices will result in application quality issues no matter what the borrower’s credit score is.
When it comes to FHA applications for a purchase money loan, Duncan pointed out that the percentage of applications which scored fair increased by over five percentage points, to 20.7% from 15.5% in 2009. Fair findings for manually underwritten FHA purchase applications increased to 27.8% in 2010 from 20.4% one year prior. For applications that went through AU, fair findings increased to 18.8% from 13.7%.
However, there was no fraud for housing found in FHA loans which were manually underwritten, but 3.4% of loans which went through an AUS did have fraud for housing.
“When we’re doing the risk analysis of the loan, when we’re looking at the loan and the underwriting decision and the item to support that decision and they’re not there, that is a direct result of a number of things.
“One is the underwriter not doing their job to close out that loan properly or someone in the loan process diverting information from or to the underwriter in order to get the decision they need to get the loan approved,” Duncan said.
FHA refinancing apps which were rated in the fair category increased to 12.8% from 8.8%, while the percentage which were rated excellent fell to 18.3% from 24.4%.
