The 2011 Outlook for Loan Quality and Compliance by Tommy Duncan

The 2011 Outlook for Loan Quality and Compliance by Tommy Duncan
Loan quality seems to be a reflection of the economy; if the is any improvement up to 2011, it is not much.  From a random sampling, the quality control on mortgage loans outlook for 2011 is looking slightly better than 2010.  85.78 percent of the 2011 loans are “excellent and good” a .54 percent improvement from 2010.  1.90 percent of the 2010 loans contained misrepresentation, in comparison to the 2011 loans which increased to 1.33 percent.  The potential repurchase is an even 12.9 percent of the total loan volume. The average credit score of the lendees in the “excellent and good” loans category continues to average 746 for both years.  Whereas the credit score for the riskier or fraudulent loans average 740 for 2011 and 721 for 2010. The single largest quality control problem for 2011 is the initial 1003 application, which dominates at 20.74 percent defects or errors from all other compliance categories.  However, it improved from 2010, where it was 22.19 percent; followed by Truth-in-Lending/Good Faith Estimate defects which was at 22.83 percent in 2010. Overall, the loan quality is looking much better in 2011 than it did in 2010.    However, there are still many more files to review and audit and 2011 is not over.  This data is from a random 10 percent sampling that represents a portion of the mortgage industry’s levels of mortgage banking’s loan production. The FHA loan is predicted to not fare as well as it did in 2010.  Currently 18.34 percent of the FHA loans audited are potential repurchases as compared to 2010’s 17.12percent and the files that contain misrepresentation contain 2.46 percent as compared to 3.23percent in 2010.    The FHA refinance potential repurchase for 2011 dropped 2.44 percent from 2010’s 12.76 percent.  At this time there has been no misrepresentation found in the 2011 FHA refinance loan. At this point of quality control review audits, all misrepresentation has been produced by FHA loans submitted through an automated underwriting system where no fraud for housing or misrepresentation has been discovered with the manual underwritten loans whereas from the quality control review the data supports a higher potential for a repurchase based on technicality from a manual underwritten loan than a FHA loan submitted via an automated underwriting system. The conventional loan quality control scores are much better as compared to the FHA loans.  Not only on risk but also as in regards for compliance.    The Disclosures FACTA is 5.66 percent for 2011 as compared to 2010’s 5.45 percent.  All other compliance area improved from 2010. There is one significant red flag, the conventional refinance loan has already passed 2010’s .52 percent fraud discoveries to .69 percent and potential repurchases in 2011 improved .82 percent from 2010’s 8.57 percent.  This is a result in climbing material defects in appraisals, verification of employment, discrepancies in tax returns and tax transcript, and credit. The conventional loan average credit scores were 767 for 2011 for loan that were excellent and good and the average credit score of 2010 was 768 for the same QC grade.  The FHA average credit score for excellent and good for 2011 was 708 and 705 respectively for 2010. THE FEDERAL HOUSING ADMINISTRATION: Since FHA changed the way correspondents and mortgagees are approved with FHA there has always been confusion at both the broker and lender level on who does the post closing Quality Control (QC) audits.  The Department of Housing and Urban Development issued Mortgagee Letter 2011-02 on January 5, 2011 made efforts to further clarify post closing QC efforts and quality control plans.  Some of these requirements have been around for a while however, restated because of their importance.
  1. The procedures used to review and monitor Sponsored Third Party Originations (STPO) must be included in a mortgagee’s FHA approved Quality Control Plan.
  1. All FHA-approved mortgagees, including those in a sponsored relationship must have a Quality Control Plan that requires the review of loans that are originated or underwritten.
  1. For those mortgagees that have STPO, the Quality Control Plan must require the review of loans originated and sold to the mortgagee by each of its STPO.  Mortgagees must determine the appropriate sample amount of each STPO’s loans to review based on volume, past experience, and other factors.
  2. In addition, Sponsors must document the methodology used to review STPOs, the result of each review, and any corrective action taken of their review findings.  A report of the Quality Control review and follow-up that included the review findings and actions taken, and the procedural information (such as the percentage of loans reviewed, basis for selecting  loans, and who performed the review), must be retained by the mortgagee for a period of two years.
  1. In addition to the loans selected for routine quality control reviews, sponsoring mortgagees must review all loans that are originated or underwritten by their company and that are originated by their STPO that go into default within the first six payments (referred to as early payment defaults).
  1. In order to ensure that sponsoring mortgagees’ operations are in compliance with fair lending regulations, the Department (HUD) requires that rejected applications must be reviewed within 90 days from the end of the month in which the decision was made.
    APPRAISAL MANAGEMENT: Last month the Government Accounting Office (GAO) conducted research and its finial opinion on the layout between the appraiser, Appraisal Management Company (AMC), and the lender.  Many of the findings are the GAO made is business as usual since the adoption of HVCC. Because of the length of the GAO report I pulled a few things that I thought were of some interest. Lenders may move away from AMCs and start managing the rotation because of the lender’s requirement to ensure AMC compliance. Appraisal quality improved after HVCC although they could not specifically tie the appraisal quality improvements to AMCs. Variances between the values in the appraisal reports and values produced by their proprietary AVMs decreased after HVCC went into effect. There is much more to be to gleaned from the GAO report and it is available at   SERVICING: Now that the industry has moved past loan officer licensing, appraisal management, repurchase claims, loan modifications, and a surplus of Real Estate Owned properties, the servicers are baptized with new compliance changes as the result of “Robo-Signing” and mishandled foreclosures and improperly recorded security instruments to properties.  The 14 banks that were recently audited were found to have flaws and are requiring servicers to have outsourced audit teams to evaluate for quality control of how well foreclosures where handled and if homeowners were financially harmed. If so, then the banks may be mandated to pay retribution.   This could be staggering to the servicers; whether it be banks or non-banks.  Also, the ripple effect and fear placed on quality control or compliance managers trickles down to the small community banks on reinventing quality control policies, procedures, and practices on servicing.  Because of vague guidance on servicing quality control, many servicers are left to devise a process for quality control and audit.  This may lead to a lack of continuity between servicers due to no standard being established.  However, during the loan modification, seasoned servicers found disconnect between the different servicing functional areas such as work-out, testing period, and foreclosure.  Each servicing functional areas had difficulty sharing information resulting in confusion between the borrower and servicer. More compliance requirements are coming to the servicers and the Mortgage Bankers Association is taking note and holding session in committees to collectively address the issues of servicing quality control. Tommy A. Duncan is executive vice president of Quality Mortgage Services LLC. For answers to your QC and FHA questions, please contact Tommy at (615) 591-2528