by Mary Kladde
There is good news and not-so-good news in our industry. The good news is that common sense appears to be gaining ground as the business model of choice for U.S. residential lending. That’s right, after almost totaling its viability as an economic engine, and compromising itself embarrassingly for a chance at Wall Street grade greed, the U.S. mortgage industry – public, private and non-profit players – is grappling with its own discipline issues.
From my perspective the most promising sign of this is found in Fannie Mae’s Loan Quality Initiative (LQI), which begins to address the legacy weaknesses and opportunities for mischief that persist in mortgage lending processes. The net result of LQI implies that pre-closing and pre-funding loan review are to become de rigueur, as will pre-purchase loan review. Another step in the right direction is the collaborative effort between the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) to develop the Nationwide Cooperative Agreement for Mortgage Supervision (NCA).
Compliance Ease co-founder Jason Roth has written an informed article about this collaboration in the September issue of Secondary Marketing Executive, but in summary, its standardized, data-intensive, multi-state approach to monitoring and auditing lenders will make it more difficult to conceal and easier to regulate mortgage lending compliance violations.
The not-so-good news is that our industry, its regulators, and policy makers continue to mistake the symptoms of our disarray for its causes. The problem, from my personal perspective as a mortgage lending back office service provider to lenders of every size and stripe, is that this industry flies with its eyes wide shut.
And it is not for lack of data. We’ve got more data than we can deal with, literally.
As a result, we are part of a supply chain trying to assemble investable financial instruments whose underlying terms and conditions are not accurately reflected in their recordkeeping. This means that investors cannot rely on the loan files they receive from lenders unless they conduct a comprehensive loan level review, including documents. If investors are going as a matter of policy to conduct loan level review, lenders must prepare for the scrutiny via their own loan review processes.
There is a fundamental disconnect in the mortgage lending lifecycle that will thwart even the most well intentioned common sense initiatives. What good is data validation, even if conducted repeatedly by both the loan originator and the purchaser, if the data in the LOS does not process straight through to DU to correctly populate the appropriate document sets?
A stubborn dilemma remains. Lenders are adding data to DU from their platforms but oftentimes loan closing documents are not synced with that data. Clearly, if DU is taking into consideration data that is not recognizable and manageable by lenders’ doc prep systems, the document sets on these loans will be unreliable reflections of their underlying conditions.
This, in my view, reduces DU to little more than a placebo by which many in our industry will be placated into believing once again that the emperor’s new clothes are glorious and impervious to error. We need standardization of loan processing data for underwriting and accurate documentation, and every lender should be girding themselves for 100% loan level review throughout the loan and securitization lifecycle.