Mortgage Industry News

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.

This article was contributed by TLC Partner Peak Performance Resources, Inc., a leading provider of mortgage industry consulting services. Learn more at www.PPRInc.biz.

Fannie’s LQI is underway: Will you be ready?

Remember when it was simple to deliver that generic, conforming loan and only the non-conforming product required meeting all the nuances of the investor?  Fannie Mae’s announcement of its Lender Quality Initiative (LQI) project has changed that for the immediate future, and the changes impact all brokers and lenders, as the requirements will be pushed down to the originator of the credit file.  Enhancements are significant and require changes in several areas, including technology, internal origination processes, quality control policy, and controls in place during delivery to Fannie Mae. Fannie Mae will provide reporting to assist lenders as the LQI plan progresses to different stages, and lenders should take advantage of these to locate the problem areas and address them before the warnings convert to fatal errors that result in undeliverable loans.

The focus areas during origination include several aspects of the borrower profile, expansion of the General Services Administration (GSA) Excluded Party List and HUD’s Limited Denial of Participation List (LDP) to include individuals in control or influencing origination or servicing, quality control policies and specificity of requirements, and delivery of the appraisal prior to loan delivery.  The Loan Delivery and Desktop Underwriter system is being revamped and will include enhancements for required delivery of additional data and changes from warnings to fatal edits for many fields. Fannie Mae will change to MISMO’s 3.0 XML delivery format. The LQI initiative also includes changes to the way Fannie Mae will deal with MI insurers and additional validations that the MI coverage is in place.

My company does not deliver loans to Fannie Mae, so are we really impacted? The Fannie Mae requirements are comprehensive and will require changes for all companies originating loans as wholesale lenders push these requirements down to their approved brokers and correspondents for all loans that will eventually be sold to Fannie Mae. Brokers and correspondents will see changes in the Sellers Guides as wholesale lenders implement their internal changes for deliveries to Fannie Mae. Not all wholesale lenders will implement changes the same way or on the same timetable, so brokers and correspondents delivering to investors will need to stay abreast of the notifications from those investors.

You have my attention!  Where do I begin?  Start at the beginning — with a plan.  Depending on the size of your organization, assign at least one person to review the requirements and determine how those areas will impact your organization’s processes.  For example, the LOS you use may require additional data fields and changes to interfaces.  The Quality Control plan will require revisions, so begin that review process. If your company delivers directly to Fannie Mae, give someone the responsibility for monitoring the new reports showing the deficiencies during the delivery process so they can be corrected before the warnings become fatal edits. The larger the organization, the more widespread the changes will be. It would be wise to inform all the staff members of the upcoming changes, the timetable for the phases, and how those changes will affect them.  Springing fatal edits on your origination sources without warning is not a way to increase loan production!

Consider all the checklists departments use, either online or printed forms for reviewing data.  Revise them accordingly to reflect the new data requirements.  Review procedures regarding processes to identify borrowers and their credit profiles.  Document existing pre-closing quality control and anti-fraud processes and work with the quality control plan to increase the steps to meet the new Fannie Mae specific requirements.  For areas where Fannie Mae will leave policies to the lender discretion, document the policy carefully to assure all employees follow the policy. Brokers or correspondents will need to decide whether to use each investor’s policies as loans are designated for sale or review all of them and develop a stringent generic policy that allows for variances only when loans are designated and locked with an investor.  Don’t forget the training for the new DU findings regarding specific requirements for documentation in new areas.

But there’s plenty of time? Fannie Mae has given lenders advance notice, and the enhancements are phased in with helpful reports to analyze your organization’s progress toward meeting the requirements. The overall complexity of these enhancements means organizations cannot take a wait- and- see attitude but should begin planning and reviewing what needs to be done within the organization.  Even those with very clean, efficient processes will see some requirements for change, and for those organizations that have been intending to do internal reviews, there’s no better time than the present!  As always, PPR is available to assist you to meet the goals you’ve set to comply with the LQI.

IMPORTANT UPDATE INFORMATION

All lenders that sell directly to FNMA or to an investor that sells directly to FNMA will be required to implement new due diligence policies and procedures starting within the next 90 days.

On February 26, 2010, Fannie Mae issued Lender Letter LL-2010-03, An Introduction to Fannie Mae’s Loan Quality Initiative, which identified policy, process, and technology enhancements aimed at improving the lender’s ability to deliver mortgage loans that meet Fannie Mae’s underwriting and eligibility guidelines and thus mitigate repurchase risk. This Announcement describes some of the changes impacting the Selling Guide as a result of the Loan Quality Initiative (LQI). Specifically:

·         Confirmation of each borrower’s identity prior to the extension of credit  (applications dated on or after 06/01/10)

·         Verification that all borrowers have a valid and accurate Social Security number or Individual Taxpayer Identification Number

·         Desktop Underwriter® (DU®) “Potential Red Flag” messages

·         Confirmation that all parties to the mortgage transaction meet certain qualifications

·         Determination that all borrower’s debts are included in the qualification for the mortgage loan

·         Identification of the property unit number

·         Calculating LTV ratios

·         Manual underwriting of DU Refer with Caution/IV loan casefiles

All customers should be prepared for some of the new due diligence required on FNMA products.   If you are not a direct seller/servicer executing these new functions, you should be prepared for delays or process enhancements by your investors who will be implementing these new functions.

https://www.efanniemae.com/sf/lqi/pdf/lqisummary.pdf   THIS SUMMARY PROVIDES RESOURCES, LINKS and DATES.