There’s no doubt that loan quality has improved a good deal since the housing crisis a decade ago. Of course, regulators and investors haven’t given originators much of a choice, yet evidence is beginning to emerge that the industry’s loan quality issues are not over.
You may have read about the recent Moody’s report which found that weakening mortgage quality could lead to the deterioration of RMBS performance. Some of the causes Moody’s pointed to included higher LTV ratios, borrowers with higher DTIs and a greater number of first-time buyers.
Indeed, we are seeing all these characteristics in our quality assurance work. We have found three specific reasons why poor loan quality is returning. Here they are:
Reason #1 – The Great Staff Shuffle
The struggling loan market has prompted companies to lay off people and shuffle the remaining staff into new positions. We see this everywhere, especially in the headlines. Wells Fargo, for example, just laid off 600 employees, while JP Morgan Chase has laid off 400. Rest assured, layoffs and cutbacks are happening at small- and mid-sized lenders as well. After all, they too are struggling with high loan production costs and lackluster volumes.
In this environment, the fight for high-quality underwriters and loan officers has become an industry-wide challenge. This has led to a huge reshuffling of staff, between companies and within organizations, with many inexperienced or new people taking on different roles. Unfortunately, processing and manufacturing errors are an inevitable byproduct of this reshuffling and reorganization.
One obvious way to deal with this is to stick with the same people to maintain consistent quality. When that’s cost-prohibitive, the next best thing is to partner with a third-party QC provider. Doing so will ensure consistent processing and manufacturing so that loan quality remains stable.
Reason #2 – The Non-QM Push
In the current market, lenders find themselves challenged with helping first-time buyers qualify in an environment where rates and home prices continue to increase. This has led to more non-QM and niche loans. Every time a lender stretches to help someone qualify for one of these products, the potential for more risk is introduced, which is often revealed in loan errors and inconsistencies. When you combine an increasingly complex product menu with using less experienced or new staff, the chance for errors only grows larger.
Not all quality errors affect a loan’s salability, nor do they result in bad loans. If the focus is loan quality, there are more errors in non-agency loans as well as loans in which there’s lower volume.
The way to counter this trend is to leverage skilled underwriters with experience in underwriting and performing pre-close and post-close QC on all types of loans. If your staff doesn’t have this expertise, it’s best to outsource it to a vendor that does.
Reason #3 – Lack of Remediation
Catching errors and inconsistencies in loan files during the QC process is one thing. Doing something about it is another.
For too many companies, QC is about simply checking a box in order to maintain compliance with state and federal regulators or the secondary market. Each time a missed stipulation, a lost document or a bad calculation isn’t investigated to determine the root cause, you can almost guarantee those mistakes will happen again.
All lenders need remediation. Monthly and annual reviews need to be accompanied by action plans that detail how loan errors will be fixed – and then those action plans need to be followed. With the right quality assurance partner, lenders can depend on rigorous monthly reviews and assistance with creating remediation plans that work.
Most of the causes of poor loan quality can be addressed by simply finding the right help. But it’s not just expertise that matters. With loan production costs near all-time highs, your best bet is to find a loan QC and fulfillment provider that only charges for services you need, so your costs stay the same regardless of volume or staff changes.
If you are a client, thank you. If you are not a client and would like to experience what such a provider looks like for yourself, drop us a note at firstname.lastname@example.org.