It’s hard to believe it’s been 10 years since the depths of the housing crisis. Thankfully, a lot has changed during that time, most of it for the better. Lenders are being more scrupulous and careful these days. But while they have buttoned down on loan quality, loan defects are now on the rise.
First American’s most recent Loan Application Defect Index bears out what we are seeing ourselves. Accoring to the index, defects rose 3.4 percent between January and February, in part due to an increase in higher risk loan applications.
Here are the top five loan defects we’re seeing at The Stonehill Group, along with what you can do about them.
1. Defective Loan Package Documentation
This has been an ongoing issue among lenders since the changes to TILA-RESPA went into effect two years ago, and it does not seem to be going away.
This too has been on the rise since TRID, as lenders are still struggling with new Loan Estimate and Closing Disclosure forms.
3. Asset Documentation
Lenders are failing to document all types of required assets, which can include everything from the cash value of life insurance policies to revocable trust funds, a borrower may have available.
4. Income Documentation
Files frequently contain income errors and missing information, such as the calculation used to determine qualifying income.
5. Appraisal Issues
Between misprsenation of physical features to poor selection of comparables, there are more types of appraisal problems than any other type of defect.
Eliminating loan defects for good may not be possible. But they can easily be reduced by following three steps:
Get help. Loan defects in the origination process is a sign of not having enough resources to keep up with volume. If you’re having trouble, supplement your in-house team with origination support or fulfillment from a relaible third party.
Get serious about pre-close QC reviews. By and large, originators with the highest number of defects are not consistently performing pre-close QC reviews, which enable an originator to understand why defects happen and how to fix them.
Develop and follow a QC plan. Sadly, many organizations fall short of this standard, even though it is required for both originators and servicers. Companies that do maintain QC plans experience lower loan defect rates.
In many cases, these three steps are best achieved by partnering with a trusted third-party vendor that specializes in loan quality and has been doing QC long enough to understand how and why loan defects develop. Often a vendor can not only help reduce loan defect rates, but also find ways to help lenders operate more efficiently and cost-effectively, which is no small challenge in today’s lending environment.
If you’re struggling with defects, increased origination volume or QC reviews, The StoneHill Group can help. Reach out to us anytime at sales@TheStoneHillGroup.com.