TheMReport — News and strategies for the evolving mortgage marketplace.
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38 | TH E M R EP O RT O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T THE LATEST ORIGINATION The Quality Control Factor Which QC regulations pose the biggest problems for post-close loans? C hallenges associated with closing disclosures have dominated the 15 biggest quality control (QC) issues in loan origination, accord- ing to an analysis by MetaSource. The three common quality control issues that continued to trouble lenders in 2017 and in 2018 were tolerance violation, calculating cash-to-close, and timing violations. For the analysis, MetaSource studied its post-close QC audits that it had performed over the past year. It revealed that lenders were still struggling to consis- tently comply with enhanced disclosure requirements under the Consumer Financial Protection Bureau's late 2015 rules. While closing disclosures took up fewer spots in 2018, compared to 2017, on the top compliance is- sues faced by loan originators, the analysis found that the number of significant regulatory findings re- mained consistent in 2018 despite the fewer number of audits due to decreasing loan originations. Among non-regulatory QC issues, the analysis revealed that incorrect income calculation, missing or defective employment verification, and insufficient assets to close were the highest-ranked challenges by lenders. "Some of these findings are likely the result of inadequate processes for document manage- ment and version control and not confusion over the now three- years-old regulatory changes," said Brady Meadows, Senior Director, Mortgage Services at MetaSource. Meadows was referring to the TILA-RESPA Mortgage Disclosure (TRID) Rule under the Dodd- Frank Act. "Despite everyone's un- derstanding of TRID and efforts to correct for it, we're not seeing the decrease in findings we should be seeing," Meadows said. "It ap- pears the rush to execute volume is superseding effective document and process management." This rush, the analysis revealed had led to lost or conflicting records, with some lenders reis- suing documents for every small change and creating multiple re- disclosures in the process, "when it's not necessarily required." Some of the other QC issues indicated by the analysis included missing or defective settlement service provider list, security instru- ments, unacceptable omissions of debts, insufficient income docu- mentation, and total points and fees exceeding the maximum limits. Loan Application Defect Risk Surges Last year saw volatile defect risk rates, but is a more stabilized market environment on the horizon? T he latest First American Loan Application Defect Index revealed a 7.4 percent increase in the frequency of defects, fraudulence, and misrepresentation in the information submitted in mortgage loan applications in December 2018 compared to the month prior. Two recent trends—the rising share of purchase transactions and the impact of natural disasters—drove the late 2018 rise in defect risk, according to Mark Fleming, Chief Economist at First American. Fleming noted that while loan application defects can happen on either purchase or refinance transactions, there is a greater propen- sity for fraud and misrepresentation with purchase transactions. "Our research indicates that natural disasters go hand-in- hand with loan application defect risk, as natural disasters create the opportunity for misrepresentation of collateral condition. Unfortunately, this trend appears to be playing out in the aftermath of the tragic wildfires that struck California in late 2018," Fleming said. "Before July, defect, fraud, and misrepresentation risk was de- clining in California. Since July, California's defect risk has steadily increased. In California, fraud risk was 14.5 percent higher than one year ago and 6 percent higher than November," Fleming said. The December 2018 Index recorded an increase of 4.8 percent compared to 2017. However, this is also a drop in the index by 14.7 percent from the high point of risk in October 2013, the report found. Refinance transactions increased by 8.2 percent compared to the previous month—up by 14.5 percent compared with a year ago. Purchase transactions went up by 7.1 percent compared with the previous month, down 1.1 percent compared with a year ago. The share of refinance mortgage transactions dropped to 27 per- cent of the overall mortgage market in the fourth quarter of 2018, 10 percent lower than the previous year. Fleming also pointed out that Q 4 2018 saw loan application de- fect risk rise significantly, with overall defect risk reached its highest point in more than four years nationally. Alaska (+32.9 percent), West Virginia (+31.5 percent), Maine (+26.1 percent), New York (+24.7 percent), and Hawaii (+21.1 percent) are the five states that recorded a year-over-year increase in defect frequency. If mortgage rates continue to trend up into 2019, a corre- sponding increase in the share of ARMs could help offset the rise in risk from the increasing share of purchase transactions, Fleming noted. "Additionally, data from the 2017 Thomas Fire in California shows that defect risk remained elevated for five months after the wildfire, before trending down again. If this historical trend continues, we expect defect risk in California to normalize moving forward," he added. Fleming is optimistic about 2019 market. He indicated that while the rise in mortgage rates and the tragic natural disasters of 2018 elevated loan application defect risk, there is a reason to believe that this will stabilize in 2019.