Risky Business

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cover story Needed most is a sensible strategic planning analysis of the national and global economies, national and global politics, future mortgage markets, and the establishment of market trigger indicators that anticipate mortgage market directions, Duncan says. Estimates that evolve from that process must be monitored weekly so that decision points can be executed to more efficiently and effectively expand or retract efforts or initiatives, he adds. Decision making in technology involves a delicate but specific balance, Duncan says. "A loan that doesn't meet every requirement of the investor or regulator will be instantly flagged by technology and production halted, which I think involves a great deal of symmetry," he said. "In the real world, a loan that fails to meet every guideline can somehow slip through the process and continue on to funding, even though all of the data available indicates it shouldn't. That's not symmetrical, but it is real life." Ultimately, it's why technology alone never can be a solution for effective quality control in mortgage lending, he maintains. As a result, "each lender will have to determine where they assume risks and which are allowed in order to focus growth in the marketplace," Duncan said. The combination of data and information will lead to a "reasonable situational awareness needed to make the next move," he added. Setting Standards, Transitioning Tech M eanwhile, while the form it will take remains nameless—albeit temporarily—the standardization of quality control applications for mandatory uploads looms as the next-gen tool, Duncan says. Mortgage bankers will be required to upload data results from prefunding and post-closing quality control, and data reconciliation will be performed between various levels of mortgage banking to affirm data and quality control consistency among levels, he explains. Furthermore, the data will be instrumental in rating loans and mortgage bankers' performances and establish standards for business relationships as well as portfolio scores. Meyer added: "Prefunding problem detection systems will definitely help measure personnel performance, identify where processes should be changed and improved, and define training program needs." As for defects measurement, compliance issues appear to outweigh risk issues several times over, though it's important not to underemphasize the significance of the latter, Meyer cautions. The number of risk defects that might warrant a repurchase remains high, while mortgage fraud in originations have "dropped off nicely" due to stronger prefunding quality control programs, he said. Mortgage fraud in originations will increase with the decline of refinance and production volumes and the increase of purchase originations, Duncan predicts. "I hope I'm wrong, especially with the efforts [devoted to] reducing mortgage fraud mortgage defects," he said. "However, in my opinion, the large volumes of refinances have [provided] a false sense of security in many quality control programs." Duncan bases his analysis on the comparison of FHA and conventional loan defects, pointing out that the sum of all conventional refinances outnumbered all FHA loan production. "While FHA defects differed from those of conventional lending . . . the FHA didn't have near the underwriting problems as the conventional loans," he said. In comparing the type of defects between the FHA and conventional loan, Duncan is unconvinced that the current quality control efforts will make much headway in the purchase market. "Appraisal defects are still flat and relatively high," he said. "For a number of reasons, I don't anticipate a reduction in appraisal defects and believe it will continue to worsen." He attributes that point of view to a number of factors, including what he labeled the high degree of human opinion and work placed into the appraisal; the number of appraisal analytics and inconsistency in many of the appraisal technology products; market inconsistencies, which make it difficult for appraisers and technology to remain current; the lack of a new generation of appraisers; and an often heavy workload, impacting appraisal quality. Apprising Appraisals L enders are doing their best to address appraisals, and many have come on line with the LQI concept and have made a number of loan quality improvements with pre-funding, Duncan adds. "If the mortgage industry wants to see improvements in appraisals, give the appraiser the same technology that's available to underwriters so they can better evaluate their appraisal and support their opinion," he said. Along those lines, when appraisers have at their fingertips the same appraisal technology as lenders, Duncan says appraisals will be the top defect-related problem in mortgage lending. "I see many non-banks addressing compliance by recruiting personnel [well versed] in law and banking, [which will help them incorporate] improvements in mortgage compliance," he said. "While some mortgage bankers have given risk managers more leverage in production, I still see some mortgage bankers overriding risk management's recommendations, which [explains] why compliance defects [largely] outweigh risk defects." Most lenders are well aware of the disparity of the "new normal" in U.S. real estate; the issue now is how to integrate these new analytical tools into existing systems and, more importantly, within the guidelines of various regulations, Villacorta contends. In Case of Emergency M ark Meyer, founder and CEO of MLinc Mortgage Solutions, suggested that one up-and-coming trend involves "lenders establishing third-party service relationships with attorneys and consultants, who are repurchase experts, for analyzing, negotiating, and mitigating associated risk and cost." Meantime, Carrington Mortgage Services EVP Rick Sharga contends the high-tech landscape du jour involves "equal parts process improvement and technology capabilities. You want the technology to be secure and easy enough to use that you can do reports and analysis on the fly," he said. Ultimately, though, Carrington believes it's mostly about the methods employed to get the job done. "We have very strict processes in terms of documentation, [to the point of doing things like] recording all of our communication with consumers," he said. "You need technology that makes accessibility to those records reliable and easy to get at." That way, if you need to deal with a regulatory issue or consumer complaint, you have a way to track back and make sure you did what you were supposed to do in the first place, he notes. Not only that, Sharga says his firm's a big believer in training. "When we bring people onboard, we do a lot of training, and we've invested heavily in online training tools, so no matter where our employees are and no matter when the regulatory rules change, we can update them and make sure they're trained to be compliant." In fact, Carrington even ties performance and behavior to compensation, an ideal way to ensure regulatory compliance remains a priority among employees, he says. The M Report | 25

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