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TH E M R EP O RT | 41 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 Critical Loan Defects Should Continue to Drop Defects on Fannie Mae loans are down since the implementation of TRID, and they should continue to fall as lenders better grasp the law's implications. C ritical defects are down compared with Q1 of 2016, according to the ACES Risk Manage - ment (ARMCO) Q 4 Mortgage QC Industry Trends Report. The report detailed the final quarter of 2016, including defect rates and findings for each Fannie Mae loan category, and pointed to the October 2015 im - plementation of TRID, as well as the industry's lack of under- standing of its requirements, as the main factors in rising defects and nonsalable loans. TRID, or the Truth in Lending Act/Real Estate Settlement Procedure Act Integrated Disclosure, is a combination of the two previous aforementioned statutes designed to help ensure borrowers know what they will owe and when it will be due. It also enhanced regulatory oversight, specifically in terms of closings. According to ARMCO's report, critical defect rates were high - est in Q1 of 2016 at 1.92 percent and declined through Q2 and Q 3 to 1.63 percent and 1.27 percent, respectively. Q 4 saw an 18 percent increase to 1.50 percent. The report also detailed the number of defects organized by Fannie Mae's loan de - fect taxonomy. In Q 4, Legal/ Regulatory Compliance accounted for 39.89 percent of defective mortgages, while Loan Package Documentation came in second at 28.27 percent. Loan Package Documentation defects, however, did not necessarily result in non - salable mortgages, unlike many Legal/Regulatory Compliance defects. Income/Employment veri- fication defects, the third leading cause of defect, only accounted for 7.58 percent. Credit-only defects showed similar results, with Loan Package Eligibility being the cause of defect 47.03 percent of the time—nearly more than all other categories combined. Income/ Employment was at 12.6 percent, and Borrower and Mortgage Eligibility sat at 11.79 percent. For Income/Employment, failure to obtain verification of employment was the top reason for defect at 60.75 percent. For Borrower and Mortgage Eligibility, 77.61 percent of reported defects were the result of annual house - hold limits being exceeded. ARMCO speculated that as industry professionals continue to better grasp the implications of TRID and lenders are able to con - vey clearer instructions to borrow- ers, critical defects should continue to trend downwards. Lenders Want Policy Changes A recent poll shows most lenders agree with the President that housing policies changes are in order. S ince his inauguration, President Trump has shown policy changes in the mortgage industry as one of his top priorities. From indefinitely suspending a cut to mortgage insurance rates within an hour of being sworn in to re- cent speculation on what his tax reform means for homebuyers, ev- eryone seems to be discussing the impending effects of his regulation and policy changes. This includes Lenders One Mortgage Barometer, who recently conducted a survey of 200 mortgage professionals regarding the matter. Of those polled, 73 percent said they share President Trump's sen - timent that policy changes would be beneficial to the lending mar- ket. One specific regulation that adds a burden to institutions is federal requirements on collecting and reporting mortgage data as outlined by the Home Mortgage Disclosure Act (HMDA). HMDA was enacted in 1975 in light of concerns that some financial institutions were not providing ad - equate home financing to qualified buyers in urban neighborhoods. Designed to promote transparency, it required lenders to disclose the details of loan applications, such as the applicant's race, gender, ethnic - ity, loan amount, type of dwelling, and whether or not the loan was awarded. Data collection, however, costs money, and while 42 percent of those surveyed said their prima - ry investment was in operational changes, such as hiring new staff, maintaining compliance, and software support, 32 percent of those said they were having a difficult time securing resources to collect, analyze, and report the data. This could be one reason for the rising cost of loans, and 65 percent of those surveyed said they believed loan costs would continue to climb. One way to lower the cost for collecting, maintaining, and reporting the data required by the HMDA is the automation that comes when institutions close mortgages electronically through eClosings. However, 39 percent of surveyed lenders are not currently using eClosings, and only one- third of those expect to imple - ment it within the next one or two years. Of the 61 percent that said they were using eClosings, two-thirds have been in business more than 10 years, suggesting that smaller lenders with fewer resources were the primary group struggling to keep up with data collection requirements. While it remains unclear which, if any, of President Trump's future policy changes will effect HMDA- or data-reporting requirements, it is clear from the survey that a large majority (65 percent) of mortgage professionals are "very prepared" for some sort of change, however that may look. © 2016, Fannie Mae. All rights reserved. Fannie Mae and the Fannie Mae logo are registered marks of Fannie Mae. Fannie Mae is an equal opportunity employer. We aspire to be America's most valued housing partner. In order to achieve that goal, we need individuals who are innovative and responsible leaders. We work to establish and uphold strong, responsible lending standards within the mortgage industry. We're committed to communities and to building a strong and sustainable housing finance system for every market and all market conditions. We are looking for employees who can join us in that commitment. Our employees are leading the way to provide safe, affordable, and reliable financing, so people across the United States have opportunities to buy, refinance, or rent homes. Join us and be at the heart of housing. Visit www.fanniemae.com/careers, and click "Search Our Opportunities" to view current opportunities, full job descriptions, and to apply online. Follow us at twitter.com/fanniemaejobs to learn what it's like to work at the #HeartofHousing.