How to Maintain Loan Quality in a Volatile Market
Phil McCall is COO of web-based mortgage quality control and audit technology ACES Risk Management Corp. (ARMCO. He can be reached at pmccall@armco.us.
Volatility has become the new normal for the mortgage industry.
As lenders struggle to withstand the highs and lows of application and production volume, it is important for them to do so with an eye firmly fixed on quality. By anticipating the unique loan quality challenges of rising and declining volumes, lenders can keep their eyes on the prize, no matter the circumstances.
When loan production slows, it is inevitable that fraud opportunities will increase because the potential income for all parties in the mortgage transaction (realtors, loan officers, appraisers, etc.) decreases. Desperate times can push individuals to do “whatever is necessary” in order to close a deal and make ends meet, and that “whatever” isn’t always on the up-and-up.
Therefore, lenders need to review their loans during down periods with an extra fine-toothed comb to ensure fraud isn’t being perpetrated. Items to pay extra attention to would be the source of funds for down payment and closing costs and property valuations, as historically these are two heightened areas for fraud to occur in a declining market.
In addition, lenders tend to expand their loan programs during periods of decline, choosing to originate loans (loan products/programs) that they have not been deeply involved with in times of heavy production. This expansion of loan products/programs can lead to many manufacturing issues that can arise due to a lack of familiarity. Thus, lenders may need to review the questionnaires they use in their pre-funding and post-closing QC audits to ensure auditors are checking these loans against the loan’s unique underwriting and compliance requirements.
One odd trend that I have witnessed over my many years of operating a mortgage company is that there can be a tendency to relax during the slow periods, and consequently, one sees an unexpected drop in attention to loan quality. While this may seem counterintuitive–after all there should be more time to spend on quality when volumes are down–staff can sometimes become less effective when the “normal” busy flow of business is not present, and they do not need to remain constantly focused. The only real strategy for combatting this is awareness of the trend and vigilance–from the top of the organization all the way down–when volumes are down.
On the flipside, the issues that occur when loan production increases are much more familiar to lenders. When there is more than enough work to go around, individuals tend to backslide into bad habits–cutting corners, “overlooking” missing loan elements, etc. Furthermore, many organizations ramp up staff in periods of rising volume, hiring new employees and promoting existing ones–often times without taking the time to provide the proper training or validate the individual’s level of experience.
Loan production in busy times almost resembles an emergency room in terms of the mentality of staff and executives alike–address the most major concerns now and fix the rest later. Unfortunately, those “fixes” often get forgotten until the loan is being transferred/sold or auditors come knocking.
This is where, as the saying goes, “The best defense is a good offense.” There are times of the year that are generally known to be slower than others–the winter months of January and February, for example–are historically a slower time for loan originations. Knowing this, lenders can plan ahead and choose these times for staff training and to automate processes to aid in managing the unexpected peaks and valleys.
Using technology such as robust QC systems that automate the tedious and mundane parts of the process while allowing analysts to focus their time on value-added tasks not only strengthens the overall QC process, but it can also enable organizations to handle volume, big or small, with ease.
Keeping up with the shifting waves of mortgage loan volume is no easy task, and with the renewed emphasis regulators are placing on loan quality, it can feel a bit like building a sand castle during high tide. However, lenders that take the time to plan accordingly and build in automation that enables them to scale operations as needed will find themselves well placed, regardless of what the tide brings in.
(Views expressed in this article do not necessarily reflect policy of the Mortgage Bankers Association, nor does it connote an endorsement of a specific company, product or service. MBA NewsLink welcomes your submissions; articles and/or Q/A inquiries should be sent to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)
