GSEs to Lenders: ‘Keep Up the Good Work’


LOS ANGELES–It’s no secret that in the years following the Great Recession and the height of the subprime loan crisis, mortgage loan quality has improved dramatically–almost to a fault, analysts said here at the Mortgage Bankers Association’s Risk Management, Quality Assurance & Fraud Prevention Conference.

“The picture looks great,” said Stephen Spies, CMB, vice president of loan quality with Fannie Mae, Washington, D.C. “Over the past several years the industry has done a really excellent job of improving loan quality.”

At present, Fannie Mae said the eligibility defect rate for loans fell to 0.42 percent–“a ridiculously low number representing little more than 400 loans,” Spies noted, compared to nearly 80,000 in 2012. “But we still have high numbers of defects that really matter.”

Spies added that Fannie Mae has made a concerted effort to minimize the rebuttal process for defective loans. “It’s really paying off for the industry,” he said.

Jude Landis, vice president of credit policy and risk management with Fannie Mae, said automation continues to be key to improving loan quality and quality assurance. She said “tens of thousands” of loans have been put through the new Desktop Underwriter 10.0 launched last week.

“We are trying to minimize the pain points by automating many of the processes that were previously manual,” Landis said. “It still allow us to manage risk without using manual processes.”

Landis said Fannie Mae’s focus on appraiser quality has also yielded results. It analyzed more than 2,000 appraisers for improvement six months after receiving education and training letters, resulting in improvements from more than 90 percent on issues identified in those letters. “We have seen a dramatic decrease in the self-discrepancy for condition ratings amongst appraisers who have received AQM letters,” she said.

“We all want high-quality loans,” said Chris Mock, vice president of single-family quality control and customer eligibility with Freddie Mac, McLean, Va. “We all want the processes to be smooth and we want to meet today’s regulatory requirements.”

Freddie Mac uses a performing loan sample for measurement, as well as random sampling and target sampling. He noted that the targeted loan sampling has increased, to more than 20 percent. “Part of it is because you’re doing such a good job,” Mock said. “So we are taking a closer look at targeted loans because of their higher risk.”

Freddie Mac also engages in non-performing loan sampling, which comprises 8 percent of its total monthly sample volume; Mock said those repurchase rates are dropping, too; he noted that the appeals process for lenders on repurchase requests remains high (53 percent), with 43 percent of requests successful in overturning the repurchase request.

Keith Becker, vice president and chief credit officer for single-family risk management with Freddie Mac, said with interest rates poised to rise soon, new challenges will present, particularly with younger borrowers who will likely hold multiple jobs in their adult years. He also cited the rise in minority borrowers and borrowers who don’t have traditional credit profiles. “These are the dynamics of the industry in the future,” he said. “We must be able to adapt to these potential borrowers who may not fit in the traditional slots.”

Looking to the future, Becker said new risk tools and refining and enhancing policies to support underwriting, including underserved borrowers and Millennials, are in the works. “We’re working hard to anticipate the needs of future home buyers,” he said. “There are unique challenges to these kinds of borrowers. It’s important to us that our profiles cover non-traditional borrowers and don’t have a negative impact on credit policy.”