GSEs Seek Balance in Risk Management, Expanding Credit

MIAMI–To put it simply, lenders–and customers–are embracing innovation, particularly in risk management.

“There is a lot of focus on innovation–there should be,” said Jude Landis, vice president of credit policy and risk management with Fannie Mae, Washington, D.C., here at the recent Mortgage Bankers Association’s Risk Management, QA and Fraud Prevention Forum. “It’s really exciting and it’s up to us make sure that innovation continues.”

Landis said she hears frequently from lenders about how they can improve the borrowing experience for both them and customers, while ensuring proper risk management. “We’re working on two tracks for the next several years,” she said. “We’re going to see loans continue to be processed the traditional way, but we’re also going to increasingly see use of these new methods, because it’s what lenders and customers are demanding.”

Landis said Fannie Mae’s Desktop Underwriter is streamlining the mortgage process. And she noted that all DU loans are now eligible for up to 50 percent Debt-to-Income ratios by removing additional compensating factors and relying on the comprehensive DU risk assessment. “By allowing different risk components, we can provide the widest door we think is possible to allow more borrowers through,” she said.

For example, Fannie Mae allows mortgage debt being paid by another party may be excluded from the borrowers DTI with certain documentation, and by allowing cash-out refinances to pay off student loan debt. She also noted that timeshare accounts are now treated as installment loans, not mortgage debt, even if they are identified as mortgage debt on the credit report.

“We continue to focus on expanding access to credit for creditworthy borrowers, simplifying guidelines, increasing effectiveness and providing more certainty to our lender partners,” Landis said.

Stephen Spies, vice president of loan quality with Fannie Mae said the company is moving toward the digital mortgage. He said as part of its new system Loan Quality Connect, Fannie Mae will be able to engage in real-time quality control management. “We can shoot you an email and allow you to fix the problem within 15 days, without us putting the loan in jeopardy by sending you a letter,” he said.

Spies said the new system is in testing stages and should be available early next year. “It’s an interactive loan quality management system that lets you work faster and smarter,” he said. “This is a huge leap forward in technology that you will be thrilled to have.”

Pam Padgett, vice president of single-family underwriting quality control with Freddie Mac, McLean, Va., said it too, has heard from lenders to handle processes more quickly, transparently, consistently and with innovation. “We want to be part of the new way of doing the mortgage business,” she said.

Padgett said Freddie Mac is looking toward cutting costs through automation. “But with the purchase market returning, file complexity is increasing,” she said. “Underwriters do seem to be successfully underwriting these loans, but there is some origination fraud trending, although still at historically low levels. We think with the proliferation of data, we can use it to assess and better decide collateral, income and assets.”

Freddie Mac has already transitioned to a new quality control workflow system, called Quantum. “It’s resulting in greater efficiency and accuracy because we’re using fewer keystrokes while expanding our fields to capture more granular data,” Padgett said. “By having the ability to capture that data, we’re able to improve our processes and drive down the cost of our own QC.”

Padgett noted performing loan defect rates continue to hover in the low single-digits. “We manage rep and warranty risk by identifying defects early,” she said. “This facilitates development of new tools to reduce reliance on delegated underwriting.”

Padgett said the most frequent deficiency category for loans remain income/employment and eligibility. “Calculating income correctly remains our number one deficiency,” she said. “One we are looking for is ‘loss-of-income’ at the time of closing; it’s a category that is growing.”

Kurt Smith, senior director of credit policy risk analytics with Freddie Mac, said the company is continuing to expand access to credit. “It’s who we are,” he said. “An example of that is our 3-percent down product and our Duty-to-Serve initiative, which aims at lower-income customers, rural customers and manufactured housing…As we consider the evolution of the borrower of the future, we are looking at ways to focus on the future generation of borrowers. We continue to focus on removing pain points and making faster decisions”

The challenge, Smith said, is finding the right balance: “the ability to expand credit to those who need it without burdening them with debt they cannot repay,” he said. “We must have the ability to be effective in both good and bad markets. In my 35 years we loosen credit when conditions are bad and tighten it when conditions are good. We have to find a better way of doing business.”