PERSON OF THE WEEK: In the years before the housing bubble, many lenders considered the subject of quality control in the same way they considered the subject of electrical power: They never thought about it until they lost it. Thankfully, the industry's approach to quality control is much different today.
But that's not to say that current quality-control operations could not benefit from even more improvement. This week, MortgageOrb speaks with Christine C. Rhea, president of Mortgage Investors Group, based in Knoxville, Tenn., to discuss her ideas on raising quality-control standards to even greater heights.
Q: How would you categorize the state of quality control in today's mortgage banking industry?
Rhea: It is definitely improving, from both a self-imposed response and by externally demanded factors. The lenders with good quality control are those that have senior management who are keenly aware of quality-control reports and findings.
Hiring and training personnel properly is critical today, because many firms that are trying to remain profitable are also cutting costs and dealing with the increased regulatory compliance requirements. In looking for good underwriters, we see that some may be experienced with collateral, while others have a solid credit analysis background.
While diminished quality control is not the sole reason for the state of today's delinquencies or foreclosures, it certainly plays a role in lender loan quality. The originating lender must have strong quality control that is as good as the investor's pre-purchase quality control.
Q: In your opinion, what are the essential elements of a successful quality control program?
Rhea: Successful quality control begins with having trained loan officers at the point of borrower contact. In order for the systems to work properly, it takes accuracy in data input when the loan comes in the door.
We spend as much time reviewing quality-control reports as we do creating them. We have implemented a new process for the entire workflow for document tracking, and we have placeholders in each part of the originations process to ensure all required documents are in the file and have been checked for completeness and accuracy. Ideally, the process should stop if a document is not in place.
At the time of loan closing, all documents should be up to date, cleared and acceptable for delivery to the investor or agency. A lender needs to be nimble enough to make immediate changes in any area of the process that is lacking. Lenders need to identify, communicate and fix any defects, regardless of their pattern or severity.
Remember, it is the originating lender's responsibility to mitigate its own risk and ensure all investor requirements have been met – and upper management needs to be a critical part of the process. Many lenders have some type of software or technology in place for their processing and underwriting, as well as for fraud detection. There is so much more technology at our fingertips compared to years ago – but although technology should be used, it can never replace human review.
Q: On the flip side, what are the core warning signs that quality control is either lacking or in need of improvement?
Rhea: Ultimately, it involves having to repurchase a loan. An originating lender needs to ask, ‘Are my loans defaulting at a greater rate than my competitors'?’ If the answer is yes, that lender needs to ascertain which part of the process requires a remedy.
Each loan in default should be looked at closely. As an originator, we need to know who submitted, reviewed, underwrote and closed the loan. Is there a key element that was missed?
For example, while reviewing loans in default during a period of time, we discovered that many had gift letters from relatives. In those cases, we immediately began scrutinizing all loans with gifts for a down payment.
Having said that, there were still loans that defaulted for no apparent reason. What makes one borrower default on his mortgage, while others let their other debts fall behind? It is not possible to underwrite the ‘morality’ of the borrower, but instead, we can only verify the facts that are presented. I would need a crystal ball for that, and I still might not get it right.Â
Q: How can a mortgage banking company correctly measure how well its quality control efforts are working?
Rhea: Obviously, they're working if loans go through a pre-purchase quality control and 100% are purchased and stay that way. Loans in default are often tied to economic circumstances rather than loan documents being dated or missing. But it is my belief that it is a company's responsibility to package a loan to Fannie Mae standards and maintain document integrity to the highest degree.
We know that our quality control is working when we can discover any problems – however small they may be – creeping up in the marketplace. Mortgage companies need to continually identify any trends and make sure errors in any part of the process are not repeated. Any trends in defaulting loans, such as loans from a particular builder or geographic part of a county, are opportunities to fix errors and further strengthen our employee training.