t role did the lack of due diligence play in the creation of the current crisis?[/b] And how can mortgage bankers use due diligence to help speed a recovery? This week, MortgageOrb talks with Sue Allon, founder and CEO of Denver-based Allonhill, about the value of progressive due diligence. [b]Q: [/b] How would you categorize the state of due diligence in today's mortgage banking industry? [b]Allon:[/b] Like everything else in the industry, due diligence fell into a shambles when the market went away. It's reassembling right now. There are a couple of scrappy firms still standing that take a manual approach to file review. They do a good job on basic work, and they have a loyal client following. There are just a couple of larger firms positioned to take on volumes of work that have the flexibility to perform a broader range of reviews beyond a simple file review. Investors are now looking for a lot more than a data dump from loan file to spreadsheet. They want to know what's wrong with a loan and what the next step should be. That takes a lot more sophistication. [b]Q:[/b] How much of the collapse of the industry can be attributed to inadequate due diligence? [b]Allon: [/b]All and none. Due diligence firms did exactly the job they were hired to do, and it wasn't adequate. If they had done a different job – and, in particular, if they had found a way to disclose their findings, investors still might have wanted to buy bad loans. But they wouldn't have been able to justify the prices they paid, and that would have put a stop to the pie-eating contest. Should they have redefined their job sooner? I think so. But the real question is whether they will redefine themselves now, or whether we'll see the same mistakes repeated once securitizations come back. [b]Q:[/b] What role did the federal government have in allowing lax due diligence to take root in the industry in the period prior to the crash? [b]Allon:[/b] I don't think it was the government's job to protect us from ourselves, and I don't think regulators saw any reason to question the due diligence process the industry adopted. I do expect the government will take an active interest after witnessing the meltdown. The onus is on the industry to take the lead on delivering a much higher level of integrity and setting higher expectations. It starts with the investor. Investors shouldn't buy if there isn't complete disclosure, with reliable, provable support behind every detail of every securitization. [b]Q:[/b] How can a mortgage banking company create and maintain a culture of organization-wide due diligence? [b]Allon:[/b] It starts at the top. The most respected leaders of organizations have to step forward to tell their people they are part of an enterprise that believes in integrity and full disclosure. It's possible for a mortgage bank to have employees who walk into their offices knowing that is their purpose and who are willing to defend it. [b]Q:[/b] If we were to revisit this subject a year from now, where would you expect to see the industry's due diligence level? [b]Allon:[/b] Securitization remains a highly effective way to bring liquidity to the market. In a year, I expect to see new issues backed by new originations and seasoned loans. I expect to see due diligence that is far superior than we saw in the past. If investors and government agencies are to be convinced, due diligence has to have real meaning. Due diligence must have scientifically proven statistical sampling methodology behind it, and it must be technology-driven. You can't do a thorough, meaningful review of a large number of loans under time pressure without a system that provides a highly controlled environment and constant checks and balances. I think you'll see due diligence firms take the lead in determining what loans they look at, what criteria they verify and what happens when exceptions are found. Ultimately, investors will see disclosure statements in offering documents written by due diligence firms that attest the completeness and accuracy of reviews. If they don't see that, they shouldn't
