REQUIRED READING: Remember the days when many loan officers would introduce ‘little white lies’ on almost every file to help smooth out the approval process and get their borrowers into a loan? Those lenders either didn't know it was happening or, more likely, simply looked the other way. After all, with the never-ending appreciation of real estate, none of the parties involved in the loan saw much risk.
Well, times have changed. Today, not only are minor misrepresentations a cardinal sin, but the layers of regulatory and disclosing rules that get enforced before loan officers even mutter their first ‘Hello’ to a potential borrower have dramatically changed how the origination process impacts success in the secondary markets.
Going forward, secondary-marketing strategies must include revisiting and revising operational policies to ensure the veracity of the loan data from the initial point of sale (POS) through closing. Admittedly, this might not be the most interesting topic to think about – not nearly as sexy as negotiating a 75 basis-point spread on a mandatory trade – but, arguably, it is just as important.
With the safety net of higher property values gone, fully understanding a borrower's true ability and likelihood to not default is key. And, comprehensive and accurate data is the source for really knowing your borrower. That means that data integrity, from the earliest documented step in an origination, can make or break your ability to sell that loan.
Loan data corruption and erroneous disclosures typically occur during the earliest interactions between a prospective borrower and a loan officer. For this reason, the POS is arguably the single most important focal point to ensure total loan quality. To this end, secondary-marketing professionals have a compelling interest in identifying and monitoring areas in mortgage lending POS protocols where data compromise is a risk.
While POS-based loan data integrity has added unprecedented relevance to success in the secondary markets, so have today's loan documents. Borrower disclosures and closing-document sets offer hard evidence of today's highly regulated and transparent mortgage transaction.
Because the devil is in the details – and the details are in the documents – this is another area to which you need to pay close attention. Documents tell two stories: They not only describe the risk profile of a borrower applicant, but they also reveal the weaknesses in a mortgage lender's operations and processes. Where there are documents, there is accountability.
Uncle Sam says�
The government has responded to the need for demonstrably improved measures to restore confidence in our industry's data integrity. For example, although recent Real Estate Settlement Procedures Act changes caused headaches for much of the industry, the reform sought to enforce transparency, accuracy and authenticity to that data that is germane to loan performance. The underlying objective of redesigning the Good Faith Estimate (GFE) and HUD-1 disclosures was to ensure that the information borrowers were presented at the POS was consistent with the final terms of the closing documents.
In the secondary markets, this data consistency results in streamlined sales, fewer suspended loans, faster warehouse turn times, and a higher confidence in your hedging strategy. Given these advantages, secondary-marketing officers should focus on establishing disclosure procedures that prevent loan officers from making unauthorized material changes to borrower-provided data.Â
Additionally, Fannie Mae's Loan Quality Initiative (LQI) is evidence that the true nature of the ‘new normal’ in the mortgage marketplace is that loan quality, data integrity and salability are inexorably linked. Fannie Mae's Early Check system provides a tool that instantly compares the loan data on a file moments before it is sold, with the state of the data at the time an underwriter approves it. With an ideal workflow, the Early Check should never result in a discrepancy, yet most environments are far from ideal. Anyone selling loans directly to Fannie Mae should be running every file through Early Check.
The mortgage-finance-related aspects of the Dodd-Frank Act also prioritize data integrity. While the minutiae of the Dodd-Frank Act are still being debated, its overall purpose is to restore the integrity and meaning of data so that loans headed for securitization are backed by clear and discrete data. This means that all loans headed for the secondary market will be scrutinized to ferret out errors, omissions, falsehoods or any other red flags. Fannie Mae's LQI might just be a ‘recommendation’ – but Dodd-Frank will likely have sharper teeth.
Lenders must now be able to prove that the data provided by their borrowers has not been tampered with or improperly altered at any point during the origination process. Secondary-marketing personnel have reason, responsibility and recourse to include data integrity – from the POS to closing – as strategically critical to their job performance.Â
For many years – even before the subprime boom – the phrase ‘loan quality’ was an intangible in the mortgage origination process. If a loan was approved, closed and then purchased by an investor, it was assumed to be of good, or at least adequate, quality. A certain number of defaults were a given, and as long as the default ratio of a lender's portfolio remained consistent and on the side of profitability, lenders learned to live with bad loans on their books. In many cases, as long as the borrower performed on the loan for a handful of months, a default would be the problem for the investor and not the lender that originated the file.Â
The harsh lesson learned over the past couple of years is that the responsibility for creating long-term performing loans falls squarely on the shoulders of the lender. As margins in the mortgage industry continue to shrink, the success of a lender is being measured by basis points that directly correlate with loan quality throughout the origination and securitization chain.
Unless mortgage data is entered accurately at the POS, is reflected in borrower disclosures as required and is transferred intact and unaltered through the LOS and to the documents engine, the concept of loan quality is a pipedream.
Rob Katz is president of San Diego-based Del Mar DataTrac Inc. He can be reached at rkrkatz@dmdinc.com. Curt Doman is president of Salt Lake City-based International Document Services. He can be reached at curt@idsdoc.com.
