REQUIRED READING: Today's mortgage banking industry looks nothing like the industry of five years ago. Heck, it doesn't even look like last year's industry! There has been a multitude of changes at almost every level of the industry, especially in regard to quality assurance and risk management.
On the surface, quality assurance and risk management represent the ability to identify certain trends – whether negative or positive – and act accordingly. That definition has been consistent for many years, but taking the concept and putting into practice has changed dramatically.
A decade ago, many mortgage lenders performed quality-assurance tasks mandated by the secondary market and other buyers. Back then, risk management was focused primarily on credit risk rather than on operational risk – and credit risk was more along the lines of underwriting guidelines and secondary-market interest-rate risks.
Indeed, it was commonplace to ‘re-underwrite’ a sampling of loans in a pool – and only after they were sold off into the secondary market. This type of quality assurance fit into a hard-charging origination market that was often characterized more by volume than clarity.
Today, however, we rarely hear about such ‘quantity versus quality’ considerations. Instead, what we are hearing is talk about operational risk, because many investors want to be assured that lenders have appropriate review processes in place.
Throughout the industry, lenders are re-evaluating their pre-funding, post-closing and compliance guidelines. No one is leaving anything to chance – and pity the lender who falls afoul of today's compliance requirements!
Anna DeSimone, president and founder of the Boston-based compliance audit services group Bankers Advisory, observes that the sea change the industry is experiencing in risk management is a welcome reflection of an industry that needed to get its act together. ‘Lenders had always been thinking on a loan-by-loan basis,’ she says. ‘That is perhaps the biggest mistake – focusing on a transaction basis. You become myopic that way, only thinking about the life of a loan like you did at its closing.’
Keeping the focus
A dramatically different and new approach to risk management is made possible by tools that allow real-time communication, helping to alleviate the 30-day gaps before closing with the borrower. This has become especially apparent with Fannie Mae's Loan Quality Initiative requirements. Of course, tools are only as good as the people using them, and it is important to ensure that today's business processes are followed.
For starters, in re-underwriting a loan, it is important for the post-closing team to be doing correlative studies between exceptions/deviations that were found during a pre-funding, as well as post-closing, review. If a lender's post-closing team could identify pre-funding conditions that were definitely linked to early payment defaults or other unsalable loans, then some repurchases could be prevented.
Also, it is important to automatically communicate critical exceptions or deviations to the areas of responsibilities and for managers to stay way ahead of the monthly reports. This maintains a level of teamwork within an organization versus a version of the ‘quality assurance police’ of the old days. This early communication process allows a dialogue between the post-closing division and the origination process. If files are missing from their imaged or hard-copy file, the post-closing-division employees can request these documents and resolve the severity of these findings way in advance of their monthly reports.
Finally, managers of particular divisions need to be on alert for potential kinks or hiccups in the origination process. Something good can actually come out of these snafus: Managers can use them to re-educate their divisions on how to prevent future errors.
It is important when loans are being re-underwritten to record deviations for trending purposes. Post-closing divisions are compiling these trends and, more importantly, the frequency of critical deviations or exceptions details that are causing loans to be unsalable.
Once the action plan is in place, the risk management team can compile trending analysis to see if the frequency of these deviations is diminishing with the re-education on the front-end processes. If deviations are going away, then the action plan, as well as the teamwork, was effective.
Further, those metrics can be broken up into segments representing low, moderate, high or prohibitive errors. All of this is good news for risk management with higher levels of quality control – which, of course, is important in today's intensive regulatory environment.
The legendary artist Michelangelo once observed, ‘The greater danger for most of us lies not in setting our aim too high and falling short, but in setting our aim too low and achieving our mark.’ Today's industry requires the risk management process to set its aim high and achieve its goal. Anything less would be unsatisfactory, to put it mildly.
David O'Malley is president of ACES Risk Management Corp., based in Fort Lauderdale, Fla. He can be reached at (954) 202-5606.
