REQUIRED READING: The ancient Greek philosopher Aristotle, when asked how to define quality, suggested, ‘Quality is not an act, it is a habit.’ In the run-up to the housing bubble and the subsequent chaos created by its collapse, quality was neither an act nor a habit – it was strictly an afterthought.
‘Until the past few years, the quality-control department was almost like the neglected stepchild,’ recalls Avi Naider, chairman and CEO of ACES Risk Management Corp., based in Fort Lauderdale, Fla. ‘There was a tremendous focus on the origination side driving as much growth and revenue as possible. But we've seen the consequences of that.’
If the events of the past few years are any indication, the mortgage banking industry has learned its lesson the hard way and has made quality control a force of habit.
‘It is much better than it was in the past couple of years,’ observes Ann Fulmer, vice president of business relations at Interthinx, based in Agoura Hills, Calif. ‘The mortgage meltdown and repurchase activity made it pretty clear that quality matters.’
‘Companies are getting serious about quality control – the federal government and wholesalers buying the loans expect them to do it,’ says Jan Wetzel, founder and president of Wetzel Trott, based in Farmington Hills, Mich. ‘If a lender is approved by Fannie Mae and Freddie Mac, you can be assured they're doing it. Otherwise, there will be no outlet for their loans.’
Yet today's quality-control efforts have taken on a new importance that requires a constant – and, perhaps, endless – focus on details.
‘We have biweekly conference calls with our underwriting staff and operation manager to be up to speed on guideline changes and investor overlays,’ says Bill Darling, CEO and secretary of Mann Mortgage, based in Kalispell, Mont. ‘We've taken a much more sober look at our quality control. It is not that we haven't been diligent for some years, but given the state of repurchases, we want to institute policies and take as much of an in-depth look as possible. We want to insulate ourselves for repurchases – those are a sobering reminder that if things don't look right from the underwriting perspective, there will be problems down stream.’
‘Quality control needs to be continually ramped up across the board until you have perfect loans all of the time,’ explains Jonathan Corr, chief strategy officer for Pleasanton, Calif.-based Ellie Mae. ‘The more you move the quality process earlier, the better off you are in terms of gaining high quality at lower costs.’
But quality control evades the comfort of a one-size-fits-all approach. For some companies, quality control is a reaction to a still-shaky industry operating in an economy that has yet to regain its footing.
‘In the past few years, we've seen a lot of companies that were hit really hard with buybacks,’ says Paul Marchese, senior vice president at Clayton Holdings LLC, based in Shelton, Conn. ‘That is really fresh in everyone's minds and nobody wants to do gown that road again.’
On the other hand, some companies are using their newly vigorous quality-control measures as a proactive tool to further enhance their market leadership.
‘We see quality control as a source of competitive advantage to those institutions that do it well,’ says Jason Marx, vice president and general manager of mortgages at Wolters Kluwer Financial Services, based in Minneapolis.
Which way to go?
With an increased emphasis on quality control, however, comes a brand new challenge: How can the industry improve on its improvements? For Jim Kirchmeyer, CEO of Kirchmeyer & Associates, based in Buffalo, N.Y., successful quality control is an integral part of the complete operation.
‘It is different in every lender's shop,’ he says. ‘But what's working now is that quality control used to be a back-room operation. Now, it has been pushed more to the forefront because of the market. Now, with the housing market upside down, there is more and more importance on the quality control and quality assurance department in the lender's shop.’
Still, there are some areas where quality control gets muddied.
‘You can send three appraisers to the same house and get back three different answers,’ says Rick Seehausen, president of LenderLive, based in Glendale, Colo.
‘In general, operations still need work,’ adds Frank Pallotta, executive vice president and managing partner for Loan Value Group, based in Rumson, N.J. ‘A lot of quality control is very operationally burdensome. Origination and servicing is still a labor-intensive process. You are expending more resources to make sure the loan is underwritten properly.’
Pallotta notes that even at this relatively late date, some companies are still struggling to get up to speed in improving quality control.
‘It is like turning around the Queen Mary,’ he says. ‘For decades, these companies did not put the time and money into servicing operations.’
Some people point to technology as helping to further enforce quality control.
‘In the origination process, there is still a lot of manual intervention,’ says Marx. ‘It brings in the risk for human error. We need to work on automating the process to get the data clean.’
However, technology has also been blamed for the lax quality control that created the industry's problems.
‘Some mortgage lenders were relying too heavily on technology and lacking verifications,’ says Kirchmeyer. ‘You can rely on technology, but you also need to do your job and verify the things that prevented loan problems.’
The wider world
But outside of the lenders' operations, there are still external forces that continue to challenge quality-control endeavors. Mortgage fraud, for example, continues to flourish, requiring a constant vigilance on the part of originators to ensure quality control is not compromised.
‘Based on put-back and buyback forensics, it is clear that fraud is an issue,’ says Fulmer. ‘Today, issues with property valuation are a pretty big concern – fraud thrives when there is uncertainty in property values. Lenders have to be on their toes – fraud schemes shift to take advantage of market changes – and what you don't know can hurt you.’
A.W. Pickel III, president and CEO of LeaderOne Financial Corp. in Overland Park, Kan., lists the fight against mortgage fraud as a high priority.
‘Although the quality of loans has never been better, we have to continually stay on the cutting edge,’ he says. ‘There is still fraud, and the guys doing the fraud seem to get smarter every day.’
Also complicating matters is the federal government. According to Rebecca Walzak, president of Walzak Risk Analysis, based in Boca Raton, Fla., the powers in Washington do not always seem to be practicing the quality-control mantra they preach.
‘The quality-control measures at Fannie Mae, Freddie Mac and the Department of Housing and Urban Development are antiquated,’ she says. ‘They've had the same quality controls in place since 1985 to 1987, and it has really not changed. It is actually based on an outdated methodology from the late 1800s – the mere inspection of loans every so often. That does not work in this day and age.’
Then there is the relatively new challenge of the recent skein of regulatory changes that came out of Washington in the past two years.
‘Washington's regulations are being overprotective,’ says Kirchmeyer. ‘People who don't know how the industry works on a day-to-day basis are trying to solve our problems.’
‘We have to wade through a manifold of regulatory issues with no real guidance,’ says Ruth Lee, vice president of sales at Titan Lenders Corp., based in Denver. ‘The only real guidance is when you lose a lawsuit. The big guys have lawyers, but the mid-tier and smaller lenders are terrorized by a tort system that doesn't support them.’
Lee also notes one key aspect that, to date, has not been addressed: a be-all/end-all understanding of what is expected from originators in regard to quality-control operations.
‘Without standards, what are you measuring quality control against?’ asks Lee.
‘How do you define 'quality?'’ says Walzak. ‘Production people say quality is about how the loan is going to perform. The quality-control people would say it means the loan can be sold and not be repurchased. We're starting with two different definitions – they're related, but they're different.’
Nonetheless, the industry is clearly on the right track in raising its quality control standards.
‘It will only get better,’ says Naider. ‘We will see more and more sophistication in the approach. In the past, there was a lot of separation between the origination side and quality-control side. Now, financial institutions moved up their quality control so it is done on the pre-funding side as well. Plus, they may get asked 75 different questions by their quality-control analysts.’
