New Processes Drive Loan Quality Improvement
By Kerry Curry | March 17, 2016
It’s been more than five years since Fannie Mae began working with its customers more proactively on manufacturing quality and lender quality control processes. The effort is part of a fundamental shift toward driving quality control as an integral part of the loan origination process.
“Today, our quality control samples are based primarily on performing loans,” explains Duane Gilkison, director of credit risk at Fannie Mae. “Currently, 99 percent of loan files that we review are performing at the time of selection and are very close to acquisition.”
“We select our random files within 30 days of acquisition,” he adds. “And we are generally delivering feedback on these reviews in the same time period in which lenders are finishing their quality control work for the same delivery month.”
Quality From the Top Down
Gilkison, along with Candace Kubida, manages Fannie Mae’s teams of quality control specialists. They also guide a team that works on lender education, supporting the mortgage industry through educational programs such as QC Boot Camp.
“Our quality control specialists work with lender partners to align our quality control results with their own quality control efforts. Together, they formulate action plans to drive loan quality improvement. Fannie Mae is also available to consult with lenders on implementing quality control best practices,” Gilkison says.
The front-end loan quality reviews typically provide results to lenders within four to six months of a loan acquisition. They represent a fundamental evolution from the pre-financial crisis practice of reviewing loans after they defaulted.
Under the former process, lenders found it difficult to transfer knowledge about those loan reviews to current loans coming off the production line. By the time the loan had gone delinquent, it might have been several years old. There often were many reasons why key findings in the loan review didn’t transfer to improving current manufacturing processes.
Fannie Mae’s quality control reviews at the beginning of the manufacturing process help lenders make adjustments. That’s because the loans remain very similar to what’s pending in the pipeline.
“You can learn a lot from the loans that are coming off the manufacturing line,” Gilkison says. “The loans are current, the staff still work for you, the product set is the same, and it’s the same kind of lending environment.”
“What you see in our random samples are some of our lowest-ever defect rates. The quality of the loans we are obtaining is really high. That translates into less downstream risk to the customer in the form of repurchase or resolution requests,” says Gilkison. “As a primary benefit of high quality, lenders are receiving rep and warrant relief on successful full file reviews as well.”
Technologies Address Defects
The top defects haven’t changed a lot over time, but the incident rate has certainly declined. Complex income calculations involving self-employed borrowers or rental income continue to be sticky spots for the mortgage industry.
Other top defects include asset verification and failure to document sufficient funds to close. Emerging defects that Fannie Mae is seeing in this area include undisclosed liabilities, interested party contributions and the complexities around multiple financed properties.
To reduce defects, lenders that sell directly to Fannie Mae have access to industry-leading tools such as Desktop Underwriter®. It provides a comprehensive credit risk assessment. EarlyCheck™ helps lenders identify and correct potential eligibility or data issues prior to loan delivery.
The company’s newest technology software, Collateral Underwriter® provides an automated risk assessment of an appraisal report. (Editor’s Note: Read related article for more information on Collateral Underwriter’s role in loan quality.)
“Because we’ve lowered the risk of repurchase for our lenders, most are fully embracing our approach to quality control and appreciate the assistance we offer,” says Gilkison.
Kerry Curry is a freelance writer for several Texas and national publications and is the former executive and magazine editor of HousingWire.