0
0
For many years, I worked for a large, successful luxury home builder located in the Pennsylvania area, which will remain nameless. One thing we all know is that a home is only as good as its foundation. Poor foundation equals a poor quality home.
That builder is very successful to this day because their homes are built on a solid foundation. The same holds true for the home’s loan; a poor application; a poor quality loan. If that’s so, and I believe it is, why are loan application defects on the rise?
A report issued by First American Financial (FAF) shows that their loan application defect index rose 4.9% in July over the June index. (Defects Rising) With all the attention being paid to loan defects how can this be? It doesn’t make sense.
With credit standards tightening, the QM and ATR rules and the emphasis placed on defect management by Fannie, Freddie and FHA one would think that defects had to be decreasing. However, according to the FAF report, overall defects are on the rise in 2015. Say it ain’t so, Joe…
It seems that the defective loan applications may be coming from specific areas of the country. Why? We don’t know, but it’s happening.
This is big news because this is a large part of what caused lenders and investors pain in the 2008 crash. Bad enough the markets tanked but when we tried to move toward correction, we found that many of the loans involved had not been properly documented. They just had too many defects.
We’ve seen the return of high LTV loans, the reduction of the FHA MIP, loosening of credit standards on certain loans and, now, a rise in the defects. Didn’t we learn our lessons?
Regardless of market conditions, loan type, credit standards or down payment requirements, quality is still job 1 (to borrow a tagline from Ford). Defect management is critical to the success and survival of any lender. Poor loan quality will suck the life out of a lender, costing additional time effort and money to correct defects before loans close. If defects are not detected and corrected, this will cause delayed deliveries and funding, potential indemnifications and possible loan repurchases. Been there; done that, and don’t want to go there again!
As my teachers back in grade school always said, “Let a word to the wise be sufficient.” In other words, sit up and take notice of the quality of the loan applications being taken in your company. Loan originators taking poor quality apps, regardless of volume, will hurt productivity, process and profits. Trust me on that.
Train your originators to take a complete accurate loan application, and then train your processors to review them when received. By the way, don’t shoot the messenger when a processor tells you an originator is submitting sloppy, incomplete apps. Do something about it, quickly. Otherwise, it may not matter.
Let’s not repeat the problems of the past in the name of increased volumes. The only thing that more poor quality loans will get you…is trouble. Then again, maybe you won’t need to worry because you’ll be out of business.
Quality counts, big time. Don’t forget it. The key to defect management is early detection and immediate correction. That you can build on.
