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Last week the 2021 Risk Management and Quality Assurance (RMQA) Forum took place virtually, over the course of two content-packed days. LoanLogics Director of Transaction and Commerce Automation Solutions was one of the event’s speakers. He and a team of fellow industry colleagues* held a panel discussion on maintaining loan quality and how to avoid future repurchases amidst a pandemic environment and growing first-time homebuyer market.
Below we share a summary of that 50-minute session, “Approaches to Ensuring Loan Quality to Minimize Repurchase Risk.” Below is part one of a two-part blog series on the topic. Part one covers current trends and their key drivers. Part two, which we will share next week, will cover strategies to improve quality and reduce repurchase risk.
The panelists began the session by noting its timeliness and importance. Repurchases and defects in all categories (income, credit, and asset) are on the rise. Alarmingly, according to the QC reviews performed by Freddie Mac, 4% of reviews in 2019 resulted in a repurchase. That number grew to 6% in 2020 and through August of 2021 that number was already at 8%. Often, multiple deficiencies are found in each loan.
Among those top defects resulting in repurchase in 2020 through present day were (listed from greatest to least) :
- Appraisal flexibility violations
- Incorrectly calculated income
- Missing/insufficient income documentation,
- Unstable income
- Missing/insufficient liability documentation
How did we get through the last few years? Many would agree it was a great snowball effect of multiple events. In the five years prior to the pandemic, repurchases were generally low and the industry was ‘happily’ chugging along. Then, as refinance volume began to explode in early 2020, the pandemic added a novel disruption, which went on to spur an industry wide staffing crisis to manage volume.
The industry began adding Covid specific guideline overlays, much of which were manual. In addition to the usual challenges that come with underwriting self-employed borrowers, the instability of last year’s job market made income documentation another “sign of the times” challenge. In the midst of all that activity, appraisal flexibilities were applied to loans not eligible, and the juggling act of liability documentation requirements felt like a hot potato at times.
From a lender perspective, internal back office and QC staff were not only battling Covid itself but also finding ways to manage over-capacity issues. Business process outsourcing (BPO) and offshoring adoption became the answer. However, it was not the golden ticket. These new outside resources, as well as newly hired internal ones, were too green. Lack of training and experience, led to missteps in underwriting and reviews.
Many lenders were rushing to adjust and tighten their credit box to mitigate risk, but still ended up making a lot of execution errors along the way. Lack of technology, particularly for income calculations, was also a key driver of the rise in defects and repurchases.
As a leading mortgage QC and doc processing technology provider, LoanLogics saw correspondent operations, audit services and QC platform clients taxed.
Pre-close review volume started to jump, spiking to 20, 50 even 100% of volume with the hope of catching errors upfront. Like the rest of the industry, missing docs were an issue, as were defects related to initial closing disclosures. LoanLogics also saw a lot of lenders wanting to add and automate COVID overlays, as well as their own specific ones to protect themselves. That meant needing to change the variables in their tests.
Interestingly, no-one on the panel felt the swift transition to a work from home model had a negative impact on operations and quality. Organizations were generally well-equipped for the shift. Technology and infrastructure were already in place to support staff working remote prior to the pandemic. To keep that model working successfully for entire workforces, many lenders implemented better processes for monitoring employees, training and engaging them in more cultural, team-building programs to help with morale.
As refinances taper and purchases begin to dominate the market, the complexity of these originations are usually found to drive loan quality issues. Without the proper long-term solutions in place, defects and repurchases will continue to rise.
Check back next week for Part 2 of this series which will tackle the strategies the industry needs to reverse defect trends and positively impact loan quality.
*Speakers for the 2021 RMQA panel, Approaches to Ensuring Loan Quality to Minimize Repurchase Risk” included: Stephen Spies, CMB, SWS Risk Advisory LLC, Principal and Founder, Don Smith, Director of Transaction and Commerce Automation Solutions, LoanLogics, Amanda Zlato, Director, Underwriting and Quality Control, Single Family, Freddie Mac, and Kathy Herig, Chief Credit Officer, Homepoint
