We are in the first six months of 2010 and I am beginning to see the trends that are taking place in the industry as a result of post closing quality control audits. The industry is still looking good in the number of quality loans that any investor would want to purchase on the secondary market. However, we are seeing a decrease in Excellent Ranking decrease 9.47 percent. I strongly believe the reason for this is the increase of number of findings we are seeing with APR Violations and errors that have increased by 158 percent and initial Truth-in-Lending (TIL) errors that have increase by 28 percent.
Good Rankings increased by five percent as a result of finding multiple minor loan errors on federal compliance on loans that would normally ranked Excellent.
The average credit score for loans that ranked Excellent is 749 where 2009 was 744. The ratios have no noticeable changed from 2009. The loans that ranked Good have an average credit score of 721 which is a slight drop from 723 in 2009. The ratios show some change from 25/37 in 2009 to 26/38 in 2010.
The loans that rank as Fair are those loans that may or will be challenged on the secondary market for repurchase. The industry is showing positive signs of improvements of six percent as compared to 2009. However, these loans are on the fence of risk. The average credit score is 705 as compared to 708 in 2009. The ratios are 26/41 in 2010 as compared to 26/46 in 2009. The reasons the loans are on the fence is due to challengeable collateral and credit issues found during the audit.
We are seeing an increase in fraud for housing in 2010. The increase spikes are in Federal Housing Administration (FHA) refinances, conventional purchases, and rural housing loan products. Even though there is enough to spread around, I highlighted these products because of noticeable increase percentages.
The year is not finished and many additional changes are coming that will positively affect the loan quality like Fannie Mae’s Lenders Quality Initiative (LQI). Something that will adversely affect loan quality is the misinterpretation of Mortgagee Letter 2010-20. Many FHA loan brokers (sponsored mortgagee) think ML 2010-20 places the responsibility on lender (sponsoring mortgagee). When in fact ML 2010-20 states either or will be responsible.
Because ML-2010-20 is still in the beginning stages and sponsoring mortgagee really has not figured out how they will handle sponsored mortgagee, we still do not know who will do what. Right now Service/Seller lenders are trying to get through LQI and have not focused on how to handle sponsored mortgagees. As far as I know sponsoring mortgagee have every intention to require the sponsored mortgagee to continue post closing quality control. Until that time of enforcement, very few brokers are doing any post closing quality control.
There is some rumored theory that the sponsoring mortgagee will grow retail divisions and not take any sponsored mortgagee originations through their company in order to reduce risk and have more control on the quality control process. If this is the case, this will reduce even more broker operations. It is more profitable for the larger mortgage bank to broker their own loans than it is to facilitate third-party originations (TPOs). I hope this is not the case. Like I said it is a rumored theory.
I was recently asked what my opinion is of LQI. I told them that it is too focused on underwriting and very little focus at the point of origination. Underwriting should be the clearing house of the information generated during origination. Because the LQI does not focus at the point of origination, the loan begins on the wrong track and may slip by underwriting. This explains why fraud for housing continues to increase even with all the prefunding quality control underwriting initiatives in place. Therefore, the argument, GSE and FHA, are you sure you want to take post closing and quality control initatives out of broker operations?
Tommy A. Duncan is executive vice president of Quality Mortgage Services LLC. For answers to your QC and FHA questions, please contact Tommy at (615) 591-2528, ext. 124 or e-mail [email protected]
You may also visit Quality Mortgage Services LLC on the Web at www.qualitymortgageservices.com.