To understand the trends of today’s market, we must first need to understand what got us to where we currently are. We need to ask ourselves how well did we do in mortgage loan quality control (QC) in 2011 and 2012? Overall, mortgage loan quality has improved very nicely by two percent from 88.34 percent in 2011 to 90.49 percent in 2012 for the collective portfolios from all mortgage loan types. This was a slight improvement with a decline mortgage repurchase potential and misrepresentation/fraud.
Why are we doing better in mortgage loan quality than we did in the past?
One reason is the mortgage industry was in a heavy refinance market because of the long life and historical low interest rates. Second, more lenders were forced into a more robust pre-funding quality assurance program with the government-sponsored enterprises (GSEs)—Fannie Mae and Freddie Mac—enhanced QC fulfillment requirements. Thirdly, investors are adopting and enforcing similar type of requirements with respective channels. In addition, just fear. With the GSEs publicly announcing approximately 900,000 loans to be pushed back to lenders for repurchase in 2013, as well as the hundreds of billions of dollars in settlements and claims in 2011-2012 resulted in enhanced QC programs that directly affected the origination process.
Even though mortgage loan quality improved, that does not mean that the seriousness of loan defects improved. Appraisal quality declined from 9.01 percent in 2011 to 15.34 percent in 2012. Appraisal quality declined by six percent in one year collectively across the mortgage portfolios. Underwriting declined from 3.14 percent in 2011 to 10.26 percent in 2012. Underwriting in 2012 had a setback decline in underwriting of seven percent in one year.
Why did we see a sharp decline in appraisals?
Many lenders started their own appraisal management function usually as its own profit center but directly influenced by internal personalities. Second, there is more technology and review techniques available to find things wrong with appraisals in the post-funding QC reviews that some appraisal management companies (AMCs) and lenders do not use because one depends on the other for appraisal QC resulting in appraisal defects not being corrected prior to closing. Thirdly, too many automated valuation model (AVM) tools have information inconsistencies between vendors and with some vendor’s inconsistent information between AVM products offerings. Fourth, the rapidly-changing housing market never leveling off creating disparities. Fifth, there are fewer appraisers with larger volumes and with more complex valuations scenarios resulting in more mistakes. In many cases there was sloppy appraisals performed by appraisers.
Why did we see a sharp decline in underwriting in 2012?
There were too many gaps and inconsistencies between the many documents provided in the tightened documentation in underwriting. Because of the redundancy of full documentation of information, there were more opportunities to miss something or create informational gaps between documents to validate other documented information.
In 2013, we will continue to see an increase in appraisal defects because the appraisers do not have access to many of the collateral tools used by the lenders and with the culmination of foreclosures on the books against other housing markets, values increasing up seven percent in 2013 there will continue to be challenges in property valuations. As for underwriting, there will continue to see the same level of underwriting defects as the mortgage markets move to a purchase market and move away from the refinance market. Mortgage fraud will increase as brokers become challenge with mortgage production volumes decreasing as they move from a refinance market to a purchase market. Mortgage bankers will shift their priorities to production and begin to outsource more of the non-profit centric tasks for stream lining resources.
Tommy A. Duncan, CMT, is president of Quality Mortgage Services LLC, a provider of mortgage quality assurance and mortgage compliance solutions. He was instrumental in developing the firm’s QA/QC software currently in use by mortgage bankers/lenders. Tommy may be reached by phone 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.