Friday, March 29, 2019

Clint Salisbury on ARMCO Study "Mortgage QC Industry Trends"

ACES Risk Management (ARMCO) recently released its quarterly "Mortgage QC Industry Trends" report for Q2 2018, which analyzes post-closing quality control data derived from 90,000 randomized, unique loans, to determine the top “critical defects” making loans uninsurable or ineligible for sale. The top 4 categories of critical defects identified during Q2 2018 were income/employment, package documentation, assets, and legal and regulatory compliance.

Of the 90,000 loans analyzed in the study, 1.71 percent contained one or more post-closing defects (approximately 1,540 loans). Of those loans, income/employment defects represented 22.73 percent; loan package defects 19.89 percent; assets defects 17.61 percent; and compliance defects 11.93 percent.

In Q2 2018, the "distribution of critical defects reflected the market's higher percentage of purchase transactions over refinances, as well as it's declining number of originations," according to the report, which goes on to state that this "finding aligns with the assertion that purchase originations are typically more intricate and complex than refinance transactions, and therefore present greater risk of critical defects."

The study highlights loan document package defects in particular, which have increased significantly increased since Q2 2017. In addition the year-over-year increase of these defects spiked 25 percent between Q1 and Q2 in 2018, marking the third consecutive quarter to see double digit increases. The study notes that these increases are “often associated with the downsizing and understaffing that proliferate in contracting markets.”

The study states that if “lenders want to maintain quality levels of market volume or purchase-to-refinance ratios, they need to implement scalable solutions such as technology. Lenders should continuously evaluate their quality control practices to assure core underwriting and insuring policies are followed.”

As a result of this study, IDS reached out to find out what companies are doing internally to mitigate loan document package defects. One lender said that they are implementing more organizational structure, for example, keeping individuals focused on one role whether it be disclosing, processing, or closing. By doing this, lenders find it easier to train and limit the number of people who are exposed to shifting compliance rules.