Return on Quality

Cogent has won Mortgage Technology magazine’s 2011 Lasting Impact Award.  The Lasting Impact Award acknowledges an individual, group or company responsible for a technology initiative or development proven to have an enduring influence that has transformed mortgage finance. 

In presenting the award, the judges cited Cogent’s “fundamental innovation as adapting quality improvement principles from manufacturing industries to the mortgage industry.”  For more information, see the links below.

See Mortgage Technology award citation here (PDF)

See how Cogent QC Systems has made a Lasting Impact.

This is a welcome validation of everything Cogent has been doing since 1991 to help lenders across the industry to improve origination and servicing quality .  Many thanks to the judges at MT magazine.

               
In the world of mortgage quality control (QC), the process of communicating the QC department’s findings to the field, recording their feedback and working together to resolve adverse QC findings has been notably inefficient.  In some companies, the QC department schedules regular weekly calls with the field, which may include branch managers, regional origination groups, servicing departments, or similar players.  During these calls, which can last hours, the field often questions the adverse findings of QC, while QC defends its actions.  Alternatively, QC departments may perform this process by exchanging emails and file attachments with the field.  And sometimes, it’s a combination of both.  Whatever the case, the systems that have evolved to document and track this process are sub-optimal.  Usually invented by business users – outside their usual job descriptions, using whatever tools are at hand (Excel, Word, Access, etc.) – these systems are usually cumbersome, error-prone and not secure.

Cogent’s first attempt at improving this process was to use the same familiar tools but to integrate the exchanged data with the Cogent QC System. Thus, the System automated the gathering and generation of QC findings and exported them to Excel worksheets that were attached to outgoing emails.  The field provided feedback to QC using specific cells in the Excel spreadsheets, which they then re-attached to emails that were returned to QC.  Finally, QC imported the feedback from the Excel spreadsheets into the Cogent QC System, which tracked returned and outstanding feedback items and allowed reporting on returned feedback.  This approach imposed some controls on the workflow, integrated feedback into the audit record, and facilitated reporting.  However, there were still shortcomings: saving and attaching Excel spreadsheets to emails was neither secure nor error-free, the import process was inflexible, and there was no facility for multi-iteration feedback between QC and the field.

For the .NET platform, Cogent started from scratch.  Instead of exchanging Excel attachments by email, CogentQC.NET users now send emails with system-generated links to a secure website, where feedback recipients log in and submit their responses directly online.  The new Web application, running on Microsoft IIS, writes directly to the same Microsoft SQL Server database to which the main application writes, so that feedback is immediately available.  Unlimited feedback iterations are possible, all of which are reportable, and both QC and the field are alerted when they have incoming feedback.  Everything is now contained within the Cogent QC System, except for the emails exchanged between QC and the field.  This new feature of CogentQC.NET has become one of Cogent’s most popular innovations.

Posted by Kaan Etem

Image by Tessa Hunkin 

Fannie Mae’s new Loan Quality Initiative adds a number of new quality control requirements for originators that must be in place by July 1, 2010.  Perhaps the biggest change is the new requirement for all originators to perform pre-funding quality control reviews, in addition to the existing requirements for post-funding and early payment default (EPD) reviews.  For mortgage quality control professionals, this is another step toward what we at Cogent call “Enterprise QC” — an integrated, end-to-end approach that promotes continuous QC monitoring of all loan origination and servicing processes.

Until now, most lenders have had a disjointed and incomplete approach to quality control across the enterprise. Even among lenders that have been doing some form of pre-funding review, the results are often not available to post-funding reviewers, because there is not a common database for sharing the information.  Although many lenders have begun using automated compliance engines (ACE’s), such as those provided by Mavent and ComplianceEase, the loans that are flagged by the ACE for potential compliance errors are not automatically targeted for post-funding reviews. And QC auditors doing reviews of EPD’s, Repurchases and Claim Denials often do not have access to the data from the pre- and post-funding reviews. On the servicing side, many lenders still do not have a formal quality control process in place, and those that do often do not have access to data from other servicing department audits, let alone audits of originations.

We believe the keys to successful Enterprise QC are: (1) the ability to easily access and manipulate the production and servicing data that are needed to accurately define the populations and select the loans that qualify for each quality control audit, (2) continuous communication between quality control managers and the managers of the processes being audited to ensure that audit checklists always reflect the most current policies and procedures; (3) closed loops for reporting, feedback and response, to ensure that adverse findings are responded to and corrective actions are implemented and documented; and (4) sharing of all quality control data across the enterprise, to maximize the returns from the risk information generated from each QC process.

The title and central theme of this blog is “return on quality”, which we broadly define as the benefits to be gained from an intelligent and continuous approach to improving mortgage loan quality. 

We said in an earlier post that we would try to formulate “return on quality” and as a step in that direction, we offer a Cogent white paper called “Quality Performance Benchmarking” that was originally developed for an audience of mortgage quality control professionals. 

Image by jacob earl

In this paper, we talk about the prevalence in the mortgage industry of a production maximization mentality, in which metrics and compensation are centered on volume; the potential hazards of this mentality; guidelines for estimating the costs of poor quality, (the inverse of the return on quality); how to reward good quality; and how to craft appropriate performance metrics, or benchmarks.  The second part of the paper talks in depth about one of the most powerful tools for benchmarking performance, control charts.

This white paper was written in 2002.  Nothing has changed in the methodology.  But in the last couple of years, the eyes of most of us in the industry have been opened to the dangers of focusing exclusively on volume, volume, volume.  We welcome your comments.

Mortgage servicers have no choice but to open their kimonos to Freddie Mac’s MHA Compliance (MHA-C) division.  So when MHA-C offers to share its insights, as they did at the Mortgage Bankers Association’s National Servicing Conference last week in San Diego, there’s a rapt audience of servicers, most of whom are struggling to comply with HAMP programs.

Servicing Management magazine was there to capture the main points.  The presenters were quick to acknowledge the difficulty of setting up and complying with the program.  However, citing Sarbanes-Oxley as an appropriate benchmark for packaging HAMP modifications, the panel suggested that a lot of the loan packages they see seemed devoid of any due diligence or quality control. 

So how do you deal with a constantly changing program that is known to be difficult to comply with but that has high documentation standards?

“The biggest takeaway I’d have for a servicer is to really understand the program, which is why I recommend having somebody in the organization who is the ‘internal expert,” says Vic O’Laughlen, vice president of servicer oversight for the division.  This becomes more important as the programs morph and spin off programs are introduced (like Home Affordable Foreclosure Alternatives (HAFA).) 

As we all know, MHA is a work in progress.  The question is, will it ultimately be a successful work?

Image by macboyx

For a clear, concise perspective on which parts of HAMP are and aren’t working, and why, take a look at this interview in HousingWire with Gagan Sharma, president and CEO of BSI Financial, “an outsourcing provider specializing in mortgage subservicing, default management, loss mitigation, due diligence, REO and quality control services to over 240 lenders and investors.” 

Among the insights:

• Loan modifications will only work for a subset of distressed borrowers, as the Treasury Department admits.  Of the 7 million or so eligible, only 1.5 million are real candidates and with fewer than 800,000 trials in place, it’s doubtful that we will see 1.5 million permanent modifications.
• Even modified loans are in danger of re-default, for two main reasons: 1) many if not most HAMP borrowers are underwater and 2) unemployment will remain high for some time.
• The willingness to reduce principal may be the single biggest determinant of modification success. But owners of mortgages have different incentives in that regard.   Banks must recognize the loss immediately, which is not appealing.  Investors who bought loans at 40-to-50 cents on the dollar may be more willing.
• Short sales and deeds-in-lieu of foreclosure are good alternatives to HAMP (and non-HAMP) modifications.  Generally faster to process, these alternatives give borrowers an incentive to maintain the property and leave mortgage owners with better collateral.

If we’re going to solve the problems that HAMP was designed to solve - stabilizing the housing market and keeping borrowers in their homes - we need to look at the incentives built into the program.  The reality is that for most servicers, HAMP is not a money-making proposition.  It costs them more to set up and maintain a HAMP infrastructure (people, systems, processes) than the payback they can expect from the program.  There must be a better way.

It’s no secret that the mortgage servicing sector is under severe strain, especially when it comes to loss mitigation and default management.  In response to massive distressed borrower volumes, servicers have hired armies of new, inexperienced servicing reps and asked them to manage loan modifications for a wide variety of complex borrower situations.  This is happening even as fundamental regulatory change is being introduced (e.g., RESPA) and loan modification programs are shifting beneath servicers’ feet.  

Meanwhile, the Treasury Department and the courts are pushing for faster loan modifications while investors who have interests in such loans are balking at the kinds of concessions necessary to make the needle move.  Thus, servicers find themselves between a rock and a hard place as they face the flood of modification requests.

Because this deluge happened suddenly and is still roiling the industry, there has not been time to automate many of the standard tasks involved in the loan modification process.  Indeed, compared to the origination side of the business, servicing automation - or workflow management - is relatively undeveloped .  This is certainly true in mortgage quality control, which is why Cogent can tout that ServicingQC is the only quality control system developed specifically for mortgage servicing. 

But as a recent piece in MortgageOrb confirms, it’s the case in default management workflow systems, too, and no doubt in other servicing sub-processes.

On the positive side, mortgage servicing is finally getting some attention.  With luck, we will see promising technology solutions at the MBA Servicing Conference, which is gathering this week in San Diego.  And given the pressure from inside and outside the industry, we should start to see some adoption of new solutions.

Currently, the biggest enemies of efficient workflow are paper and the telephone, as the MortgageOrb article reiterates.  Both are inefficient, hard to track and prone to error and both are legacies of the traditional workflow of mortgage lending and servicing.  Now that the light of day is shining on the servicing world, we can hope that new technology adoption will lead the way to the Promised Land of eMortgages.