Return on Quality

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?

It’s good news that in some quarters, quality control is beginning to matter. But here’s the Economist to remind us that the job of risk manager “is said to have the risk profile of a short option position with unlimited downside and limited upside — something every good risk manager should avoid.”

Small wonder that talent is staying away in droves.  In sales-driven cultures - like mortgage banking - it’s frowned on to discourage transactions, without which money can’t be made.  The bias is to get the deal done.  So risk managers are always swimming against the current. 

However, risk is currently the busiest area for financial recruiters, which means there is a lot of activity.  Chief risk officers are being appointed, risk committees and departments are being formed, and new regulations are announced with frequency. 

But business practices adapt to new structures and find their way around them. (Like fraud, in some ways.)  Once the spotlight is off regulation and compliance, experience suggests that a new innovation will make it seem like “it’s different this time”.  And the Cassandras in risk management will be ignored anew.

So how does a risk manager survive the next bull market?  Hope that new incentives will be put in place to encourage the right behavior.  And show the ROI of risk management - or in the case of mortgage quality control professionals, show the return on quality (ROQ).  In future posts, we’ll try to help formulate that ROQ.

Image by Rutty 

Berkery Noyes, “the only middle-market investment bank with research and M&A transaction teams dedicated to the mortgage technology, regulatory and compliance market,” has just published its 2009 Recap and 2010 Predictions For the Mortgage Technology Market. 

Providing a view from 30,000 feet, the report lists a number of high-profile M&A transactions from 2009 and offers up a few trends in the mortgage technology space, including:

• accelerating vendor movement towards becoming a complete end-to-end solution provider
• more stringent lending guidelines and regulations increasing the need for compliance, fraud prevention and risk-mitigating technology solutions
• burden of ensuring proper compliance moves to the point of sale rather than merely at closing, and falls on all mortgage industry participants

In the context of these trends, the report states that market participants no longer see compliance and auditing solutions as “nice to have” - they have become “must have” solutions.

We couldn’t agree more.

One of the ways that servicers or investors can excise nonperforming assets from their portfolios is to try to put them back to originators by claiming fraud and/or breach of representations and warrants.   Potential malfeasance like this is uncovered via forensic audits, which have become increasingly popular since the mortgage crisis hit.  While forensic auditing for this purpose has typically been limited to institutions - investors, servicers, originators and mortgage insurers - the practice has now spread to the retail borrower, as described in today’s MortgageOrb article “When Forensic Loan Audits Are Used Against Lenders.”

This phenomenon has even touched Cogent.  Recently, we’ve been approached by a handful of clients to help them extract loan audit data from their Cogent systems for the purpose of forensic loan auditing.  Typically, this is in support of litigation in which opposing counsel requires every scrap of data that could be relevant.  Without a knowledge of both the mortgage quality control workflow and the application supporting it, this can be difficult for clients to accomplish on their own, especially after layoffs have reduced knowledgeable staff. 

Although projects like this are outside Cogent’s normal scope of work, we have the expertise to help clients.  More than anything, though, this is yet another reminder of why robust quality control is imperative in today’s world. 

Image: Dena M. Roudybush

Here’s a timely and relevant learning experience: Sheshunoff, an established publisher of financial information, is offering a webinar on February 23rd called “Mortgage Servicing from A to Z: What Every Mortgage Servicer Needs to Know“. 

The blurb reads as follows: “With the continuing scrutiny on the mortgage industry and the ever-changing regulatory landscape, it is more important than ever for mortgage servicers to stay on top of the latest regulatory developments and industry trends affecting this volatile area. Join our interactive audio conference, Mortgage Servicing from A to Z, as our expert speaker gives you an insiders view into federal and state regulatory requirements, hot topics and best practices.”

The ‘expert speaker’ in question is Dena M. Roudybush, senior counsel for Compliance Counsel, PC a Virginia based law firm that is dedicated to serving the mortgage banking and financial services industries.

Cogent, for one, has seen tremendous activity in the mortgage servicing arena, with particular interest in servicing quality control.  This session sounds like a good way to get up to speed on the major changes taking shape.

At the launch of HAMP (Housing Affordable Modification Program), the Treasury Department and the Department of Housing and Urban Development (HUD) set as their goal the modification of 3m to 4m mortgages.  Through December 2009, approximately 850,000 borrowers had been placed into trial modification programs and 66,000 had been placed into permanent modifications.  Hardly a blistering pace.

We outlined some of the issues with the structure and deployment of the program in our HAMP Best Practices article published in the December 2009 issue  of Servicing Management magazine.  Mentioned in that article were the documentation requirements of the program, which slowed the process down.  In recognition of this, Treasury and HUD have released new requirements for upfront documents and guidance on permanent modification conversion.

Effective for all trial period plans with effective dates on or after June 1, 2010, a servicer can only evaluate a borrower for HAMP after receiving an initial package that includes a request for modification and affidavit (RMA) form; the Internal Revenue Service (IRS) 4506T-EZ form, which gives servicers the ability to pull the borrower’s tax return; and two pay stubs from the borrower for proof of income.

Said Herb Allison, the assistant secretary for the Treasury: ““We’re making it as easy as possible for homeowners to provide the documents. A lot of the problem of converting the trial mods to permanent mods has been time delay between the verbal communication about their eligibility to actually getting the documents and sending them in.”

Every little bit helps.

Image by Peregrine Blue 

As a consequence of the financial crisis, we are undergoing wholesale change in the regulatory environment of real estate finance.  The changes are coming hard and fast and continuously, making it difficult to establish and manage new business processes.  How do you keep up?

There’s no single answer to this question.  We have clients who take it on themselves to keep abreast of regulatory changes because they want full control over their regulatory compliance.  Other lenders want to outsource the management of change and turn to third parties to keep them up to date. 

Wherever you fall in the spectrum, you will probably welcome any tools that ease the burden of staying current.  And such tools are cropping up.  For example, Wolters Kluwer has just launched ”The Reg Z Center“, a free online resource which provides an overview of the changes affecting loans covered by Regulation Z, the effective dates for changes and suggested solutions for implementing changes. 

Being a for-profit entity, the company does promote its compliance solutions on the site.  But this is in keeping with the ‘Web 2.0′ business model, whereby useful information is provided for free, interaction among interested parties is encouraged (via a forum, blog, or discussion group), and a long-term relationship is cultivated while simultaneously establishing credibility.

The Reg Z Center joins the company’s other similar resource centers for Fair and Accurate Credit Transactions (FACT) Act “red flags” and the Real Estate Settlement Procedures Act (RESPA).

If you’re interested in the world of mortgage servicing, MortgageOrb has just published an interesting overview of the major milestones of 2009 and what to expect in 2010.  With input from several industry veterans, the article surveys the changing role of the servicing function, the performance of various government programs designed to ease the mortgage crisis, the conflicts of interest between servicers and investors, the potential impact of millions more ARM resets due in 2010 and 2011, and more.  Well worth a read.

We came across a well-written article recently titled “The New Rules For Compliance In The Post-Crash Environment” by Louis Pizante, CEO of Mavent, Inc. and a veteran of the industry. 

In addition to a concise synopsis of the events leading up to the current regulatory overhaul of the mortgage industry, the article outlines some of the changes we can expect in the way compliance reviews are performed.  In short: earlier in the origination process, more electronically and with greater automation. 

Mortgage compliance and quality control reviews can and should be performed on many levels, and at different points in the loan life cycle.  Tools such as automated compliance engines, automated fraud engines and automated valuation models can flag loans that merit further review.  The next step is to apply a rigorous methodology to digging deeper in order to:

1) determine whether a complete file review confirms the automated findings;2) fix the individual loans if possible;3) identify the source(s) of the issue(s);4) select additional loans from these source(s) and conduct complete file reviews to see if there is a pattern of issues;5) generate feedback to the field and document corrective actions to fix the flaw(s) in the origination or servicing processes and/or stop doing business with the identified sources.

We are seeing more tools for automating more aspects of the mortgage life cycle.  Don’t forget, though, that it was partially the over-reliance on automated underwriting tools that got us into our current mess.  Maybe tomorrow will be different, but today we still need human beings checking to see if it all makes sense.