The Importance of Loan Quality
The Fed raised rates by another three-quarters of a point and hinted at continued yet lower increases in the future. The MBA expects origination volume to decline to $2.05 trillion in 2023, down from an expected $2.26 trillion in 2022. Not good numbers if you’re a mortgage lender. A tight market, eroding margins, and plummeting refi volumes are just some of the factors forcing lenders to cut staff, terminate lines of business and even shutdown.
In such a competitive market, everything that a lender can do to successfully originate, fund and sell a loan is paramount to its existence. That’s why the topic of loan quality was everywhere at this year’s annual MBA Conference in Nashville. Why? Because the quality of a loan has direct economic and reputational consequences on the lender.
I’ll explain. Examples of common, critical deficits fall into two categories: credit and collateral. Credit defects could be missing or expired documents required by the GSE, documentation not supporting the borrower income or assets, and incorrect calculations. Collateral defects often involve a lender missing flags on the appraisal for soft markets and high CU1 scores. Poor loan quality can have severe adverse impacts on a lender:
- They may be forced to buy back the loan at significant costs to the lender
- They may not be able to sell certain loans to GSE’s (Fannie and Freddie) and to aggregators
- They could lose their GSE tickets if quality is not maintained, where the threshold of critical defect rates must be consistently below 2% or less at Post Close. (5% or less at the Pre-fund stage).
- Aggregators could refuse to buy the loans, or squeeze already tight profit margins
- State and Federal regulators could revoke licenses
- A declining reputation could affect loan volumes and profits
- Margins move into negative territory
No one in the mortgage ecosystem—brokers, loan officers, realtors, or borrowers—wants to work with a lender that closes a loan and then must bring the borrower back to the table to re-sign or even renegotiate loan terms, or requests additional documentation.
Example: one lender said they are auditing 100% of their loans, pre-funding, to ensure that they don’t run the risk of having to buy the loan back or incur a penalty with a cost of up to 30% on the loan amount. Do the math: 30% of a $300,000 mortgage is… $90,000. For one loan. And how are they auditing the loans? With people of course. After having shed over half their workforce.
Checkpoint Audit Helps
Checkpoint classifies mortgage loan files into discrete loan documents, extracts data with high accuracy and enables validation of the final output across multiple checkpoints in the loan fulfillment process, eliminating costly errors, increasing loan quality, and enabling a faster loan throughput, all while letting operations teams be more efficient.
Auditing—automated or not—ensures that human errors are caught and resolved before costs are compounded. The further into the loan life cycle, the greater the time, effort, and cost required to fix the issues.
Auditing plus Intelligent Automation ensures that loan reviews are consistently done the same way every time. The combination reduces human errors, enables 24/7 reviews, and decreases FTE costs, since usually high value and high-cost resources are doing the audits.
The Checkpoint Audit platform does not remove humans from the decision making, it helps them be more efficient by finding and highlighting potential issues that the underwriter or operations team can then make a decision on.
Finally, and importantly, it sets the lender up to absorb increases in loan volumes (once the market rebounds) while maintaining the higher quality of their loans, without having to hire expert resources.
1CU scores: “Collateral underwriter” scores. An automated score that the GSE’s put on an appraisal. If it is too high there is a high risk associated with that property maintaining its value. The main critical defects are associated to Credit (borrower’s ability to pay) and Collateral (property value is solid).