WHY? To Lower your Companys Net Defect Rate! Presented by: David - - PDF document

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Mortgage Bankers Association

9/21/2017

QC for Purchase Markets

September 25, 2017

Moderator: David O’Malley, Director, Loan Quality Solutions, LoanLogics Speakers: Deana Evert, Senior Vice President of Quality Control, Caliber Home Loans Madeline Johnson, CMB, AMP, Executive Financial Consultant, Milliman, Inc.

Relationships between Net Defect Rates, Training and Action Plans

WHY?

09/25/2017 Presented by: David J. O’Malley Director of Loan Quality Solutions LoanLogics

To Lower your Company’s Net Defect Rate!

30 pounds lighter!

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Mortgage Bankers Association

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Driving Down Net Defects Through Technology Data and Doc Processing

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Mortgage Bankers Association

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Measurable Data Accuracy Prior to Audit Best Practice Audit Worksheets

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Automatically Communicate Exceptions Action Plan Reporting and Tracking

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Action Plan Reporting and Tracking Action Plan Reporting and Tracking

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Mortgage Bankers Association

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The Game Has Changed. Play Different.

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Mortgage Bankers Association

9/21/2017

QC For Purchase Markets: Assessing Risk by Channel

September 25, 2017

Presented by Madeline Johnson, CMB Executive Financial Consultant Milliman, Inc.

Agenda

Background and Introduction Are there differences in risk between Correspondent and Retail Channels? Defining Default Risk Evaluating Channels of Business

• Factors impacting results
• Correspondent default risk ranking

State of the Practice 08/03/17

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Mortgage Bankers Association

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• Served the mortgage industry for
• ver 20 years
• Started with mortgage insurance

analytics

• Expanded to many areas of the

mortgage landscape

• Provide transparent, documented,

and validated analytics to the industry

• Data sources:

– CoreLogic Servicing and Securities Data – Freddie / Fannie/ Ginnie Mae Loan- level Acquisition Data – Freddie / Fannie Loan-level Performance Data – HMDA – Moody’s Economy.com – Client Data

Lenders / Servicer s

Loan Loss and Repurchase Reserving Mortgage Performanc e Models MSR Analytics Quality Control Prioritization TPO Monitoring / Benchmarkin g Servicing / Underwriting Prioritization Fair Lending Analysis

Mortgag e Insurers

Actuarial Opinions Reserving Economic Capital Modeling Pricing / Product Developme nt QC Design

Investors / Reinsurer s

Whole loan valuation Portfolio Optimizatio n Risk share analytics Model validation

Governmen t Agencies

Data processing FHA Actuarial Review Develop President’s Budget Ad hoc analytics

QC Firms

Platform integration Statistical Sampling

Milliman Mortgage Practice

Who do we serve?

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Sizing the Channels: Large Banks

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MBA Production Channel Mix for Large Banks

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Source: PGR: MBA and STRATMOR Peer Group Roundtables

Modeling Default Risk

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Default Risk Summary

Milliman’s Default Score is a composite default rate calculation that combines three attributes of mortgage credit risk to estimate the frequency of borrower defaults Borrower Risk Creditworthiness of the borrower; Underwriting Risk Underwriting adjustments such as product and loan type; and Economic Risk Historical and forecast

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• 0.5%

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% Default Rate Origination Quarter

Milliman Mortgage Analytics Demo Milliman Default Score by Origination Quarter Fannie Deliveries Sample Lender

Economic Product (E.g Occupancy, Amort, etc.) Borrower (FICO/LTV/DTI)

Purchase Loans: Modeling Default Risk Comparing Origination Channels

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Mortgage Bankers Association

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Historical purchase loan volume delivered to the GSEs from September 2015 through May 2017.

Although retail

• rigination volume

is significantly higher than correspondent, the average default risk spread between correspondent shows correspondent loans have higher risk.

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Source: GSE Fannie/Freddie Delivery Data September 2015‐ May 2017

Variables that impact Default Risk

Looking at the data we see that correspondent loans generally have higher LTVs and lower FICO than retail loans.

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Source: GSE Fannie/Freddie Delivery Data September 2015‐ May 2017

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LTV Matters

The data shows that correspondents generally originate more loans with LTVs> 95%. Loans with higher LTVs have higher default risk scores.

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Source: GSE Fannie/Freddie Delivery Data September 2015‐ May 2017

Correspondent Lenders Default Distribution

Correspondents that originated more than $100 million loans in 2016 were ranked by average default risk scores. Risk managers utilize this information in counterparty management decisions.

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Loans from lenders with > 4% default score should be reviewed for targeted sampling.

Source: GSE Fannie/Freddie Delivery Data September 2015‐ May 2017

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Conclusion

Information on your correspondents risk profile is important to minimize risk:

• Monitoring business channels to evaluate counterparty risk
• Evaluating loan characteristics and the mix of business of your deliveries
• Monitoring risk scores by channel and product
• Understanding potential repurchase risk

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Contact Information

Madeline Johnson, CMB, AMP Executive Financial Consultant, Milliman Madeline.Johnson@Milliman.com (O) 301-977-8226 (C) 240-551-6514

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Mortgage Bankers Association

9/21/2017

Action Plan Effectiveness in the Race for Purchase Money Market Share

September, 25, 2017

Presented by Deana Everett SVP, Quality Control Caliber Home Loans

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Mortgage Bankers Association

9/21/2017

Industry News:

Competitive purchase market drives rise in application defects Loan application defects increased for the seventh consecutive month in June, due to the highly competitive purchase market, according to First American Financial Corp. For all applications, the First American Loan Application defect index increased 1.2% month-to-month in June to 84 from 83 in May. When it comes to purchase loans, the index increased to 91 from 90, while for refinance loans it increased to 70 from 68.

"The market shift toward more purchase mortgages, coupled with rising rates and tight inventory, is generating the consistent upward trend in defect risk," said First American Chief Economist Mark Fleming in a press release. "Purchase transactions are inherently more at risk of defects, fraud and misrepresentation, and the pressures resulting from one of the strongest sellers' markets in recent memory compounds the risk of an error on a loan application."

Caliber Stats

• #2 lender in volume in 2016
• 2nd largest volume gain over 2015
• Retail purchase mix increased from

70% 12/13 to 86% 6/17

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Action Plan Effectiveness

• Retail volume increased over 3700% (12/13 - 12/16)
• Market share nearly tripled (12/13-12/16)
• Defect rate dropped by over 17 points from highest point (6/15-12/16)

Action Plan Effectiveness:

Company C implemented 9 Action Plans in April, 2015 to combat increased defects

• 3 were effectively remediated Q3 2015
• 4 were effectively remediated Q4 2015
• And the final 2 were remediated Q1 2016

Caliber QC is responsible for collecting the action plans from fulfillment, assessing potential effectiveness, monitoring and closure. Caliber requires new Action Plans after 2 consecutive months of unacceptable results post implementation and closes out after 2 consecutive months of negligible findings

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Action Plan Effectiveness:

Sample Action Plan Tracking Report:

Action Plan Tracking for QC Post‐Closing Material 1 2 3 4 5 Apr‐15 Oct‐15 3 2 1 3 0 7/6/2015 Credit/Liabilities ‐ undisclosed/omitted debt Added to Pre‐Fund QA check; Individual underwriters counseled; added to all regional calls; reminder sent to entire underwriting team Apr‐15 Oct‐15 4 1 3 1 0 7/6/2015 Appraisal ‐ Missing/Illegible/Incomplete Completion Certification ‐ 1004D Individual underwriters counseled; added to all regional calls; reminder sent to entire underwriting team, condition added when appraisal marked "subject to" May‐15 Sep‐15 3 2 2 1 7/6/2015 Income Calculation Error‐Rental income Individual underwriters counseled; rental income training mandatory for anyone with error in last 3 months. QA will target loans with rental income for review. Jun‐15 Jul‐15 2 1 1 7/23/2015 Assets‐Gift funds not properly documented Individual underwriters counseled; added to all regional calls; reminder sent to entire underwriting team. QA will target loans with gift funds for review. Jun‐15 Apr‐15 1 1 7/6/2015 Income Calculation Error‐ Commission, OT, bonus Individual underwriters counseled; added to all regional calls; reminder sent to entire underwriting team. Income training mandatory for anyone with error in last 3 months. Jun‐15 Mar‐15 1 0 7/23/2015 Income ‐ Self‐Employment improperly documented Auto Condition is now placed on all loans with SE borrowers requesting a completed 4506T with business and business forms listed. Month 1st Observed Most Recent Month Observed Meeting discussed/Field Notified Root Cause Exception Trending post Remedial Action Taken

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Mortgage Bankers Association

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Common QC Defects for Purchase Mortgages

09/18/2017

Presented by Teri Hermann Chief Risk Officer Evergreen Home Loans Your Logo here

AGENDA

• Background and Introduction
• Common QC deficiencies
• Quality Assurance and Remediation
• Trend Tracking
• Management Reporting

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Mortgage Bankers Association

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BACKGROUND AND INTRODUCTION

• Evergreen Home Loans is a retail mortgage lender open for over 30 years, headquartered in

Bellevue, WA. Evergreen has 62 locations in the Western U.S. offering a full range of mortgage products

• We originate, fund, and service loans for our customers
• We are an approved seller to Fannie Mae, Freddie Mac, and Ginnie Mae

Ever ergr green has een has receiv ived the ed the follo llowing wing rankings: nkings:

• Fortune Magazine names Evergreen a

2016 Great Place To Work for Women

• Fortune ranks Evergreen No. 12 in their

national survey of best workplaces in finance and insurance

• Seattle Business Magazine names

Evergreen FIRST in 2017 WA 100 Best Companies to Work For-Large Company category

• Puget Sound Business Journal awards

Evergreen second place in 2017 WA Best Workplaces-Large Company

COMMON QC DEFICIENCES

Assets

• Overstated or miscalculated assets
• Gift funds not properly sourced or documented

Credit

• Borrower does not meet the major derogatory recovery period requirements
• Letter of Explanation for adverse credit not provided
• Non-borrowing spouse credit documentation not provided when required

Income

• Self Employed or Commission income incorrectly calculated
• Required income documentation based on source not provided
• Secondary income not verified or verification insufficient to document per guidelines
• Gaps in employment not explained or income stability not established

Property

• The value and marketability of the property was not supported as of the effective date of appraisal

Compliance/Legal

• The file does not contain evidence of credit approval, suspense notification, Notice of Incompleteness, or Notice of Adverse Action within

30 days from Application Date

• The file does not contain evidence of disclosure or re-disclosure within 3 business days of TRID application date or valid change of

circumstances

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Mortgage Bankers Association

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QUALITY ASSURANCE AND REMEDIATION

Training

• Improve training

programs for staff involved in the loan

• rigination process

Validate Application Data

• Automate

comprehensive data validation at time of application Implement File Review Procedures

• Review process

prior to submission to underwriting

• 2nd underwriting

review process for higher risk files Pre-Funding Quality Control Reviews

• Allows defects to

be identified and addressed prior to loan closing

• Create reporting

based on findings

Post-Closing Quality Control

• Include required

and discretionary sampling

• Identify

discretionary based on previous trends and risks identified

Reporting

• Individual

department reports

• Executive Report
• Include trending

information in reporting

Action Plans

• Create Action

Plans based on findings

• Assign

completion of action plan to appropriate department

Improve Processes

• Monitor Action

Plans to completion

• Continuously

monitor the efficacy of all processes above

TREND TRACKING

Trend Tracking is the best way to track and monitor your QC effectiveness

• Create tracking reports to determine most common findings and how
• ften they reoccur
• Track ratings over time to see if findings are decreasing to evaluate

effectiveness of action plans

• Track the performance of individuals and entities to determine where

training should be focused including:

• Originators
• Processor
• Underwriters
• Branches

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Mortgage Bankers Association

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MANAGEMENT REPORTING

Report to Management

• Deliver to management within 30 days of the audits being completed.

Corrective Action Plan and Monitoring

• Action Plan should identify actions to be taken and timetable for completion

Follow-up!!

• Periodic meetings with production, processing, underwriting, and compliance

to review findings and action plans

• Establish monitoring for completion of action plans

Reporting to Investors and Agencies

• Report any misrepresentation, breach of your contract agreement, or

detection of fraud within 30 days of uncovering the findings.