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

9/21/2017 Mortgage Bankers Association 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? To Lower your Company’s Net Defect Rate! Presented by: David J. O’Malley 30 pounds lighter! Director of Loan Quality Solutions LoanLogics 09/25/2017 1

9/21/2017 Mortgage Bankers Association Driving Down Net Defects Through Technology Data and Doc Processing 2

9/21/2017 Mortgage Bankers Association Measurable Data Accuracy Prior to Audit Best Practice Audit Worksheets 3

9/21/2017 Mortgage Bankers Association Automatically Communicate Exceptions Action Plan Reporting and Tracking 4

9/21/2017 Mortgage Bankers Association Action Plan Reporting and Tracking Action Plan Reporting and Tracking 5

9/21/2017 Mortgage Bankers Association The Game Has Changed. Play Different. 6

9/21/2017 Mortgage Bankers Association 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 7

9/21/2017 Mortgage Bankers Association Milliman Mortgage Practice Lenders Investors Mortgag Who do we serve ? / QC / Governmen e t Agencies Servicer Reinsurer Firms Insurers  Served the mortgage industry for s s over 20 years Loan Loss and Whole Actuarial Data Platform Repurchase loan Opinions processing integration  Started with mortgage insurance Reserving valuation analytics Mortgage Portfolio FHA Statistical Performanc Reserving Optimizatio Actuarial  Expanded to many areas of the Sampling e Models n Review mortgage landscape Economic Develop  Provide transparent, documented, MSR Risk share Capital President’s Analytics analytics Modeling Budget and validated analytics to the industry Pricing / Quality Product Model Ad hoc Control  Data sources: Developme validation analytics Prioritization nt – CoreLogic Servicing and Securities TPO Data Monitoring / QC Design Benchmarkin – Freddie / Fannie/ Ginnie Mae Loan- g level Acquisition Data Servicing / – Freddie / Fannie Loan-level Underwriting Prioritization Performance Data – HMDA Fair Lending Moody’s Economy.com – Analysis – Client Data 15 Sizing the Channels: Large Banks 8

9/21/2017 Mortgage Bankers Association MBA Production Channel Mix for Large Banks Source: PGR: MBA and STRATMOR Peer Group Roundtables 17 Modeling Default Risk 9

9/21/2017 Mortgage Bankers Association Default Risk Summary Milliman’s Default Score is a Milliman Mortgage Analytics Demo composite default rate calculation Milliman Default Score by Origination Quarter that combines three attributes of Fannie Deliveries Sample Lender mortgage credit risk to estimate 3.5% 3.0% the frequency of borrower Default Rate 2.5% defaults 2.0% 1.5% Borrower Risk 1.0% 0.5% Creditworthiness of the 0.0% -0.5% borrower; Underwriting Risk Origination Quarter Underwriting adjustments such Economic as product and loan type; and Product (E.g Occupancy, Amort, etc.) Borrower (FICO/LTV/DTI) Economic Risk Historical and forecast 19 Purchase Loans: Modeling Default Risk Comparing Origination Channels 10

9/21/2017 Mortgage Bankers Association Historical purchase loan volume delivered to the GSEs from September 2015 through May 2017. Although retail origination volume is significantly higher than correspondent, the average default risk spread between correspondent shows correspondent loans have higher risk. Source: GSE Fannie/Freddie Delivery Data September 2015 ‐ May 2017 21 Variables that impact Default Risk Looking at the data we see that correspondent loans generally have higher LTVs and lower FICO than retail loans. Source: GSE Fannie/Freddie Delivery Data September 2015 ‐ May 2017 22 11

9/21/2017 Mortgage Bankers Association LTV Matters The data shows that correspondents generally originate more loans with LTVs> 95%. Loans with higher LTVs have higher default risk scores. Source: GSE Fannie/Freddie Delivery Data September 2015 ‐ May 2017 23 Correspondent Lenders Default Distribution Correspondents that originated more Loans from than $100 million lenders with loans in 2016 were > 4% default ranked by average score should be reviewed default risk scores. for targeted sampling. Risk managers utilize this information in counterparty management decisions. Source: GSE Fannie/Freddie Delivery Data September 2015 ‐ May 2017 24 12

9/21/2017 Mortgage Bankers Association 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 25 Contact Information Madeline Johnson, CMB, AMP Executive Financial Consultant, Milliman Madeline.Johnson@Milliman.com (O) 301-977-8226 (C) 240-551-6514 26 13

9/21/2017 Mortgage Bankers Association Action Plan Effectiveness in the Race for Purchase Money Market Share September, 25, 2017 Presented by Deana Everett SVP, Quality Control Caliber Home Loans 14

9/21/2017 Mortgage Bankers Association 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 2 nd largest volume gain over 2015 • • Retail purchase mix increased from 70% 12/13 to 86% 6/17 15

9/21/2017 Mortgage Bankers Association 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 16

9/21/2017 Mortgage Bankers Association Action Plan Effectiveness: Sample Action Plan Tracking Report: Action Plan Tracking for QC Post ‐ Closing Material Exception Trending post Most Recent Month Meeting discussed/Field Month 1st Observed Observed 1 2 3 4 5 Notified Root Cause Remedial Action Taken Credit/Liabilities ‐ Added to Pre ‐ Fund QA check; Individual underwriters counseled; added to all regional calls; reminder sent to entire underwriting team Apr ‐ 15 Oct ‐ 15 3 2 1 3 0 7/6/2015 undisclosed/omitted debt Appraisal ‐ Individual underwriters counseled; added to all regional calls; reminder sent to entire underwriting team, condition added when appraisal Missing/Illegible/Incomplete marked "subject to" Apr ‐ 15 Oct ‐ 15 4 1 3 1 0 7/6/2015 Completion Certification ‐ 1004D Individual underwriters counseled; rental income training mandatory for anyone with error in last 3 months. QA will target loans with rental Income Calculation Error ‐ Rental income for review. May ‐ 15 Sep ‐ 15 3 2 2 1 7/6/2015 income Individual underwriters counseled; added to all regional calls; reminder sent to entire underwriting team. QA will target loans with gift funds Assets ‐ Gift funds not properly for review. Jun ‐ 15 Jul ‐ 15 2 1 1 7/23/2015 documented Individual underwriters counseled; added to all regional calls; reminder sent to entire underwriting team. Income training mandatory for Income Calculation Error ‐ anyone with error in last 3 months. Jun ‐ 15 Apr ‐ 15 1 1 7/6/2015 Commission, OT, bonus Auto Condition is now placed on all loans with SE borrowers requesting a completed 4506T with business and business forms listed. Income ‐ Self ‐ Employment improperly Jun ‐ 15 Mar ‐ 15 1 0 7/23/2015 documented 17