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PERSON OF THE WEEK: Is the mortgage banking industry finally getting a handle on the concept of quality control (QC)? It might appear to be the case, according to Tommy A. Duncan, president of Brentwood, Tenn.-based Quality Mortgage Services. This week, MortgageOrb talks with Duncan about the findings of his recently completed QC overview of mortgage banking during the past year.

Q:  How would you grade the mortgage banking industry's efforts to improve QC?

Duncan:
There were many culminating factors that resulted in QC improvement in 2011, such as Fannie Mae's Loan Quality Initiative (LQI), the handling of repurchase claims, enhancements of loan operating systems and pre-funding QC document review systems, and consistently thorough underwriting. According to my research, loans that qualified as sellable to the secondary market increased by 3.22% from 2010, which means that 3.22% fewer loans would fall into the repurchase category. 

The average credit score increased from 746 in 2010 to 749 in 2011. Mortgage loan defects were reduced, and improvements were made in the areas of applications, truth-in-lending and good-faith estimates (TIL/GFEs), and disclosures.


Q: How would you grade the level of quality control of conventional loan types versus that of Federal Housing Administration (FHA) loan types?

Duncan:
Based on my research and data analysis, I would use the following scores: Both FHA and conventional loan types showed improvements over 2010, with FHA improving by 6.89% and conventional loans improving by 5.72%. The FHA loan type audited for QC passed at 81.41% for sellable on the secondary market, whereas the conventional loan type passed at 90.92%. 

The average FHA credit score for 2011 that passed the QC audit was 709; the
average conventional loan credit score that passed the QC audit was 766. The FHA loans showed QC improvements in TIL/GFE, appraisals, HUD-1 settlement statements and underwriting, but digressed in disclosures and maintained the same score levels in the areas of applications and insurance premiums. The conventional loans showed QC improvements in loan applications, initial TIL/GFEs, underwriting and disclosures, but showed setbacks in LQI, HUD-1 settlement statements, appraisals, reverification of employment and final TIL disclosures.


Q: Has an improved focus on QC resulted in measurable declines in mortgage fraud?

Duncan:
Yes, an improved focus on QC resulted in measurable declines in mortgage fraud. Both FHA and conventional loans showed improvements, with the FHA having 1.17% fewer loans containing misrepresentation and conventional loans containing 0.55% fewer loans with misrepresentation, according to data from the 2010 audits. 

Despite lower credit scores and higher ratios, the FHA loans showed improvements in appraisals and underwriting, whereas conventional loans had higher loan defects in the areas of LQI, appraisals and reverifications of employment.


Q: What role have investors played in improving QC?

Duncan:
Some investors pushed the QC leverage down to the brokers by requiring QC plans and independent QC audits reports to be submitted from third-party QC mortgage loan audit providers. Also, many QC managers have been pushing back to the point of origination and underwriting for accountability to respond to QC audit reports. In some cases, the investors are allowing the QC department to drive production, rather than operation driving production.


Q: Within the industry, which areas of QC might be in need of improvement?

Duncan:
The area that needs the most improvement is the ability for a lender to affirm the data entered into an automated underwriting system is in line with the documents in the loan. Once the industry has mastered file and data integrity, the loan quality will only marginally improve.

We are still waiting to see what QC emphasis will result from the Consumer Financial Protection Bureau's role with nonbank mortgage lenders. It may be up to two years before we see any results of shifts and changes to nonbank lender QC programs.


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