By: Rob Chrisman
What, if anything, is putting a crimp in expected loan production? Perhaps the CFPB’s QM rules are indeed restricting residential lending. In one example, here is what the public sees on the narrow QM DTI box. But hey, no one at the CFPB ever said that non-QM loans were bad loans, although the consequences from unintentionally doing a “bad” loan are truly on the collective mind of the industry. It is just so darned hard & expensive to originate a “perfect” loan…
“Rob, it seems like all my co-workers are yapping about risk. Is there anything different about the risk lenders have now versus 10 or 20 years ago?” Yes and no. The basic risks are the same, but the importance, scope, and minimization of risk have increased dramatically, as has the cost of reducing it. There’s no position of “risk dude” or “risk dudette” at a lender although many lenders have chief risk officers if they can afford them. (And can a company afford not to?) But everyone is pulled into the risk equation: underwriters, appraisers, head of operations, modeling & analytics, financial analysts, quality assurance managers, compliance, fraud investigators & auditors, production and servicing. And if you think that pretty much sums up the bulk of the personnel, you’re right.
The Agencies are “happy” to deal with credit risk. After all, that is what guarantee fees are for, right? But when someone like Fannie is dealing with approximately 1,400 lenders, operational risk is not something they want to assume. The Agencies, and other investors, are carefully watching the migration away from the pristine risk profile that the industry has developed over the last several years. They want viable counterparties with plenty of net worth, and lenders exiting or merging cause some instability. And any investor walks a fine line between offering more and more to their clients versus protecting themselves. Given the recent announcement from the FHFA about the Agencies needing to focus on non-regulated servicers, the premise that the Agencies aren’t interested in operational risk oversight may be shifting.
The interesting thing is that everyone I have asked has told me that not every loan should be done – so logically not every borrower will qualify for a loan. Fred Jackson wrote to me saying, “Regarding the comments on mini-correspondents, after all this time, does it not amaze you that many (still) believe that Fannie and Freddie underwrite the loans they buy. No matter how many times it’s explained that it’s the responsibility of the seller to qualify and underwrite the loans, with DU or LP or manually, and how obvious it is that, to underwrite every loan bought , F&F would need to have as many underwriters as all their sellers put together, why don’t people get it? The same applies to large correspondents who are seller/servicers. Do the math, folks.”
Risk management in mortgage lending is a burgeoning field. How does one measure, track, and reduce loan defects? What will the upcoming RESPA/TILA changes mean to risk? Are you preventing all fraud in your originations? And if not, why not? How are you handling your underwriting, repurchase, indemnification, and rescission risks? The CFPB appears to be focused on counterparty risk – how are you monitoring your vendors? What about cybersecurity, or the risk of the janitor throwing a bunch of loan files in the dumpster (I saw that one happen several years ago)? Is the company monitoring appraisal and review appraisal risks? Collateral valuation is critical to investors. How about for third party originators – how are they watching their broker clients?
But wait – there’s more! Are you hedging your secondary marketing risk correctly? Will your warehouse lender be around next month? Conversely, will the warehouse bank’s clients be around next month? Are you adequately training your staff on risk metrics and avoidance? Are you at risk of your LOs running amok in social media, saying they have the best rates in town? And the CFPB wants to make sure that a lender’s LOs are not being compensated to steer borrowers in one direction – the risk of a lender not doing that are pretty darned steep.
And when a lender has their eyes on all of that, is there any time or resources to actually originate a loan profitably? Is it easier doing all of that when you’re a big bank than when you’re a lender doing $30 million a month? Not only are lenders measuring, tracking, and reducing loan defect rates, but they are also mitigating repurchase, re-default, and rescission risk. And all of this is for QM and non-QM loans, vanilla product or expanded – that should have little bearing on a company monitoring and minimizing risk. Indeed, managing risk is critical, and expensive, for lenders.