Earlier in the month we visited Newtown Pennsylvania, located outside Philadelphia. The town has a rich US history and the colonial downtown beautiful. As we drove through the downtown back to our hotel at night, every victorian house we passed had candles flickering in the windows. We passed a 9/11 Memorial Reflection Pool on the way to the airport in the morning and took this picture at sunrise.
A mortgage banker has certain critical vendors which are vital to the company’s operations and survival. The critical vendors we’ve identified are quality control, sub servicer, appraisal management companies (AMC) and interest rate risk management advisors. During our 2012 travels, we’ve seen a lot of really great critical vendor relationships. We’ve also seen many strained critical vendor relationships. What we’ve found is finding the right critical vendor, working to create bi-party expectations, performing quality assurance and ensuring results meet the bi-party expectations are the keys to great critical vendor partnerships.
Quality Control Company
We know it may sounds crazy to perform quality assurance on your quality control company, but if you don’t, how can you assure the audited loans meet your quality control standards? Quality assurance on your quality control company can be broken down into two areas: performance and validation.
Are you receiving your Quality Control Reports within your expected time frame? If not, why? Is it an internal or external issue? Timely Quality Control Reports are critical to identifying and eliminating any systemic loan level defect trends.
On all Quality Control Reports, we recommend requesting a cover page to outline the quality control company loan selection process. The cover page should include the percentage of loans audited (to total production) and all targeted selection criteria. We also recommend requesting copies of all field and desk reviews.
After receiving the quality control report, generally a 10% audit of the loans selected for review will give you a good snap shot at the quality control company’s quality of work. The loans should be re-underwritten by an Underwriter not associated with the originated loan. The defects found by the Underwriter should be matched up against the quality control company’s defects and Management should look at both findings side by side. Any major issues should be addressed.
We’ve heard during Agency approval onsite visits, quality assurance on the Quality Control Report as being a hot topic. More specifically, mechanics on how quality assurance is performed and what Management does with the findings.
If you’re Agency approved, servicing loans and using a sub servicer, you most likely have a Sub Servicer Quality Assurance Policy and Procedure (it’s an approval requirement). However, are you following the policy and procedure? Sub servicer quality assurance can be broken down into three areas: Financial Review, Operational Procedures and Review, and Structural Review.
The financial review includes how the sub servicer positions their accounting to comply with new regulations, bank account reconciliations and reviewing audited financial statements. In addition, you may want to review servicing system reporting, lock box/cashiering processes and tax payment of escrowed account polices and procedures.
Operational Procedures and Review
Operational procedures and review monitors how the sub servicer manages daily servicing operations. Key items to validate are the servicer’s cash flows, delinquency collection, borrower communication, investor remittance, new account set up and escrowed item management, payment reporting and quality control sampling methodology.
The structural review ensures the sub servicer is sound structurally. Licensing, facility, corporate structure and insurance are all validated.
Generally we recommend our clients visit their sub servicer prior to signing a letter of engagement and meet with the sub servicer in the sub servicer’s corporate location at least once a year.
Interest Rate Risk Management Advisor
Many mortgage bankers we meet use an interest rate risk management advisor to provide daily analytics and consulting services for their mandatory trading activities. We’ve seen an increase in number of mortgage bankers using an interest rate risk management advisor to perform all trading functions. If your company is outsourcing the trading function, make sure you have record of the trades either by having an employee on the phone, record the call or ensure the broker/dealer confirmations are sent directly to an employee of the company.
We’ve run across many mortgage bankers that don’t measure hedge effectiveness or use an external report provided by the interest rate risk management advisors to monitor the hedge. Regardless of the external reports provided, we always recommend hedge effectiveness be monitored internally.
Appraisal Management Company (AMC)
We usually hear the same large AMC names during our travels, but many mortgage bankers include one or two local AMCs in their approval pool that we’ve never heard of. If you use a smaller AMC, make sure you confirm they comply with the Appraisal Independence Requirements (AIR). The whole basis of AIR is for the originator not to know who is conducting the appraisal and for the appraiser not to know who ordered the appraisal until the appraisal is completed. This process is known as a double blind selection process. If your Loan Officer (or anyone else privy to the origination process ordering an appraisal) orders the appraisal, ask your AMC if they use a double blind selection process and ask about the mechanics of the ordering process after the appraisal is ordered.
When working with critical vendors, we always recommend mortgage bankers obtain the ‘show me the money’ validation and not take anyone’s word for the work being completed. At the end of the day, even though you may be using an outside company to perform certain functions, the responsibility, and monetary and legal risks all fall on the mortgage banker.
Cameron Watts, CMB
C. M. "Corky" Watts, CMB