There is a lot of talk about today’s improved loan quality and loans on the secondary market today are better, but recent events have clearly highlighted the need for better vetting when it comes to processing on the servicing side, and not to be overlooked as this occurs is that there is still a lot to look out for on the origination side, too.
“Everybody is going for the highest quality,” according to Sue Allon, CEO of due diligence firm Allonhill said, noting that her firm has been busy with seasoned loans as well as new Federal Housing Administration/Veterans Affairs and Jumbo product. “Sequoia set a high bar,” said Allon, referencing the first post-downturn private-label jumbo securitization that has, by and large, proved to be a tough act to follow.
While there are high-quality loans being originated out there, things can still go wrong along the way that could jeopardize them.
“I am shocked at how much fraud we’re seeing,” Allon said, noting that one of the most common types has been signature forgery on documents such as disclosures and promissory notes. There is in particular more business-to-business fraud these days, she said.
However, Allon said her team is not seeing “subprime fraud” in terms of borrowers buying more house than they can afford—something today’s rules and market conditions make challenging.
The market has changed in many ways, she noted. For example, “to walk away from an originator relationship used to be unheard of.” This is clearly not so anymore.
Allon said her team also is involved earlier in the process today at the prefunding stage, noting that if problems are caught before funding, one does not end up with a problematic loan there is pressure to sell.
However, Allonhill feels it can’t opine on a deal until after the final HUD-1 form that confirms costs associated on the loan is out, due to concerns related to whether it falls into the “high cost” category that has more stringent rules. The way the business is set up this can be challenging, she said.
In its effort to be a label identified with an operation that “doesn’t bend,” Allon stresses the need not to take shortcuts that can be compromising and the need for firm rating agency guidelines. She said she believes, for example, that documents obtained from third-party vendors when it comes to credit scores, credit reports, title, appraisals, etc., should all be ordered through a third party such as Allonhill.
“If the issuer got to order it, then there’s some vague chance [of subjectivity],” she said. “To me it’s a little bit tainted.”
The sampling process, which many became wary of in the wake of the downturn, has to be a “scientifically derived sample size” to make sure it is big enough and, if there is an error, recalculations have to be done to ensure the investor gets an acceptable picture of the pool.
Until not only underwriting but all portions of the mortgage process on both the servicing and origination sides are properly vetted, the market will continue to face setbacks.
That’s of course easier said than done, given continuing economic malaise and the business world’s emphasis on efficiency. But the cost of not doing it clearly could be high and potentially create more systemic risk.
As Aite Group’s John Jay noted in a report last week, it appears the latter could be the result of fallout from servicing processing woes that have led to three major companies to put thousands of foreclosure sales and evictions on hold in the 23 states where foreclosures are handled by the courts.