are you really safe
SEPTEMBER 2010
KENTUCKY MORTGAGE PROFESSIONAL MAGAZINE
NationalMortgageProfessional.com
24
continued from page 20
in obtaining financing. Furthermore, the added administrative burden and fees may reduce the number of people approved to originate loans, potentially slowing down the origination process and further raising production costs. By reducing the productivity of any one originator, per loan costs will likely further increase. Given that the lenders are beholden to their stakeholders to maintain margins and profit, these costs are likely to be reflected in the price of obtaining a loan. The most troublesome conundrum arising out of the SAFE Act is that there is an embedded assumption in the resulting legislation that it is possible to weed out most, if not all, unscrupulous loan originators by regulatory fiat. However, in dealing with matters of human nature, and with complex transactions that involve multiple parties and data sources, it’s not that simple. Just because someone is entered in the NMLS, there is no guarantee that they will foreswear all future fraudulent activities. And of course fraud can occur at multiple points in the origination work flow continuum—even at the borrower level. The SAFE Act addresses only one element of a highly elaborate system. Moreover, the SAFE Act does not provide for the continual monitoring of agents in the system. While the system may make it harder for someone to get registered initially, any registrant could later “turn bad” and cause a lot of damage before they are identified and stopped. Periodic agent reviews by the lenders or self-engendered re-certification by the agents themselves would also likely drive up the cost of doing business as yet another layer of red tape is added to an organization’s procedures.
such as in the manipulation of appraisal information/appraised values, etc. in order to get loan approval and, thus, commissions paid. Given this situation, a more holistic approach should be taken to ensure that fraud can be systematically identified across the entire mortgage loan origination process. Why focus solely on the agents when the process of the loan origination itself can be used to help identify, weed out and correct fraudulent information?
Technology offers a better way “Trust, but verify” has long been a watchword of international relations. This recognizes a fundamental truth: It is virtually impossible to identify all of the bad actors in a process upfront, no matter how many safeguards are put in place. Fortunately, for the mortgage industry, there is a better way. New cloud-based lending technologies provide the opportunity to monitor for and detect fraud throughout the lending process. This approach is both far less intrusive and more cost-effective than the NMLS, giving the lender the ability to check loan data throughout the process to ensure it is complete, accurate and unchanged through loan delivery. In this way, it is not dissimilar to the Six Sigma processes that were introduced in product manufacturing a decade or more ago—a system of continuous monitoring designed to drive quality. Until recently, it has been difficult to replicate this kind of technology-driven quality control in mortgage origination. After all, creating a loan is not like building a widget: There is unpredictability to the process that does not exist in manufacturing. That is now starting to change.
A more holistic approach is required
Baby vs. bathwater
Creation of a residential mortgage is a highly complex process involving numerous people and a multitude of tasks. The SAFE Act does not require mortgage underwriters or loan processors to go through a similar qualification or registry procedure. Fraud can be introduced anywhere along the line by these people or others who have access to loan data and files throughout the process. Even closing agents, post-closing activities and audit procedures, introduce the possibility of changes to data and paperwork. The SAFE Act addresses the individual loan originator and really just one step in the origination process—that of the individual (loan originator) counseling the borrower on the appropriate financial product and the income they received as a result of the consultation. However, originators can also be involved in fraud later in the process,
The mortgage industry has always been subject to periods of boom and bust, though the last several years have been extraordinary ones by anyone’s standards. Yet, the market has reacted to self-correct. Underwriting guidelines have adjusted dramatically to counter the years of easy credit. Exotic loan products have been eliminated. Government regulators have stepped in to try and address the problems that developed over the last cycle. While there is an important role for regulation, it is not the only, or necessarily the first, line of defense. By its nature, regulation tends to be expensive, cumbersome and potentially off-target. Often, rules are designed to solve last year’s crisis, not the next impending crisis on the horizon. On the other hand, some technological solutions offer a level of control and flexibility that can adjust to regula-
tions and market conditions, as well as individual agent-level actions. Cloudbased technologies in particular are gaining adoption within the mortgage industry and are evolving rapidly to
“By reducing the productivity of any one originator, per loan costs will likely further increase.”
place. When it comes to detecting the latest iteration of their schemes, technology gives lenders a fighting chance. Lawrence Fried is a mortgage market analyst with Dorado Corporation, a provider of cloud-based consumer lending solutions based in San Mateo, Calif. He may be reached at (650) 227-7300 or by visiting www.dorado.com.
Footnote enable best business practices and to adjust to changing circumstances. Fraud and fraudsters are nothing, if not infinitely, malleable in their efforts to game whatever system is put in
fha insider
1—For those who are interested in reading through the legal documentation, you can find it here: www.hud.gov/offices/hsg/ramh/safe/ smlicact.cfm.
continued from page 21
upfront and the annual premiums. These changes as outlined in Mortgagee Letter 10-28, are effective for all case numbers assigned on or after Oct. 4, 2010. Here are the six things you need to know about these changes: 1. The upfront premium is now one percent for all standard FHA programs. 2. The annual premium is now 0.90percent for LTVs greater than 95 percent on 30-year loans. 3. The annual premium is now 0.85 percent for LTVs equal to or less than 95 percent on 30-year loans. 4. The annual premium is now 0.25 percent for LTVs greater than 90 percent on 15-year loans. 5. The annual premium is now 0.00 percent for LTVs equal to or less than 90 percent on 15-year loans. 6. These premiums apply to purchases, regular refinances and streamlines. Please note that this new law also gives FHA the authority to raise the annual premium at will up to 1.5 percent for LTVs at or below 95 percent and 1.55 percent for LTVs more than 95 percent.
FHA implements minimum credit scores Mortgagee Letter 10-29 establishes minimum credit scoring requirements for all standard FHA programs* and is effective for case numbers assigned on or after Oct. 4, 2010. Here are the four things you need to know about these changes: 1. Borrowers with a minimum credit score at or above 580 are eligible for maximum financing.
“Although I am all for making FHA stronger, I fear that many of the policy changes over the last year are moving FHA away from its original mission of helping the average creditworthy American achieve homeownership.”
2. Borrowers with a minimum credit score between 500 and 579 are limited to a 90 percent LTV. 3. Borrowers with a minimum credit score of less than 500 are not eligible for FHA-insured mortgage financing. 4. Borrowers with a non-traditional credit history or insufficient credit are eligible for maximum, but must meet the underwriting guidance in HUD 4155.1 4.C.3. *Please note that these new requirements do not apply to: Title I, Home Equity Conversion Mortgages; HOPE for Homeowners; Section 247; Section 248; Section 223(e), Section 238. Go FHA! Jeff Mifsud founded Southfield, Mich.based Mortgage Seminars LLC in 2004, has been an FHA originator for 13 years, is a contributor to LoanToolbox.com and is a former FHA underwriter. Jeff may be reached at (877) 342-9100 or e-mail jeff@mseminars.com. Visit author Jeff Mifsud’s Web site at http://mseminars.com for tips and information on FHA loans and details from some of the nation’s top FHA specialists.
• Daily updated mortgage industry news • Industry blogs • Write your own blog
• Find loan programs • Discover local and national events • Get access to video