TRID is finally here

TRID IS FINALLY HERE, and make no mistake, TRID will negatively impact mortgage banking profitability over the next couple of quarters.   Many of the secondary marketing managers I regularly speak to plan to price their 45 day rates with 30 day prices, reducing margins to the cap markets department.  Richard Cordray has publicly stated that the CFPB is not going to be “punitive” but rather “corrective” in future audits of the new disclosures, but saying that, most companies will eat extension fees and disclosure mistakes even if the lender isn’t at fault.  Who wants a flurry of consumer complaints to attract the attention of regulators?  With compliance costs up and profitability down,  the margin for error has never been smaller.

Which brings me to the next point, mortgage fraud and its impact on a mortgage banker’s balance sheet.  CoreLogic should be out with their year over year statistics on fraud for Q2 2014 through Q2 2015 sometime early Q4 2015.   I’ll make a bold prediction– the overall occurrences of detected fraud will be comparable to the previous year with some categories going up and some down. Yep, stepping way out on a limb with that forecast.

CoreLogic will identify about $20 billion of mortgage loans with fraud or about .65 to .7 percent of all files sampled.  These statistics have been pretty consistent over the last couple of years. Thus, even with all the very impressive anti-fraud software and the best underwriting our industry has ever seen, fraudulent loan applications, like cockroaches, can be reduced but never eradicated.  How does your institution protect itself from funding a portion of the next $20 billion?

Recently I spoke to a senior ops manager who ran correspondent operations for one of the top 5 bankers before the crash.  He said, “The sooner we found out about a customer experiencing some kind of financial stress the less money we lost, we saved tens of millions by learning things early.”  Sounds obvious but there weren’t many ways to regularly monitor a TPO in the 2000’s.  I’m not saying this is universally true, but someone who is having financial difficulty is more likely to stretch ethical boundaries when making certain decisions.  I’m also not saying that you should terminate a valued customer because you learn they are involved in civil litigation or bankruptcy for example, but you’d like to know about it before their loan quality starts to slip.  This idea of monitoring a TPO after the initial due diligence is one of the founding principles here at Comergence.  The ongoing surveillance of a TPO’s background might be the difference between purchasing  a number a bad loans or flagging the account for additional QC, and not.  This is especially true in a world of delegated underwriting.

So in an environment where mistakes are less easily washed over with profits, the cost of owning a fraudulent loan has never been more negatively impactful to the bottom line.

Is not properly vetting your appraisers worth the risk?

Background screening has become a hot topic in the appraisal industry lately.  Various appraisal-related organizations have formed committees to attempt to create a standardized process that meets the compliance needs of lenders but also makes the process easier and more cost-efficient for the individual appraisers. Appraisal-related conferences have sessions dedicated to the subject and more lenders are pushing background screening requirements to their appraisal management partners.

While I get a host of questions, a common one from appraisers is “Why now?”  Some AMCs have been performing background screening on their appraiser panels for a decade, but the sudden influx is mainly tied to heightened requirements for lenders’ oversight of third party vendors.  One of the areas that is a primary focus for the CFPB is a lender’s compliance management procedures.  The CFPB is shining its light on lenders’ relationships with their third parties.

As a result of this increased scrutiny, lenders are more risk averse than in the past.  Billions of dollars in judgments against some of the nations’ largest banks have resulted from lawsuits filed as a result of the increased focus on regulations and oversight.  The message that has been delivered is that this is just the beginning.

SO WHAT’S THE RISK?

Putting all of the regulation aside, let’s use some good ol’ common sense.  Appraisal management companies have grown rapidly since the advent of the HVCC and one of the core reasons lenders utilize their services is due to an AMC’s ability to help the lender comply with appraisal independence requirements.  Most AMCs will tell you that an essential operational piece of their business is choosing the best appraiser for each assignment.  This is a combination of quality ratings, performance ratings and proper vetting to ensure the most qualified panel possible.  Background screening is part of the vetting to ensure the right appraiser is chosen for each assignment to avoid possible liability exposure and buy backs.  As an AMC, you could be putting your business and your lender at risk if you aren’t performing background screening.  There have been cases where the failure to properly vet the background of an appraiser has caused the loss of major business relationships and the eventual erosion of the AMC.

USE A SIMPLE COST/BENEFIT ANALYSIS 

Performing a cost-benefit analysis is often the first step in determining the need for a background check for your appraisers.  In general over the past 10 years, various lawsuits have arisen due to improper background screening. According to statistics provided by Liability Consultants, Inc., the average settlement of a negligent hiring lawsuit is around $1 million..  And they report the highest award in a negligent hiring case was $26.5 million.  Research from Crimescreen.com states  “…in a sample study of 300,000 background checks conducted by a major screening firm, the company found: 5% of applicants had criminal records, 36% had motor vehicle violations, prior employment was unverifiable for 18% and education could not be verified for 11%.” These statistics aren’t industry-specific but provide some perspective on the potential risk.

With penalties in excess of $1 million, the potential cost of a negative judgment in a negligent hiring lawsuit dwarfs the fees for performing proper due diligence.  It’s important to  evaluate other risks that are intangible but could turn into tangible future risk and consider the negative impact an incident could have on your brand and the reputation of your AMC.  While significant monetary loss could result in a lost judgment, the reputational risk associated could also result in bankruptcy and/or eventual closure of a business.

No AMC can prevent or control every action made by their appraiser panel, but thorough due diligence, combined with background screening and monitoring can help minimize that risk.  Taking the time to conduct a thorough background screening can reduce the chances of lawsuits. It can also reduce an AMC’s liability should a bad situation occur through the actions of a panel appraiser.  The most intelligent risks are those where the potential downside is limited, but the potential upside is virtually unlimited.  Ask yourself if not performing thorough background screening is an intelligent risk. It only takes one…

The shrinking pool of residential appraisers could have a ripple effect

You may have read the article by Lance Coyle, President of the Appraisal Institute, in yesterday’s Working RE news edition email addressing the future of the appraisal industry entitled The Future of Valuation.

Mr. Coyle addresses a major problem in the appraisal industry that several different organizations, appraisal firms and appraisal management companies have taken steps to try and bring to light as well as help solve the problem.  But it’s still not getting the due attention that it deserves. When turn times on appraisals become 4 + weeks due to the challenges of having too few appraisers, the industry will certainly take notice—but I’m afraid it may not be soon enough.

The real problem is there are a number of barriers to entry to become an appraiser.  Now those interested in an appraisal career are required to have a 4 year college degree.   Recently the number of experience hours for certification rose to 2500.  In reality you are looking at over 6 years of education and experience to start your career as a residential appraiser.  Individuals coming out of college, who are looking for a career don’t often have the luxury of additional training for 2 or more years.  This is one area I believe should be reconsidered  to help give new appeal to the industry.

Perceptions about requirements have also made it difficult for appraisers willing to take on trainees.  Some believe that the GSEs don’t accept trainees for assignments.  Licensed trainees are accepted by the GSE provided a licensed supervisory appraiser also signs the report.   But even though the GSEs accept trainees, lender overlays may exclude trainees for orders.  On a positive note this perception is getting better and more AMCs and Lenders are open to accepting orders from trainees than in the past.

Liability is also a concern for a lot of supervisory appraisers. What kind of liability could a supervising appraiser be exposed to if a trainee were to make a mistake? The potential risk could also result in appraisers not hiring and training new blood in the industry.

Other concerns include having enough volume to support a trainee, additional stress, additional time and expense requirements as well as a growing concern that an appraiser may be training his future competitor.

I believe that most of these concerns can be overcome and there are a lot of brilliant people working to help ensure a bright future for the industry, but without enticing the next generation, which would mean a loosening of the licensing requirements, it will be a very difficult proposition.