Banking Law

After all the public sturm und drang over (1) the failure of mortgage lenders to enforce sound mortgage underwriting standards during "The Bubble Years," (2) the difficulties caused to foreclosing lenders by poor loan documentation, and (3) the fact that Fannie Mae and Freddie Mac have been on a loan repurchase jiahd for the past year or two, you would think that bankers of today who originate residential mortgage loans would be more cautious in their approach to loan underwriting than a bomb disposal expert in Kandahar is in his approach to an IED. If that's what you'd think, you'd be dead wrong. At least, that's Freddie Mac's story.

According to a recent article in The American Banker (paid subscription required), "lenders still are not catching common defects."

Pamela Padgett, vice president of single-family underwriting at Freddie Mac, told banks and servicers in a Webinar last week that despite improvements in underwriting, lenders still are not catching common defects.

She described persistent problems with what she called "back-to-basics" fraud, such as altered documentation.

"We continue to find ineligible loans in our performing loan quality control sample," Padgett said. "Why? Because the message has not been delivered effectively across departments, especially production and underwriting."

Lenders still have plenty of "room for improvement in the loan quality of current originations," she said.

Other common defects leading to loan buybacks are appraisals that do not support the value of the property, insufficient income documentation, income errors and title deficiencies. Loans with these problems are twice as likely to become 90 days delinquent within the first year, Padgett said.

Between them, Fannie and Freddie forced over three billion dollars in loan buybacks in the first quarter of 2010, an increase of 64% for Freddie and 65% for Fannie from the same quarter last year. That's a healthy chunk of change for something that ought to be a relatively simple matter of quality control in an era when the volume of residential lending is substantially lower than it has been in years.

Nobody expects perfection. Nevertheless, there's no excuse any longer for "the message" not "being delivered effectively across departments." Any bank that's playing the residential mortgage origination game these days and hasn't heard the word about "quality control" better either get with the program pronto or find another market niche. Like, maybe, basket weaving.