How to Avoid Due-Diligence Drama: 7 Steps
It’s wise to study any firm you consider hiring to improve loan quality
By David L. Hippensteel, council member, Gerson Lehrman Group Councils
Traditionally, mortgage investors hired due-diligence un- derwriters to help them find the
long-term-investment and securitiza-tion viability of mortgages. In the past
year, however, more mortgage brokers and
lenders have hired due-diligence underwriters to help improve the origination,
underwriting and approval processes.
All would-be clients of due-diligence
underwriting firms should evaluate
carefully any firm or provider they consider using. A failure to do so could result
in due-diligence underwriting that provides the same results as front-end underwriting — or far worse.
David L. Hippensteel is
a member of the Gerson
Lehrman Group Councils
and adjunct faculty of Bryant and Stratton College’s
business-development
department. He provides
onsite training in due-dili-
gence underwriting, due-diligence supervision,
mortgage-fraud investigations, and mortgage
repurchase-prevention strategies to secondary-market mortgage-investment banks, mortgage
brokers, mortgage lenders and commercial underwriting firms. He consults public and private
clients in the areas of consumer-credit repair,
debt management and residential foreclosure
prevention. Reach him at refimortgages@
wi.rr.com or (414) 801-7368.
Understanding the issue
The goal of due-diligence underwriting is
to protect firms against potential repurchase events and to prepare for prepurchase rebuttals that secondary-market
investors could send.
In addition to reviewing loans and
training on fraud prevention, due-diligence firms also can explain how to avoid
approving questionable loan applications
before these approvals cause problems.
The relatively small cost of a weeklong
due-diligence-underwriting course can pay
for itself when its training allows a broker
to avoid a single repurchase demand of a
poorly performing mortgage. Brokers who
learn and apply due-diligence-underwriting
concepts and practices to their businesses —
and can prove as much to secondary-market investors — often will find it easier to
sell their closed mortgages. They also likely
will face fewer repurchase and rebuttal
costs associated with those sales.
But the growing demand for due diligence has led to an increase in firms advertising these services. This represents a
double-edged sword for brokers seeking a
reputable provider.
With alarming frequency, wholesale account representatives, brokers, front-end
underwriters, title-service employees and
even real estate agents are attempting to
reinvent themselves as due-diligence experts. This seems to result from economic
opportunism more than a desire to provide
a meaningful, useful service to the mortgage industry.
Moreover, the tools that make a great
due-diligence underwriter aren’t the
same as those of the aforementioned
professionals.
prospective due-diligence-underwriting
providers must pass. These exams should
cover credit and compliance issues, as
well as mortgage-fraud investigation and
general logic problems. Avoid any firm not
willing to take such an exam.
5. Ask to see the firm’s training and
quality-control procedures: The ab-
sence of either should cause you to run
the other way.
6. Never deal with due-diligence-underwriting firms that don’t perform
annual state, national and federal criminal-background checks on their staff
members: While a crime on someone’s
record does not always mean the person
has ulterior motives, it can cast a pall of
suspicion. Obtain copies of the most-recent
criminal-background checks before paying
for any services.
“Growing demand
for due diligence has
led to an increase in
firms advertising these
services. This represents
a double-edged sword
for brokers seeking a
reputable provider.”
7. Ask to watch the due-diligence underwriters in action: Ideally, you can
watch as they evaluate your batch of test
loans. See how they review the files and
how they cover all areas of interest. If you
see something that makes you nervous, ask
about it. If you get anything other than a
sincere, no-nonsense answer, look for another provider.
Residential Mortgage Banking
Branch Program for Professionals
Guaranteed, an established and well-funded Mortgage Banker
since 1992, is positioned to continue its prominence in the industry.
As a leading FHA Direct Endorsed Lender, we underwrite all files in-house.
This allows for faster approvals, common-sense underwriting and timely closings.
We are actively seeking relationships with productive mortgage teams
and entrepreneurial mortgage professionals.
■ ■ ■
Properly executed due-diligence underwriting serves a growing purpose. The problems
mortgage-industry participants face likely
would be less-exaggerated had such underwriting taken place at the outset.
Rather than look to the past, however,
brokers should look forward. As they do,
due-diligence underwriting emerges as a
logical answer to many questions. Improper
due-diligence underwriting, however, could
cause more problems than it solves.
Past Articles
EXECUTIVE OFFICES:
Two Gannett Drive, Suite 110, White Plains, NY 10604
call: Kelley Berkheiser or Louis Tesoriero
(888) 329-GHMC
www.joinguaranteed.com
Guidelines to consider
Adhering to the following seven steps will
help ensure due-diligence providers actually can perform the services they claim.
1. Request the résumés of all due-diligence-underwriting staff: Compare the
staff’s underwriting experience and employers with lists of companies associated with
the origination, under writing, approval and
funding of the mortgages to be reviewed —
assuming the due-diligence provider would
be hired to review problem loans. Chances
are if a front-end underwriter missed something when the mortgage was approved, it
will happen again. The eyes performing
the due-diligence underwriting must be
completely independent.
2. Ask about and verify the firm’s in-formation- and data-security systems:
Because of the immense cost involved in
ensuring data safety, many wannabe due-diligence companies skimp on information technology and security. Deadbolt
locks, burglar alarms and security guards
aren’t enough. Companies should keep
file-access logs that show when staff members accessed clients’ information and for
how long. Servers that handle client data
storage and access should have multiple
firewalls. Company computers should
have unique logins and passwords linked
to individual users to enable monitoring
data access. These login-and-password
combinations should be on 90-day renewal cycles so any misappropriated login
or password eventually expires.
Most important, company employees who access client data outside of the
main office should do so through a secure
Web site that requires a second unique
login-and-password combination. Remote
access also should be limited to normal
business hours.
3. Submit a test set of mortgages for
review: Make sure the test set has certain
recognizable errors and see if the company
catches them. If the results show anything
less than a 97-percent-accuracy level, take
your business elsewhere.
4. Make the provider take a competency
exam: Many large secondary-market mortgage investors have developed exams that
by David L. Hippensteel
“The 1003: Your Legal Shield?”
November 2008
“Where Due-Diligence Underwriters Go
Wrong,” July 2009
View these articles and more at
scotsmanguide.com
24 Scotsman Guide | Residential |
scotsmanguide.com | August 2009
