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By gagan Sharma
president and Ceo
BSi Financial Services inc.
Keeping Quality in High Quantity
proper quality control can help originators mitigate risk and meet investors’ demands
The head of a business’s quality control department isn’t always the most popular employee in
the company. after all, it’s the task of
the quality-control staff to push the operations staff to identify deviations in
their processes.
Nonetheless, quality control has
taken on a renewed importance in the
mortgage industry today. For one thing,
lenders must ensure that their loan
documentation and disclosures are being completed correctly to meet investors’ demands in the secondary market. The loans that investors buy must
adhere to a variety of strict guidelines,
which include meeting the standards
represented in their own disclosures.
The sooner that deficiencies in the
loan-origination process are noted, the
quicker corrective action or process improvements can be put into place. By
identifying a problem and then fixing it,
the lender is saved from writing a bad
loan or having to buy it back later.
In the end, no one benefits more than
originators themselves, who mitigate
their own risk by having safeguards in
place to ensure that requirements and
guidelines are met for every loan they
process. Brokers and originators should
keep themselves well-informed about
the quality-control measures that may
affect and strengthen their business,
measures that may be required of them
from either internal or external sources.
different, there are common quality-
control components that both pro-
cesses share. For instance, both aim to
define exceptions and deviations from
predetermined criteria and prioritize
the criticality of each.
all exceptions, of course, are not
equally critical; some items require
greater focus than others. Needless to
say, foreclosing on the wrong house is
a worse mistake than merely having
an incorrect phone number listed for a
borrower. Likewise, there tends to be
more of a focus on loans that have the
greatest risk of delinquency, and priori-
ties also can vary based on guidelines
from individual investors.
continued on page 48 »
requirements
New government requirements, such
as Fannie Mae’s Loan Quality Initiative
and a similar program from Freddie
Mac, are putting renewed emphasis on
loan-data verification at the pre-closing
and post-closing stages. These ground
rules represent a new approach to risk
management, one that pervades the
entire mortgage industry. Both programs are intended to ultimately mitigate expensive put-backs and generate
higher quality loans.
Fannie’s Loan Quality Initiative, for
example, asks that originators perform quality-control reviews before
funding — not just post-closing — to
prevent completing mortgage loans
that have significant defects like misrepresentations, inaccurate data or
inadequate documentation. The originator’s quality-control process must
be able to spot critical defects in loans
and ensure that they have been addressed, fixed and documented.
Lenders also must establish an auditing process to ensure that quality-control measures and policies are
effective and being reported to a company’s senior management in a timely
fashion. Better quality control upfront
inevitably improves servicing results on
the back-end, which in turn can be the
right formula for preventing buybacks.
Timing
While the functions involved in originating and servicing loans may be
gagan Sharma is president and cEO of BSI
Financial Services Inc., in Irving, Texas. BSI is
a leading provider of mortgage subservicing
and quality-control services. Previously, Gagan
ran a business-process outsourcing company
focused on call-center services. he assembled
the management team, raised more than $8.5
million in financing and grew the company to
1,200 people serving clients like citigroup, Merrill Lynch and Sovereign Bank. Gagan worked
in Deloitte consulting’s hi-tech and telecom
practice. E-mail gagan@bsifinancial.com.
By richard e. cox
Certified trustee sale
officer and owner
a ZreCon
Stress the
Distressed
reap rewards from
promoting the purchase
of distressed-property
notes
In today’s market, investors are becoming increasingly interested in purchasing distressed properties. and why not? Short-sales, real
estate owned properties (rEOs) and
trustee sales can be potentially lucrative investment opportunities for
your clients.
That said, the terms of purchasing a
distressed property often can be discouraging to investors. For instance,
when it comes to short-sales, rEOs and
trustee sales, the lender itself is always
in complete control of the sale’s terms
and whether or not the transaction will
move forward, and this lack of control
and influence can be unappealing to
some investors.
With that in mind, mortgage brokers
and originators should advise their
clients that simply purchasing short-sales, rEOs and trustee sales isn’t the
only way to invest in distressed properties. For the truly intrepid investor, buying discounted notes can provide for an
intriguing, if slightly unconventional,
investment approach.
Brokers and originators with clients
who are interested in this method of
investment — or, for that matter, mortgage professionals who are interested in
pursuing note buying for themselves —
should familiarize themselves with a few
note-buying strategies and principles.
common scenarios
With regards to foreclosure investing,
clients and mortgage professionals
alike should be aware of the concept
of the strategic foreclosure — aka the
controlled foreclosure. This is when a
note holder makes the financial decision to file a non-judicial foreclosure on
a delinquent borrower as a means of
bringing about a resolution to the delinquency. That resolution will typically
take one of three directions:
1. The owner takes responsibility and
begins making payments.
2. The owner cannot afford to make
mortgage payments, and thus the
note holder must negotiate with the
owner to get a deed in lieu of foreclosure (DIL) or conduct a short sale
of the property.
sale, the note holder still can benefit from the scenario. For example, if
the property in question is desirable
enough for the note holder to keep, the
“For the truly intrepid investor, buying discounted
notes can provide for an intriguing, if slightly
unconventional, investment approach.”
3. The owner refuses to take responsibility for payments and refuses
to undertake a short sale or DIL,
forcing the note holder to initiate a
trustee-sale foreclosure. The end
result of this circumstance will be
a change of ownership, either to
a third party with a fair-market bid
or to the note holder with a full-bal-ance bid.
regardless of the situation’s ultimate
resolution, the benefits to the note
holder are numerous. For instance, if
the property owner begins making payments, the note increases in value as a
performing note and therefore theoretically can be resold at a profit.
Even if all else fails and the note
holder must complete the foreclosure
by beginning the process of a trustee
continued on page 48 »
note holder does not have to discount
the total balance owed. If the property is not desirable enough for the
note holder to keep, there’s still a great
amount of financial leeway because
of the discount present at the time of
the note’s initial purchase. Because of
the note’s minimal initial cost, the note
holder can drop the opening bid to an
richard e. cox is a certified trustee sale officer, licensed real estate broker, and owner
of aZrEcON, an independent regional foreclosure trustee and processing firm based
in Phoenix. he has been involved in various
facets of the foreclosure market since
originally becoming a real estate licensee in
california in 1981. reach him at (602) 999-
6287 or richard.cox@azrecon.com.
