When most mortgage producers and lenders think of mortgage compliance and mortgage quality control, they think of the things that keep the state and mortgage agencies auditors off their backs. The difference between mortgage compliance/quality control and mortgage risk management are the odds of having a repurchase or indemnification from FHA, FMAE, FMAC, or an investor.  The risk is in the financial burden having to take ownership in the loan whether it was fraudulent or just poor risk assessment prior to closing. 

The lack of a risk management plan could result in a financial set back in lending and mortgage operations.  Also, one should consider the adverse effects it may have on any agency or investor relationships.  The compliance and quality control mostly focuses on having the correct information in the loan i.e., disclosures, signed and dated documentation, and correct charges which have little or no effect on whether the loan is fraudulent or will remain in good standing.

The majority of fraudulent loans are an inside job. Borrowers are not sophisticated enough to know the inner workings of a mortgage loan to get it through the difference stages of loan processing, underwriting, and closing.  This is true even when a robust compliance program is active.  The reason fraudulent loans get through underwriting is the underwriter is focused on ratios and check lists to get the loan through while compliance is looking for the appropriate disclosures, signatures, dates, and appropriate charges with very little effort placed on the depth of the loan or the risk assessment.

Many of the mortgage fraud investigations Quality Mortgage Services has participated in resulted in recognizing that preventive risk management procedures may have raised a flag prior to closing.  Most management officials and compliance managers want better tools of risk management capabilities built into their existing business workflows to mitigate risks against fraud, so adverse risks can be detected prior to closing.

Fannie Mae has found that:

• Income/Employment information was inflated or fabricated (25%)
• Credit history, liabilities and/or identity were misrepresented (21%)
• Property value was inflated and there was misrepresentation in other areas of the loan transaction (15%)
• Intent to occupy the subject property was materially misrepresented (15%)
• Assets (5%) ¹

“An Occasional Newsletter from Fannie Mae’s Customer Education Group”, Focus on…Preventing, Detecting & Reporting Mortgage Fraud, December 2005   

Lenders predict an increase in fraud cases in:

• Identity theft
• Falsified or Misrepresented loan application
• Falsified or altered support documentation
• Inflated home appreciation
• Inappropriate house flipping

In most cases, underwriters are over worked and under pressure to get loans to closing.  Post closing quality assurance validates the compliance and credit worthiness of loans with little or no risk assessment.  REMEMBER…. Mortgage fraud is usually an inside job and the individuals involved know the weaknesses of the system and know what it takes to get loans through.  In most cases when fraud is an inside job, several properties are involved resulting in large liability costs back to the originating source.   

Does every lender/mortgage banker need to perform risk management?  Yes, however, the majority of the loans closed and sold are solid.  Management must determine what degree or level of risk management needs to be performed by analyzing the following:   

What the acceptable financial burden is from repurchases or indemnifications and all associated costs involved in the repurchase?   

What level of tolerance will an agency or investor accept in defaulted loans before severing their relationship?    

What will adverse relationships and reputation cost?   

What is the Return on Investment in performing risk management verses accepting a percentage of repurchase or indemnification?       

What level of confidence and creditability is perceived by the agency or investor by having a risk management program?