Quality Control in Loan Appraisal Review

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The strategic value of QC process in the mortgage industry

THE STRATEGIC VALUE OF THE QUALITY CONTROL PROCESS IN THE MORTGAGE INDUSTRY (2003) The mortgage industry has originated record loan volumes month after month for the last three years. The sub-prime segment in particular has greatly benefited from the boom in the housing market buoyed by interest rates that have approached historical lows. However a second condition is critical to explaining the dramatic expansion of the sub-prime segment: the unprecedented access to large amounts of financial resources which has been leveraged to fund lenders’ growth. Institutional investors reacted to equity markets far more unpredictably than in the bubble years by redirecting a greater share of their resources to mortgage-backed securities. Lenders understand that this was the perfect storm for the mortgage industry and that the competitive landscape will change soon. In the next stage of the industry life-cycle, lenders are likely to face fiercer competition for both market share and for investors’ financial resources. As a consequence, those who are getting ready for the times ahead by solely developing superior market capabilities will solve only half of the growth equation. Future industry leaders will be those that are able to increase marketing effectiveness and as well as to deliver higher value to institutional investors in terms of both the quality of the loans underwritten and the investing experience (what does “investing experience” mean?). To solve the second half of the growth equation lenders need to design effective and efficient business models that address investors’ needs for quality and service by integrating QC and post funding operations in the production pipeline. This enhances both the loan quality and service level without compromising production performance. GAIN A COMPETITIVE ADVANTAGE USING QC: A SUB-PRIME MARKET EXAMPLE A leading sub-prime wholesale lender, took full advantaged of the boom in housing and refinancing markets created by low interest rates and availability of funds to finance its growth. By exploiting these favorable conditions and implementing a business model strongly focused on customer service, our client was able to outpace the competition and grew at a double-digit monthly rates for three years between 2000 and 2003. This type of lending, of course, comes with substantial risks, and the value of these loans on the secondary market depends heavily on quality appraisals and underwriting decisions. During the mortgage boom, the number of loans that had overvalued appraisals increased significantly. Fitch Ratings reflected investors’ concerns with its April 15th 2004 press release, saying that Fitch planned to knock off 10-15% of the home values in about two dozen soft markets where lenders did not use full appraisals. Lenders’ operations are complex, manual, and require the cooperation of several external parties, such as appraisers. The lender realized that more stringent controls on appraisers needed to be implemented. However the client found such measures hard to put into place during times of tremendous growth and considered these measures often at odds with increasing the production pipeline capacity. In order to continue its success as a top wholesale mortgage lender, the lender needed to address the following challenges:


The strategic value of QC process in the mortgage industry

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Identify appraisals that are overvalued and automatically screen them for review Discourage brokers from using appraisers who routinely inflate property estimates. Address the manual hand-offs in the loan origination process across departments.

THE SOLUTION The lendere decided to redesign a new appraisal quality control model adopting enabling technologies to increase process automation. The lender assessed its existing process for appraisals’ review and then redesign the process introducing gates at each step of the...
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