MBA NewsLink: QC has always been integral to loan origination. What has made Fannie Mae’s latest requirements so noteworthy?
Pamela Hamrick: They’re more stringent than previous requirements. Fannie Mae is asking lenders to conduct monthly prefunding reviews of 10% of their closed loans or 750 loans (whichever is the lesser amount) from the previous month. This is a sea change for many lenders who have been more accustomed to doing most QC reviews at the post-funding stage, especially during periods of heightened transaction activity, such as 2021, when originations exceeded $4 trillion.
However, increased defects in loans sold to Fannie Mae during this active period helped lead to this change. These defects present long-term risks to the industry, and Fannie Mae is trying to help lenders identify those risks and subsequently reduce them.
The GSE’s actions are leading to important discussions among lenders. They’re calling attention to QC as a practice for preventing issues that could have a negative balance sheet impact. The slower market is an opportune time to reconfigure QC operations and emerge stronger for it.
MBA NewsLink: What do you see as the benefits of a more proactive QC strategy?
Pamela Hamrick: I like that you use the word strategy. QC is often seen as a more tactical process of catching every error and ensuring regulatory compliance. It’s actually much more than that. Those who lead mortgage and QC operations help to protect lenders’ financial performance, cashflow, agility, brand integrity and customer/partner relationships. They often surface important trends and insights in time to correct them and improve lenders’ long-term growth as a result.
The purpose of QC is to install important safeguards throughout the lending cycle and ensure the quality that Fannie Mae requires from origination to closing. Sometimes it’s like crawling up and down and across all the threads of a spider web to identify every critical issue. But if a loan gets pushed back because of defects and omissions, and a lender needs to request additional documentation a year after a closing, that’s a recipe for disaster. The market will start to question lenders’ competency and caring and negative word of mouth spreads fast.
Experienced operations and QC leaders, though, do even more to help lenders to flourish. Their insights prompt these organizations to change their policies in order to solidify their marketplace positioning. Targeted loan sampling, for example, could uncover a growing percentage of risky high-LTV loans, or an expanding percentage of borrowers with condominiums in hurricane-prone states—causing lenders to update their underwriting or QC guidelines.
Read the rest of the interview at MBA Newslink