NEW YORK--(BUSINESS WIRE)--Widespread changes to U.S. residential mortgage origination practices since the financial crisis have reduced the risk of fraud and misrepresentation, according to Fitch Ratings.
A key driver behind the poor performance of the peak vintage collateral was weak operational controls for the information used in the loan decision process. The industry as a whole, through its own initiatives, investor demands and regulatory mandates, has created a new lending paradigm that has improved the quality of the information and should result in lower credit risk.
Several of the improvements have been driven by legislative changes. In 2008, national standards for non-depository loan officer licenses were introduced for the first time, requiring a written test, completion of education courses and a criminal background check. In 2014, the Ability to Repay rule was implemented, prohibiting 'stated income' loan programs for most mortgage loans. Misrepresentation of income was believed to be common among stated income loan programs. Nowadays, lenders typically do not rely solely on the income documentation provided by borrowers. Most lenders require borrowers to sign Form 4506 T, enabling the lender to verify the income documentation provided by the borrower directly with the IRS.
Lenders have also implemented a number of additional changes to reduce operational and misrepresentation risk. Loan officer compensation now typically includes consideration of quality control results and often includes claw-back provisions for poor performing loans. Similarly, underwriter compensation also typically includes quality control results in addition to volume measures. Quality control reviews pre- and post-closing are now more frequent and comprehensive than prior to 2008.
Components of the loan production process have been separated to prevent inappropriate influence. Underwriting departments and loan origination departments are now typically separated to allow for greater underwriting independence. Direct communication between loan officers and appraisers is typically constrained, and appraisers are now typically selected by an independent Appraisal Management Company or by a lender group outside of production. Many lenders have added specialized internal appraisal underwriting units to either independently review the appraisals or provide a resource for credit underwriters to maintain appraisal quality.
Technology advancements have also played a key role in reducing risk. Fraud risk tools, which were uncommon prior to the financial crisis, are now widely available and heavily used to assess misrepresentation of identity, occupancy, employment/income and a number of other types of fraud, such as non-arms-length transactions, straw-buyers and concurrent closing schemes. Publicly available information on the internet, such as Google Maps and Zillow, are also commonly relied on to review appraisals in ways that were not possible prior to the financial crisis.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.