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Detecting Undetected Risks

You’re a successful mortgage banker, operating a profitable company.  The Company has Agency approvals, a loan servicing portfolio, broad based written policies and procedures, and an experienced management team.  From out of nowhere, you get an unpleasant surprise:  first, your Credit Officer informs you of several investor loan repurchase requests and second, your Vice President of Capital Markets says he expects another huge secondary market loss this month.  

You demand an explanation from your two senior managers.  The Credit Officer stated the loan repurchases were the result of poor underwriting decisions on loans originated from one of your Regional Operation Centers.  More specifically, the loans where underwritten by one recently hired Underwriter.  Upon further investigation, targeted pre and post funding quality control had not been performed on the Underwriter as required under the Company’s Quality Control Plan.

The Vice President of Capital Markets stated the secondary market losses were the results of MBS roll costs.  Many loans pooled for sale had data integrity issues that resulted in delays in loan purchase.  Because of delays, the secondary marketing department decided to postpone investor delivery until loans were fully eligible for purchase.  Loans were delayed up to 30 days for delivery, which resulted in extensions and roll costs. 

Mortgage banking today has many risks lurking around, sometimes undetected.  A broad risk management process is increasingly needed to ensure there are solid policies and procedures in place and they provide a template for employees to perform tasks.  More importantly, employees and management must be adhering to the policies and procedures.  

The Chief Executive Officer or the Board of Directors may take the position that the Company’s senior management is responsible for ensuring adequate policies and procedures are in place, and ensure and validate employee activities follow the policies and procedures.  Periodic independent review should be implemented to identify any weaknesses that increase the Company’s risk.  An independent assessment of risk areas is a proactive approach to avoid unexpected and costly surprises.  


C. M. "Corky" Watts, CMB                                              Cameron Watts, CMB     
408.497.3135                                                              415.722.0369