by Tom Wells
During these highly unusual times with COVID 19, there are unique credit risks you have to manage including: is the borrower employed (even if you get the verbal a few days before closing) or is the self-employed borrower still in business at closing. Or will you get a quality appraisal since some appraisers may want to race through the house interior as fast as possible.
Not- withstanding these highly unusual times, you should always question yourself and your team what are the credit risks you must manage to ensure you have a sound mortgage portfolio. Although times change and you may have to put more focus on one risk over another (for example lender and/or borrower misrepresentation and fraud or COVID 19 challenges), there are three credit risks that you need to manage regardless of what type of market we find ourselves.
- Short Memories – We need to ensure the pendulum does not swing too far either way – don’t be too conservative or too liberal. When times are great, we tend to chip away bit by bit on credit requirements either due to competition or just because it feels ok due to current loan performance. But as we know, going too liberal gets us into trouble (SISA, NISA, excessive layering of risk of credit, capacity and collateral) However, it seems when we course correct, we want every mortgage to be perfect and do not want any defaults, which is unrealistic. I challenge your credit team to ensure you always remember the past since history seems to repeat itself when managing your book of business.
- Models – Models are a great innovation for the mortgage industry. We gain efficiency, consistency and in most times accuracy. However, we need to ensure we understand what the models are telling us to ensure we don’t miss the big picture and assume the model is always correct just because the model says it is correct. I challenge your credit team to ensure they understand what the models are doing and ensure they are used correctly.
- Managing Credit Risk through the Ranks – You want to ensure that your end to end credit risk management process is solid. You can have the best underwriting in the world but if you don’t have good controls to ensure loan conditions are remedied or you loan officers and processors don’t know what to look for to manage credit risk, you will have less than acceptable loans in many cases. You don’t want your automated underwriting system and/or your human underwriter to always be the goalie. You want a consistent risk management process throughout the organization.
Tom Wells – is a highly successful and experienced (over 30 years) senior mortgage finance professional with strong leadership and credit risk management skills. Tom was previously responsible for all front- line credit risk management of over 1,000 lenders of all sizes with > $300 B in sales at Freddie Mac which included negotiating credit terms, performance management and client credit relationship management.