What Does Prepurchase Due Diligence Mean Today?
Over the past 8 – 10 years loan level, prepurchase due diligence has come to be viewed by the investment community as a commodity and an unfortunate, albeit necessary element of the long gone days of private label securitization.
Maybe because interest rates are so low, credit quality is relatively high, and loan products are “vanilla” (for lack of better term) so that the perception of loan level risk is minimal.
Maybe because we, as an industry, have compliance fatigue after finally figuring out how to meet Ability-to-Repay, Qualified Mortgage, and TILA/RESPA Integrated Disclosure (TRID) requirements.
Maybe loan origination technology has become so advanced that the tech has ceased giving lenders such a broad and unchecked ability to “configure” the manufacturing process, so as to permit guideline deviations, bad credit decisions based on insufficient income or asset documentation, or let low level employees set fee applicability in their third party compliance engines that permit gross manufacturing violations.
Maybe two of the three “Maybes” are real… However you look at it, Lenders will continue to make errors in the manufacturing process by underestimating their credit, compliance and collateral valuation obligations. As our nation realizes that there is a large segment of the population that does not have meaningful access to credit to purchase a home and this tight credit box we have been living within finds ways to expand, somebody needs to independently define, identify and assess loan level risk to determine if the purchasing party, the Assignee, will be subject to:
- “real and meaningful” civil liability and regulatory oversight risk;
- capitalization-ration impairment if the asset is on your portfolio and the value may be negatively due to a manufacturing defect;
- foreclosure value impairment or cost increase in the event that the mortgage does not perform, the liquidation the asset and recapture their investment is subject to significant or catastrophic loss severity.
While these concerns are real, the industry may currently have a false sense of comfort as Lenders have had many years of success pushing “vanilla” loans to the GSEs unchecked, based on the presumption that any loan defects or errors will not surface until the asset ceases performing (See first “Maybe” above). As the GSE Patch sunsets in 2021 and the QM requirements become more amorphous with the ATR/QM Amendments, the mortgage industry will require that these new credit driven legal risks be quantified and addressed through thoughtful and meaningful due diligence testing that will not make unfounded determinations, but define the real risk for Assignees, so as the market can do what it does best… quantify the risk and price for it accordingly.
