Many of the lending practices that helped bring down the mortgage industry have been reformed thanks to home lenders, government and technology.
Weak operational controls over documentation used in loan approvals were a key driver behind the poor performance of pre-crisis residential loans.
But the quality of information used in the approval process for home loans has improved since then — reducing the level of credit risk.
That is according to a report issued by Fitch Ratings.
Behind the improvement are mortgage industry initiatives, investor demands and regulatory mandates.
Fitch said legislative changes are responsible for some of the improvement.
For instance, national standards for non-depository loan officer licenses were introduced in 2008. As a result, originators were required to take a written test, complete education courses and undergo a criminal background check.
Last year, the Ability-to-Repay rule was implemented. This eliminated the use of stated-income for most loans — a common pre-crisis practice.
The ratings agency noted that lenders today rarely rely solely on income documentation provided by loan applicants and instead obtain a signed Form 4506 T — enabling them to verify income directly with the Internal Revenue Service.
Lenders have tied quality-control results to loan officer compensation. In many cases, claw-back provisions are included for poorly performing loans.
Fitch said that quality-control reviews before and after the loan closing are
now more frequent and comprehensive than they were prior to 2008.
Nowadays, lenders typically separate underwriting from loan origination departments to enable more underwriting independence.
In addition, constraints on loan originator communication with appraisers and the use of appraisal management companies or appraisal selection services has boosted loan quality.
Also enhancing the valuation process are the addition of specialized internal appraisal underwriting units by lenders to either independently review the appraisals or help underwriters maintain appraisal quality.
On top of that, online information like Google Maps and Zillow is helping to improve appraisal review.
The report indicated that increased utilization of improved technology, such as fraud risk tools,
has also played a role in increased loan quality.
