The year is shaping up to be a challenging one for many lenders. So far, we have seen a widening of criteria, increases in risk layering and loosening of underwriting controls as firms attempt to achieve lending volume objectives. At the same time, competition has forced prices down, squeezing already tight margins. Sometimes we wonder if we have been transported back to 2007/2008!
Another analogous pre-crash trend is the current worrying rise in attempted and successful mortgage fraud. Recent increases in financial crime is not only driven by ID fraud and cybercrime, but mortgage fraud is increasing because there is a growing acceptance that ‘gaming the system’ is okay. It seems that a growing number of applicants do not know of, or care about the consequences of lying when applying for a mortgage, basically obtaining a mortgage by deception and are relaxed about altering documents or exaggerating income to get the mortgage they want. Such a trend may be a by-product of tighter affordability tests or a big shift in applicant attitudes, but whatever is behind it is a worrying trend for lenders and funders.
While these trends are creating disquiet in lenders credit and risk committees, they at least can take direct steps to ‘up their game’ to defeat the resurgence of attempts to con underwriters into making loans they shouldn’t. Funders were not historically able to take such direct action; having agreed a funding line for a lender there was traditionally little oversight into whether loans were made in accordance with the agreed criteria and processes until the renewal of the facility. But this is where the comparisons with the pre-crash world end. This time around funders are being more proactive in their oversight, usually retaining an independent third party to regularly monitor the lender’s compliance with the funding agreement and the procedures/criteria behind it.
Different funders instruct us to carry out such reviews in a variety of ways. We are often asked to review loans before drawdown and in other cases we carry out quarterly reviews. Our reviews can be via remote access to a ‘data room’ or by on-site reviews. However, the common theme in all these jobs is funders want to access our experienced underwriters who have worked at the coal face through booms and recessions and have forensically analysed lending files as expert witnesses in Court actions. Give us a call to discuss how we can help your independent oversight.