It’s been no surprise to see a flood of books aiming to unravel the causes of the financial crisis of 2007-2009.  By many accounts, Gregory Zuckerman’s “The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History” is the best of the bunch.

Now Michael Lewis, one of our favorite financial authors, has thrown his hat into the ring and released “The Big Short: Inside the Doomsday Machine.”  Lewis is one of the most engaging writerss working today, with a particular flair for apt analogies and clear phrasing (“A credit-default swap was confusing mainly because it wasn’t really a swap at all.  It was an insurance policy…”)

By weaving compelling characters into his narrative, he manages to entertain while informing.  No mean feat.

For a taste of Lewis’ latest, check out the long excerpt in Vanity Fair.  You’ll see that it reads like a thriller and crystallizes a lot of the thinking that’s surrounded this epic debacle.

(By the way, note the interesting phenomenon on Amazon’s customer reviews of the Michael Lewis book.  Almost every one-star rating bemoans the lack of a Kindle version of the book, not the actual content of the book.)

The title and central theme of this blog is “return on quality”, which we broadly define as the benefits to be gained from an intelligent and continuous approach to improving mortgage loan quality.

We said in an earlier post that we would try to formulate “return on quality” and as a step in that direction, we offer a Cogent white paper called “Quality Performance Benchmarking” that was originally developed for an audience of mortgage quality control professionals.

Image by jacob earl

In this paper, we talk about the prevalence in the mortgage industry of a production maximization mentality, in which metrics and compensation are centered on volume; the potential hazards of this mentality; guidelines for estimating the costs of poor quality, (the inverse of the return on quality); how to reward good quality; and how to craft appropriate performance metrics, or benchmarks.  The second part of the paper talks in depth about one of the most powerful tools for benchmarking performance, control charts.

This white paper was written in 2002.  Nothing has changed in the methodology.  But in the last couple of years, the eyes of most of us in the industry have been opened to the dangers of focusing exclusively on volume, volume, volume.  We welcome your comments.

Ocwen Financial Corporation, which does residential and commercial loan servicing, special servicing and asset management, is reporting significantly better results in its HAMP modifications than the rest of the industry.  And they attribute it to superior technology.

In congressional testimony, Ocwen’s President Ronald Faris claimed:

• that Ocwen is converting trial modifications to permanent modifications at a rate that is 10 to 20 times greater than industry average;
• a 3-month re-default rate of less than 5% for Ocwen, versus 18.7% to 33.7% for the industry; and
• a total of 100,000 successful modifications since the beginning of the mortgage crisis.

These impressive numbers could use a little clarification.  So could the statement that Ocwen has spent “$100 million in R&D to build loans servicing technology that incorporates behavioral science for effective customer communication and is also scalable for high volumes.”  But Ocwen is an industry leader and when they report these kinds of results, it’s worth listening.

Image by sgrace

Likewise, their recommendations for improving the HAMP program carry weight.  Among those:

• Lower the borrower debt-to-income (DTI) ratio for modifications to below 31%; in other words, allow for lower monthly payments on modifications
• Allow for principal reductions on modified loans
• Make additional funding available for housing counseling groups
• Require underperforming servicers in HAMP to outsource to servicers that perform

Also worthy of note: Mr. Faris is one of the few industry voices who believes that HAMP is a “well designed response to the mortgage crisis”.  Maybe he’s on to something.

Mortgage servicers have no choice but to open their kimonos to Freddie Mac’s MHA Compliance (MHA-C) division.  So when MHA-C offers to share its insights, as they did at the Mortgage Bankers Association’s National Servicing Conference last week in San Diego, there’s a rapt audience of servicers, most of whom are struggling to comply with HAMP programs.

Servicing Management magazine was there to capture the main points.  The presenters were quick to acknowledge the difficulty of setting up and complying with the program.  However, citing Sarbanes-Oxley as an appropriate benchmark for packaging HAMP modifications, the panel suggested that a lot of the loan packages they see seemed devoid of any due diligence or quality control.

So how do you deal with a constantly changing program that is known to be difficult to comply with but that has high documentation standards?

“The biggest takeaway I’d have for a servicer is to really understand the program, which is why I recommend having somebody in the organization who is the ‘internal expert,” says Vic O’Laughlen, vice president of servicer oversight for the division.  This becomes more important as the programs morph and spin off programs are introduced (like Home Affordable Foreclosure Alternatives (HAFA).)

As we all know, MHA is a work in progress.  The question is, will it ultimately be a successful work?