GSE Guidance:
Successfully Working with the GSE’s, through the CEO Lens
January 22, 2024
By Luana Slettedahl, Principal at BlackFin Group
Welcome to part one of my newest series, GSE Guidance. A series of articles designed to help home lending CEO’s work more effectively with the GSE’s (Government Sponsored Enterprises) – Fannie Mae and Freddie Mac. These key insights will help expand the CEO’s horizon for building up their firm’s foundational understanding to working with these GSE’s and ensuring your team is meeting the expected standards. This insider knowledge and guidance will not only strengthen your relationship with the GSE’s but eventually provide your team with valuable business benefits.
A very common mistake I encounter during my consulting engagements is that leadership at lenders will believe when their firm is approved with a ‘Correspondent Aggregator’ then all the processes are naturally in place for that institution to more easily seek out, apply for, and become approved as a Seller/Servicer with either of the GSE’s. This is where the mistake begins.
Making this assumption continues to result in a painful, long and drawn out, application and eventual conversation with either of the GSE’s that will result in either the application needing to be withdrawn or being denied. Instead, a firm should first seek out and request a ‘GSE Readiness Assessment’ by a qualified consulting advisor to ensure a successful road to becoming an approved Seller/Servicer.
The ‘GSE Readiness Assessment’ will help aid you as the CEO and be key to helping you drive required changes within your organization. With that said, here are some examples of pitfalls can easily exist within your organization and that you are unaware of.
Credit Risk
The GSE’s look to your firm to absorb, manage, and mitigate credit risk – in other words have an experienced leadership team which is capable, and effective in assessing credit risk and making correct decisions.
Underwriting History:
Correspondent Aggregators (CA) provide different underwriting options.
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The approval status to move to GSE execution is when a firm can demonstrate they have an underwriting team (and leadership) that has delegated underwriting approval for Conventional loans to GSE standards. Additional credit goes to organizations that also have underwritten files to FHA, VA, and RD standards as this broadens out the experience of an underwriting team in assessing credit risk.
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If a firm is unable to demonstrate they can achieve delegated underwriting status then the approval moves to non-delegated status. This means that files are then reviewed and approved by the CA, which impacts numerous cycle times and customer service levels. The dependency on this model will hinder your firm in being approved by the GSE’s.
Where should your firm rank? A history of effective underwriting actions with long-term results that demonstrate credit decisions were prudent is where your firm must land.
Quality Control
The GSE’s require that your firm has an effective Quality Control Plan and Program that demonstrates attention, management, and risk mitigation which effectively identifies and resolves loan defects that arise during the loan origination, underwriting, and servicing processes.
This is where the discussion gets a bit complicated, as Lenders want to make loans – that is what pays for the bottom line. If Quality Control gets in the way of loan production volume and good credit decisions a natural conflict surfaces within the organization. Too many times firms that want to seek out GSE approval have not developed a robust and GSE compliant Quality Control Program – they are dependent upon the Correspondent Aggregator to have the robust protocol.
Quality Control is one of the primary reasons firms can’t meet GSE requirements – leadership thinks the process is running well – after all the firm is selling loans to Correspondent Aggregator’s so then the Quality Control processes must be acceptable right? Here are some examples where Quality Control does not meet the GSE standards:
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Quality Control was with a Third-Party Vendor and the process was managed by the firms Loan Production Manager. While outsourcing Quality Control is acceptable, the fact that the process was managed by the Loan Production Manager created an inherent conflict and put the very integrity of the Quality Control Process at risk and is not acceptable.
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Quality Control was check-list oriented. The process was where the lender would double-check that the forms to warrant loan approval were in the file, though no re-verifications of the accuracy of the documentation occurred, no re-assessment of the underwriting decision occurred, etc.
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Pre-Funding Quality Control gaps. This process would mitigate errors that occur on the loan prior to close and is the earliest step that can detect misrepresentation or fraud protecting the lender from an ineligible loan, or a loan that could result in an early payment default.
Stay tuned for my next article to continue the discussion and provide key insights for working directly with the GSE’s, Fannie Mae and Freddie Mac.
Luana Slettedahl is a Principal Consultant with BlackFin Group in the Mortgage Strategy Practice. Luana brings forty years of diversified experience in Capital Markets, Mortgage Servicing Rights, GSE and Ginnie Mae relationship management and Seller / Servicer requirements. Her understanding of how to successfully do business with the GSE’s and Ginnie Mae, has made her a significant asset to her clients. For more information contact info@blackfin-group.com