The Strangest Cases That Crossed the Desk

Mortgage due diligence is often a detailed review of loan files, but after years in the business, the people doing those reviews can encounter some unusual cases.

What happens when a loan has more than 100 Loan Estimates and Closing Disclosures, a borrower repeatedly uses bankruptcy filings to delay foreclosure, or an appraisal shows a property that is barely standing?

In Episode 13 of The AiCR Exchange, Joe Furlong speaks with Scott Bledsoe, Director of Operations for the Due Diligence Group at MIAC Analytics. They discuss what mortgage due diligence involves, how loan reviews are organized, some of the strangest cases they have encountered, how the work has changed from paper files to digital records, and what today’s newer loan products mean for due diligence.

What does mortgage due diligence actually involve?

Mortgage due diligence is essentially a re-underwrite and audit of loans. The review examines how a loan was approved and whether it meets the applicable guidelines and regulatory requirements.

As Scott explains, the work is often performed for clients who are buying or planning to buy loans. It can also be used by institutions that already have loans on their books and want to understand potential defects, determine how loans might be sold, or get a better view of what those loans are worth.

Due diligence can also be performed before entering a new relationship with a seller. In that situation, a sample of loans can be reviewed to give the buyer an opinion about the type of product they are likely to receive.

What happens when a loan file has an unusually large number of disclosures?

One of the cases discussed involved a loan with 105 Loan Estimates and Closing Disclosures. A more typical loan might have three or four of each, prompting Scott to regard this as highly atypical.

The challenge is that a reviewer cannot simply look at the final disclosure. The changes throughout the process need to be examined, including why terms or fees changed and whether the required disclosures and timing requirements were met.

That level of review can become particularly important when there are repeated changes. Each change can create additional disclosure requirements and, depending on the circumstances, can affect the timing of a closing.

What are some of the strangest loans that due diligence reviewers have seen?

One of Scott’s most memorable cases involved a million-dollar house in Florida. The borrowers had lived in the property for seven and a half years without making the first payment on the loan.

The situation involved repeated bankruptcy filings shortly before foreclosure sales. After one bankruptcy was discharged, the foreclosure process would have to start again. The borrowers later refinanced and eventually went through a similar process again.

Joe and Scott also discussed another case involving a stated-income loan where a borrower identified his occupation as a car mechanic and reported monthly income of $140,000. Another involved a property in Detroit where the appraisal showed a house that was falling down and had recently caught fire, yet someone was attempting to obtain a mortgage on it.

These cases illustrate why reviewing the actual loan file matters. The unusual details can be easy to miss when looking only at a summary of the loan.

How has mortgage due diligence changed from paper files to digital reviews?

Due diligence was once an on-site, paper-intensive process. Scott describes teams of underwriters traveling to offices where they would work through boxes of loan files. Some files could contain 1,000 to 1,300 pages.

The work could also involve reviewing collateral, servicing records, and payment histories. Loan files had to be physically secured, with procedures for signing files in and out of vaults.

Today, the loan files are digital. That has changed where the work takes place and how reviewers access the information. Joe and Scott also reminisce about the practical realities of on-site reviews, including the now-famous “rubber thumb” used to work through physical paper files.

How is a large due diligence project organized?

The first step is determining how many loans are involved and whether the loan files are complete. The review team can also receive loan-level data from the seller or originator and compare that information with what appears in the actual files.

Scott says discrepancies between the data and the loan files are common, which makes the comparison an important part of the process.

The review itself is divided among people with different areas of expertise. Some team members focus on data entry and document recognition. Others specialize in credit and underwriting. Compliance specialists review timing requirements, Loan Estimates, Closing Disclosures, and other required disclosures.

The findings are then reported to the client. When an exception can potentially be cleared with additional documentation, the team can review trailing documents and determine whether the exception can be resolved.

What does the current loan market mean for due diligence?

Scott sees the return of alternative credit products, including newer NonQM and DSCR-type loans, as a response to the need for additional credit options.

At the same time, he says the lessons from previous market cycles make caution important. Having reviewed loans through earlier periods of the mortgage market, he believes these products should receive careful review.

Joe and Scott discuss the idea that the mortgage market can swing between extremes. Their view is that the market is now somewhere between the conditions that existed during the housing crisis and the much tighter environment that followed.

How is technology changing the way loan reviews are performed?

Technology has moved due diligence from DOS-based laptops and physical files to digital loan files and tools that can help locate information within those documents.

Scott points to the difference between searching through a thousand-page loan file with a rubber thumb and searching through a digital file for a specific data point. The work still requires finding and evaluating the information, but technology can reduce the manual effort involved in locating it.

He also discusses using AiCR to read loan documents and provide data to the review team, rather than requiring someone to manually search through hundreds or thousands of pages for a particular piece of information.

Frequently Asked Questions About Mortgage Due Diligence Cases

What is mortgage due diligence?

Mortgage due diligence is a re-underwriting and audit of loans. It examines how loans were approved and whether they meet applicable guidelines and regulatory requirements.

Who uses mortgage due diligence?

The episode describes due diligence being used by clients buying loans, planning to buy loans, or reviewing loans already on their books. It can also be used when evaluating a potential new seller by reviewing a sample of that seller’s typical loans.

Why do reviewers examine more than the final loan disclosure?

Changes made during the loan process can affect disclosures, fees, loan terms, and timing requirements. Reviewing the history of those changes helps determine whether the required requirements were met.

How are large loan review projects divided among a due diligence team?

Different team members focus on different parts of the review. The episode describes specialists in data entry and document recognition, credit and underwriting, and compliance and disclosure requirements.

How has technology changed mortgage due diligence?

The work has moved from physical loan files and on-site reviews to digital files. Technology can help reviewers locate specific information in large loan files without manually searching every page.