Freddie Mac adds mortgage quality control automation tool

Fraud and misrepresentation remain persistent challenges in the mortgage industry and Freddie Mac is responding by bringing Quality Control Advisor Plus to the market, a tool which automates this compliance function.

The tool is currently in a phased onboarding process with plans to make it available to all lenders by year-end, including the participants in Freddie Mac’s performing loan repurchase alternative pilot.

Participants in this pilot have a 26% lower non-acceptable quality loan rate compared with those sellers who are not a part of it, Freddie Mac said.

What is Quality Control Advisor Plus?

Quality Control Advisor Plus is an integrated system that brings together previously separate pieces of technology, which will cut months off of the current QC process for most users, according to Sonu Mittal, executive vice president and head of single-family in a press release.

“This new platform doubles down on our transparent and proactive approach to modernizing our QC processes,” Mittal continued in a press release. “It provides considerable efficiencies for lenders so they can quickly identify and remediate issues as early as possible to minimize reoccurring defects and improve loan quality.”

Lenders are able to upload as many as 250 files at one time for analysis. It also allows for more consistent decision making and standardized communications.

The Freddie press release points to income-related problems as being the primary driver of loan defects. The government-sponsored enterprise recently came out with a new calculator to help with borrowers who have a variety of income sources.

In a blog post issued on Nov. 17, Mittal also pointed to Loan Product Advisor’s asset and income modeler, AIM for short.

“Our recent analysis shows increased use of AIM correlates with lower overall defect rates, which reflects loans that carry significant issues,” Mittal said. “In fact, mortgages originated by lenders who leverage our digital tools are on average four times less likely to have loan defects than those originated without them.”

The current share of misrepresentations in mortgage files

As of the second quarter, Freddie Mac repurchase demands are down 56% from their peak in 2023 because of the pilot program, with industry feedback being overwhelmingly positive,” Mittal added.

A recent study from Cotality found that one in every 118 mortgage applications had indicators of misstatements in the second quarter. Its Mortgage Fraud Application Risk Index was at 132 for the third quarter. While this was down by 2.7% from the second quarter, it rose by over 8% on an annual basis.

Meanwhile, a separate study from Transunion found that credit washing activity, the act of boosting one’s score by falsely claiming tradelines contained inaccurate information, rose 700% in the last two years. While more commonly seen for auto loans, this activity has leached into the mortgage and home equity lending space, observers noted.

In August, Aces Quality Management’s first quarter critical defect rate index was at 1.31%, up 15 basis points from the all-time low of 1.16%, with income and employment as the most cited errors.

At the time, the report speculated that the change in where defects were being found may reflect lagging adoption of tools such as Freddie Mac’s Loan Product Advisor Choice and Fannie Mae’s self-employment income calculator.

Fannie Mae does offer Loan Quality Connect, which allows lenders to work in a single system for loan file submissions, status updates and document management.

It allows for instant communication and document sharing as well as loan quality feedback with real-time reporting.

Mortgage industry response to Quality Control Advisor Plus

This new product is an encouraging step by Freddie Mac to strengthen manufacturing quality across the mortgage industry, said Phil McCall, president and chief operating officer at Aces.

The exception data produced through this platform contains important indicators which, when combined with lenders’ internal pre- and post-funding reviews, can lead to more accurate assessments of loan quality and risk,” McCall said. “Advancements that create earlier, more actionable feedback loops help lenders address potential issues before they become costly, an outcome that benefits both originators and the secondary market.”

These updates from Freddie Mac relate to the post-delivery audits which are conducted as part of the government-sponsored enterprise’s mortgage purchase process, McCall pointed out.

“They do not lessen lenders’ obligations to maintain robust quality control prior to loan delivery,” he warned. “Continued progress toward greater data transparency and the ability to securely share QC insights would further enhance overall loan quality and strengthen the mortgage ecosystem.”

Freddie Mac providing lenders with better tools and faster feedback about their loan files is a good thing, said Lance Ludman, senior vice president of Certainty Home Lending.

“What’s not to like about technology that speeds the process and improves quality?” Ludman asked rhetorically. “As an industry, we’ve spent decades struggling to streamline so many of the behind-the-scenes processes that borrowers rarely understand, resulting in days or weeks of delay to their transactions.”

Certainty supports Freddie’s efforts “to return the focus where it matters most — delivering for the consumer,” he said.

The product addresses an item Citywide Home Mortgage talks about in its operations, which is getting actionable feedback to its loan officers while issues with the loan file can still be fixed effectively, said John Cady, CEO and president.

“The real value here comes from compressing the timeline between origination and quality review so our teams can adjust before defects become patterns,” Cady said. “Anything that helps us identify and resolve problems in real time rather than months later is going to improve both loan quality and the originator experience.”