This article provides a high level overview of
mortgage industry key performance indicators and the use of KPI to
implement a seller performance monitoring program and scorecard
report.
Mortgage Industry Key Performance Indicators
The first step in implementing an effective performance monitoring
program is to identify seller Key
Performance Indicators (KPI). More often than not, a KPI and the
associated risk will vary depending on whom you ask within the
investor organization. Typically, Seller Risk Administration in
conjunction with other departments in the investor organization
determines which risk factors are tracked and evaluated. Ultimately,
Seller Risk Administration will determine which KPI are given the
highest weight for reporting a seller risk ranking.
Typically, even though they are often at odds, all of the following
investor departments are considered primary stakeholders in
development of an effective performance monitoring program.
- Seller Risk Administration. Seller Risk Administrations primary
responsibility is determining the amount of risk that a seller
represents to the investor organization and implementation of
programs for the mitigation of seller risk.
- Correspondent Sales and Sales Support. The correspondent
lending sales department's primary responsibility is convincing
originators (a.k.a. sellers) to sell their loans to the investor
and managing the resulting correspondent sales relationship. The
sales team works hard to establish these relationships and the
Account Executives commissions are based on the loans that their
sellers send to the investor. Typically, the sales Account
Executive is the first person that the seller will call when Seller
Risk Administration presents them with negative feedback. Because
the sales team is the primary link between the seller and the
investor organization it is essential that the sales team
understands and is involved with the performance monitoring program
decision making process. If sales is not involved in the decision
making process more often than not the performance monitoring
program is a failure.
- Secondary Marketing and Loan Registration. An investor's
Secondary Marketing department is typically responsible for
determining the loan products that the investor will offer,
correspondent loan registration and monitoring of the resulting
pipeline. The Secondary Marketing department manages the investor's
servicing portfolio and sets daily rates based on the investor's
hedging and pooling strategies. Secondary Marketing, from a seller
performance monitoring perspective, is very concerned with a
seller's pull
through, funding
quality and early
payoff statistics.
- Underwriting and Pre-Purchase Quality Control. Prior to
purchase the Underwriting
and Pre-Purchase Quality Control units ensure that the loan package
delivered by the seller meets published guidelines for the loan
product that the loan is delivered for. Seller Risk Administration
relies on Underwriting and Pre-Purchase Quality Control for
ensuring that the loan and data associated with the loan is correct
and accurate. Underwriting and Pre-Purchase Quality Control are key
in identifying major issues like fraud and errors and omissions on
key loan qualification documents.
- Loan Processing a.k.a. Funding Department. Once Underwriting
and Pre-Purchase Quality Control have done their jobs the Funding
Department takes over. The Funding Department loads the loan into
the servicing system, reconciles any loan accounting issues and
validates the loan package and wires funds to the seller. From a
performance monitoring standpoint the funding department provides
key information on seller funding quality.
- Post-Purchase Quality Control. Investor's typically perform
quality control (QC) checks on a percentage of the loans they fund.
This additional quality control data is used in assessing seller's
risk ranking.
- Servicing. The Servicing Department is crucial for providing
and maintaining statistical data for a seller's delinquency,
early
payoff, early
payment default and other servicing related issues.
Developing Seller Risk Profiles
Once the various departments within the investor organization have
identified key performance indicators Seller Risk Administration is
responsible for the development of risk profiles for assigning a
risk ranking and/or grade for its sellers. This is an iterative
process and as previously indicated a key performance indicator and
the associated risk will vary depending on whom you ask within the
investor organization. In the development of seller risk profiles
there are two (2) major approaches.
- Approach 1 - Each key performance indicator or selected
key performance indicators are individually weighted and scored. A
final risk ranking is presented for the seller based on the
weighted score of all performance indicators being considered in
the risk profile.
- Approach 2 - Performance categories are created and
given a statistical weight. Individual key performance indicators
are then assigned to a performance category and given a statistical
weight inside of the performance category.
Sample Seller Scorecard Report
A seller scorecard report as the name suggest provides a seller with
feedback, in the form of a risk grade or ranking, on the state of
their relationship with the investor. The risk grade can be
numerical or descriptive depending on the preference of the
investor.
The scorecard will normally display results for performance
indicators that are measured in determining the risk grade. Results
are typically displayed in tables, charts and graphs and can be as
complex or simple as the investor desires. The following images are
extracts from a sample report.
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Performance Based Seller Management
With the results of a profile driven Seller Scorecard Report the investor has a tool that will allow them to manage their seller relationships based on the seller's performance. Implementations of Performance Based Seller Management may include:
- Performance Based Volume Incentives. The seller is paid an additional 5 bps for all production over 5 Million as long as the seller maintains a Seller Scorecard Rating of "A".
- Performance Based Service Release Premiums. Sellers are issued periodic custom service release premium schedules based on their Seller Score Rating.
- Exceptions and Waivers. Sellers are granted loan exceptions and/or waivers based on their Seller Scorecard Rating.
- Marketing Premiums and other recognition. Typically, during the holidays investors send their sellers Christmas Cards; however, their best sellers normally get a premium gift basket. The Seller Scorecard Report can help the investor determine which sellers get what.
When implemented correctly a Seller Performance Monitoring program enhances the investor to seller relationship. It lets the seller know exactly where he stands with the investor. Good account managers will start to see even the negative feedback as opportunities to interact with their customers or cut dead weight. Risk managers will be able to report and trend a seller's performance improvements or decreases over periods of time and provide an early warning when the trend is going in a negative direction.
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