Mortgage Industry Key Performance IndicatorsThe 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 ProfilesOnce 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 ReportA 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.
Performance Based Seller ManagementWith 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.
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