AI Replaced Me

YOUR COMPLIANCE QUESTION

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Two weeks ago, you wrote an article titled Will AI Replace Me? When I read it, I was still employed. Well, it's two weeks later, and I have been fired and replaced by an AI bot. I am still in shock. I really did not think my job was in jeopardy. Other people in my company were also fired and replaced by AI bots.

 

Yours is the only compliance firm I have come across that explains the positives and negatives of artificial intelligence. I guess, for me, it is a big negative. I have been in the mortgage world for over twenty years. My main positions were in underwriting, processing, and closing. I have looked around for work, and nobody's hiring. I'll bet those positions are now using AI bots.

 

I don't know what to do next. I'm only forty-five. I have limited savings and a small family. I feel like I'm getting squeezed out of the mortgage industry. A group of us met with our company's COO, and she said the company is moving rapidly toward AI across its origination process. So, it looks like I'm heading for a dead end. It feels like I'm being thrown on a trash heap.

 

What is happening with these AI bots? 

Is it Us (the humans) against Them (the AI bots)?

 

Signed,

Jobless

 

OUR COMPLIANCE SOLUTION

AI POLICY PROGRAM FOR MORTGAGE BANKING™  

Our AI Policy Program aligns with Freddie Mac's AI governance requirements for Freddie Mac Sellers/Servicers. Responsible AI practices can help align AI system design, development, and use with applicable legal and regulatory guidelines. 

Our AI Policy Program consists of the following policies:  

1.      Artificial Intelligence Governance Policy

2.      Artificial Intelligence Use Policy

3.      Artificial Intelligence Workplace Policy

4.      Artificial Intelligence Credit Underwriting Policy

5.      Artificial Intelligence Do & Do Not Policy

6.      Artificial Intelligence Ethics Policy

7.      Artificial Intelligence Vendor Management Policy  

Contact us for the presentation and pricing! 

 

RESPONSE TO YOUR QUESTION

 

This is a scary time as the world embarks on this new era of AI technology. Unfortunately, unemployment will increase as AI replaces human workers. The change will not be one-for-one. In some cases, it will be far worse, as one AI bot can replace hundreds of humans on a task, especially in loan processing, underwriting, and other operational roles. I'm going to be brutally honest with you: underwriters are among the more commonly cited "at risk" roles in mortgage banking.

 

WILL AI REPLACE YOU

 

In the March 19^th article you cited, Will AI Replace Me?, the concern expressed was from a loan officer. However, I stated the following AI automations that, as implemented, would adversely affect the need for humans, as follows: 

·       AI underwriting engines can now complete the entire initial underwriting process autonomously, approving loans days faster than traditional methods. This process is probably the clearest current example of loan origination being removed entirely from human hands. 

·       Unfortunately, loan processors, underwriting assistants, compliance analysts, escrow coordinators, closing personnel, and data entry clerks are at the intersection I described above, where humans and mimicking humans reside. 

In the March 25^th article, Will AI Reduce Fair Lending Violations?, I noted, in pertinent part, that "AI can streamline underwriting, reduce operational costs, and identify creditworthy applicants that traditional credit scoring methods might overlook." 

SYSTEMIC CHANGE 

The transition is systemic, not particularized to just your company, loan products and services, region, or institutional type. From point of sale to securitization, AI is quickly becoming embedded. AI is already doing a lot of what junior underwriters used to do. And, as you know, Fannie Mae's Desktop Underwriter and similar automated systems have been handling straightforward loan approvals for years. That trend is accelerating due to artificial intelligence.

Non-Delegated Lenders: Quality Control for Non-QM Loans

Podcast | Substack

QUESTION 

I am one of the underwriters for a non-delegated lender. We received a request from an investor to conduct quality control. My boss says we do not have to do quality control. His position is that, at most, we need only a limited quality control audit. I came from another non-delegated lender, and they always did QC. 

He says we do not have to perform most aspects of QC audits, including credit analysis, re-verifications, credit reports, appraisal reviews, adverse action reviews, EPD issues, and GSE/FHA-VA underwriting reviews. Because we originate non-QM loans, he says QC is minimal. I read your Bulletin 2017-12, and it clearly shows that non-delegated lenders should do QC. 

I would like you to discuss QC requirements for non-delegated lenders. 

Does a non-delegated lender have to do quality control for non-QM loans? 

OUR COMPLIANCE SOLUTIONS 

We recommend the following compliance solutions for quality control support: 

Quality Control Audits

Our audits focus on risk mitigation, compliance, error correction, process improvement, verification, and ongoing monitoring. 

QC Tune-up®

This is our Second Line of Defense review that focuses on predictable output, reliable data, investor confidence, and reduced production cost. 

RESPONSE TO YOUR QUESTION

The question about a non-delegated lender having to conduct quality control seems to be one of those perennial questions that pop up from time to time. There is no mystery to the requirement. I appreciate that you have been reading our Bulletins. Anyone who wants to subscribe to our free Bulletins, please sign up! 

Whether you are originating QM or non-QM loans, you should be conducting quality control audits. Fannie Mae's non-delegated quality control (QC) requirements include having a comprehensive written QC plan, a process for selecting loans for prefunding and post-closing reviews, and a system for reporting and taking corrective action. 

If you're a non-delegated lender originating QM loans, the QC plan should be independent of the production process, and, among other things, you must conduct a minimum number of prefunding and post-closing QC reviews each month, based on a percentage of total loan volume. 

If you're a non-delegated lender originating non-QM loans, you should have QC processes in place. Because non-QM loans do not meet the criteria for purchase by Fannie Mae or Freddie Mac, the lender assumes all the risk, making a robust QC program essential to manage the loan quality and potential defects. 

Let's look somewhat broadly at the QC requirements. You must have a written QC plan that outlines your QC philosophy, objectives, and risks, with a process for selecting loans for review using random and/or discretionary methods across all products. The QC function must be independent of the production process, or, at a minimum, reviews must be conducted by personnel not involved in underwriting the specific loans subject to audit. 

The QC plan for QM loans must cover both prefunding and post-closing reviews, ensuring compliance with the Fannie Mae Selling Guide, the lender contract, and applicable laws. You can check out Fannie's requirements in the Lender Quality Control Programs, Plans, and Processes section. 

With respect to pre-funding, a minimum number of prefunding reviews must be completed each month, with the loan selection meeting at least the lesser of 10% of the prior month's total loans, 10% of current month projections, or 750 loans. 

Regarding post-closing, loans must be selected for monthly reviews, and the entire QC cycle must be completed within 90 days of loan closing. 

You must have documented procedures for reporting QC findings to management, documenting loan level findings for resolution, and taking timely corrective actions. All QC-related documentation must be retained for at least three years. An internal audit of the QC process itself should be performed annually to ensure compliance with the lender's policies and procedures. Our QC Tune-up®, a Second Line of Defense function, provides such support.

The Comeback of Portable Mortgages

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SUBSTACK

QUESTION 

Our loan committee wants to originate portable mortgages. I am an old school guy! Is this the new gimmick to generate sales? I don't know, but it doesn't make much sense to me. When I was with Chase back in the eighties, there was a rollout similar to a portable mortgage. Well, it crashed and burned! Yet, now it's back. 

The whole deal mostly rests on the lock-in effect. You should explain it to your readers. And, contrary to the hype I'm hearing, the portable mortgage can lead to increased risk, and prices can go up. On top of that, there's no secondary market. 

Are portable mortgages yet another gimmick to generate sales? 

SOLUTIONS 

We recommend our Compliance Reviews. 

Comprehensive and responsive compliance reviews provide a deep dive understanding of strengths and weaknesses in the implementation of state and federal banking laws, rules, regulatory guidelines, investor expectations, and Best Practices. 

RESPONSE 

I understand your concerns, but I would not assert that private enterprises and government entities are concocting some grand scheme in considering a comeback of portable mortgages. As usual, market histrionics are fluttering about like untethered balloons. 

Granted, many features of portable mortgages pose risks for both homeowners and investors. 

Your memory of the portable mortgage offered by Chase Home Mortgage in the late eighties is correct. So, the basic structure of the portable mortgage goes back to that time. Chase viewed it as experimental in the sense that it was more of a prototype; that is, it was notionally a portable fixed-rate mortgage. 

However, true portability has never been achieved in this country. This is because of the prevalence of "due-on-sale" clauses that require the loan to be paid off when a home is sold. I remember that E-Trade offered a version in the early 2000s as a portable "option." Around that time, my firm provided compliance guidance to E-Trade in its development of mortgage banking compliance, but a compliance review of the portable "option" was not in our remit. The fact is, portable mortgages have remained niche products, at best. And for good reason, which I will explain shortly. 

One reason it did not catch on is obvious: the U.S. mortgage industry's structure, in which loans are often sold to investors or entities like Fannie Mae and Freddie Mac, has historically not supported portability. 

No portable mortgages are currently allowed by Fannie Mae and Freddie Mac, but the Federal Housing Finance Agency (FHFA) is now actively evaluating whether to implement them in the future. Current news reports that the FHFA is working with Fannie Mae and Freddie Mac to determine how to make these loans possible in a safe and sound way, which strikes me as quite a heavy lift. Currently, Fannie and Freddie only allow fixed-rate loan transfers in limited situations, such as due to the death or divorce of the original borrower. 

The "hype" you are hearing concerns the GSE approval of portable mortgages, based on the claim that they could make it easier for homeowners to move and keep their lower interest rates, thereby unlocking more homes for sale. Maybe so. Then again, maybe not. 

Let's tack down a few important details about the structure of portable mortgages. 

A portable mortgage is a home loan that allows a homeowner to transfer their existing interest rate and terms to a new property when they move. In theory, this can save the homeowners money on closing costs and help them avoid taking out a new loan at a potentially higher interest rate. Nevertheless, the new property must meet the lender's criteria, and the homeowner must requalify financially. 

PORTABLE MORTGAGE TRANSACTIONS 

Here is a brief outline of how the portable mortgage works: 

·       Transferring the Loan 

When selling one home and buying another, the existing mortgage is "transferred" to the new property.

The 50-Year Mortgage – Pros & Cons

The 50-Year Mortgage – Pros & Cons

QUESTION 

I am the underwriting manager for a mid-sized regional lender. Recently, an investor asked us if we would be interested in originating 50-year mortgages. This mortgage loan has been in the news a lot recently because the president has been pushing it. 

Yesterday, our loan committee met and decided to look into the pros and cons of 50-year mortgages. Next week, we have to present a report to senior management, and they will decide if it should be brought to the board for discussion. 

I do not want to parrot the mortgage news. Some of this news media seems more interested in driving sales than in what might be good for borrowers or the risks to lenders. I am asking you to share your perspective with us. I know you do not mix words. 

What are the pros and cons of 50-year mortgages for borrowers and lenders?  

COMPLIANCE SOLUTION 

We recommend our Compliance Library. 

A dynamic, digital compliance library consisting of master policies and procedures, reflecting a financial institution's size, complexity, and risk profile, ensuring conformance with primary regulatory guidelines and federal and state mortgage and consumer loan originations. 

RESPONSE 

The promoting of this loan product, such as it is, has been stirred up recently by the president's remarks and massive news coverage. In my opinion, the president is recommending a flawed loan that is detrimental to a consumer's long-term financial interests, and the news media, as usual, is chasing a shiny object that supposedly highlights sales over substance. 

A 50-year residential mortgage is a home loan with a repayment period of 50 years (600 months!), significantly longer than the standard 30-year term. Its primary benefit is lower monthly payments, which can make homeownership more accessible. Fair enough! However, this comes at the cost of paying substantially more in total interest over the life of the loan, and it results in much slower equity accumulation. 

I suppose that stretching the loan over a longer period reduces the monthly principal and interest payments. To that extent, it could help some first-time buyers qualify for a mortgage or afford a more expensive home. The term "affordability" has become quite a hobby horse these days, given that monthly payments could open up homeownership to more people, especially in expensive housing markets. Ultimately, it will not beneficially resolve the affordability issues that consumers face today. 

But a 50-year mortgage seems like a form of indentured servitude. Over 50 years, the total amount of interest paid on the loan can be hundreds of thousands of dollars more compared to a 30-year mortgage. A central pillar of building equity in our society, home ownership, is seriously derailed because of slower equity growth. A much larger portion of early payments goes toward interest, meaning you accumulate equity much more slowly. It could take 30 years or more to build up significant equity, compared to about 12-13 years for a 30-year mortgage (excluding appreciation and down payment). 

Plus, the interest rates are higher. Lenders will charge a higher interest rate on a 50-year mortgage to compensate for the increased risk of lending for a longer period. Thus, mortgage originations would tread into uncharted territory. This is a new product, and lenders may be uncertain about the long-term risks, which could impact its availability and cost. 

Let's discuss these primary factors involved in 50-year mortgages: 

·       Feasibility

·       Alternatives

·       Legislative and Regulatory Changes

·       Impact on the Housing Market

·       Impact on the Economy

·       Inflationary Risk 

FEASIBILITY 

The 50-year mortgage is currently an idea under consideration, not an approved policy. But ideas often have a way of working themselves somehow into politics and policies. I am skeptical that certain key issues can be disposed of through politically palatable, economically viable, and financially responsible policies, even by way of legal and regulatory compliance. I'll mention but a few that come to mind.

Shared Equity Loans – Pros and Cons

QUESTION 

I am a mortgage broker in northern California. It's just me and my husband. In the last few months, several clients have come to me for a shared equity mortgage. I admit, I didn't know too much about them in the past, but all of a sudden, people want them. The more I look into them, the more I think they can really hurt my clients in the long run. 

There are some lenders who have pitched us on offering these shared equity loans. However, we haven't done them yet. We provide other second lien options to our clients. But one client is now insisting on it, even after I told her about the way she could lose in the long run. I know she's desperate for money and will do anything. If we don't give her a shared equity loan, she's going to another broker to get it. 

Maybe you have an opinion about share equity loans. We use your Brokers Compliance Group on the hourly plan, and you've been so helpful to us. So, we've got the compliance angle covered. But we need your straight talk on the consequences of the shared equity loan. 

What are some consequences of a shared equity loan? 

SOLUTION 

HEC Tune-up® 

(Home Equity Contracts)

RESPONSE 

Just prior to the advent of the new Administration, on January 15, 2025, the CFPB published an overview entitled Home Equity Contracts: Market Overview.[i] 

In that outline, the CFPB offers the following definition:

Home equity contracts are financial agreements in which a homeowner gets an upfront cash payment from a company and, in exchange, must repay a lump sum amount in the future that is based, in part, on their home's value. These contracts are often called "home equity investments" (HEIs), "home equity agreements," or "shared equity agreements." 

Shared equity mortgages are sometimes confused with shared appreciation mortgages. While both involve a lender benefiting from home appreciation, in a shared equity mortgage, the lender actually owns a portion of the property, whereas in a shared appreciation mortgage, the lender simply receives a share of the appreciation upon sale or refinancing.

 The CFPB first publicly addressed home equity contracts in the January 2025 issuance cited above, when it took three coordinated actions related to them. These actions included filing an amicus brief, issuing a consumer advisory, and publishing a market overview. While not binding, these actions signaled the CFPB's interest in monitoring and potentially regulating contracts of this type. 

Specifically, on January 15, 2025, the CFPB: 

·       Filed an amicus brief: In Roberts v. Unlock Partnership Solutions AOI, Inc.,[ii] a case involving a home equity agreement.

·       Issued a consumer advisory: Warning consumers about the risks associated with home equity investment contracts.

·       Published an issue spotlight: Providing a market overview of home equity contracts.

 

Share Equity Loan Arrangement 

Here's a brief synopsis of the CFPB's example of a shared equity arrangement:[iii] 

·       Homeowners typically repay the home equity contract company with a single large payment, often referred to as the "repayment amount" or "settlement amount."

·       Repayment is due by the end of the term (usually 10 to 30 years) or upon a triggering event, such as when the homeowner sells the home.

o   Example: Homeowner gets a $50,000 upfront cash payment:

§  After three years, the homeowner repays between $68,045 (if the home depreciated by an average of 1% per year) and $71,538 (if the home appreciated by any amount).

§  If the homeowner waits the full 30 years, the estimated repayment amount ranges from $25,183 (if the home depreciates by an average 1% per year) to $831,000 (if the home appreciates by an average 5% per year).[iv]

What to Expect from a Fannie MORA audit?

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QUESTION 

Last month, you answered a question about doing an internal audit in advance of Fannie’s MORA audit. We did not pay much attention to it because (A) we never had a MORA audit, and (B) we did not expect a MORA audit anytime soon. Then, all hell broke loose! 

Yesterday, we got a letter from Fannie Mae telling us that they will be scheduling a date for an on-site audit. They are requesting policies, procedures, and many other documents. There are due dates. This review makes a state banking exam look like child’s play. But I’m a QC manager, so I don’t have the whole picture of our risks. However, I do know one thing: we are not ready for this MORA audit. 

The CEO called a team meeting in the conference room. Our compliance manager is in charge, and everyone reports to her. I got your name at the meeting because she said we are going to use you to do a MORA Tune-up®. I just wish they would have done this sooner. 

What I need – and I think they need it too – is some idea of what we can expect from the MORA exam. I hope you don’t wait to reply. The compliance manager and others in management read your articles. They pass them around to us all the time. Please tell us what to expect about the MORA process. 

What is the audit process of a Fannie MORA audit? 

SOLUTION 

MORA Tune-up® 

RESPONSE 

If you want a copy of this article, please contact us here. 

We realize your question is urgent. Accordingly, we are prioritizing a response. You only have a few weeks to get ready for the MORA audit, the purpose of which is for Fannie Mae to evaluate your company’s compliance with Fannie guidelines as well as assess the operational risks. 

For those who don’t know, Mortgage Origination Risk Assessment (MORA) is a Fannie Mae review of a Fannie Seller/Servicer. It is intended to be a collaborative engagement led by the review team with the active participation of your organization.[i]

Getting our MORA Tune-up® engaged is one of several readiness activities you must undertake as soon as possible. Ours is the pioneer of the Compliance Tune-up, a unique review that provides a risk assessment and self-evaluation to satisfy the Second Line of Defense. I am grateful that your compliance manager chose Lenders Compliance Group. Nevertheless, to all our subscribers, please know that a few compliance and law firms offer to prepare you for the MORA review. Pick one you trust and get it done! 

There are seven phases in the MORA review process, and I will outline them for you. My outline will give you a high-level view. You should not delay! 

Here are the seven phases of a MORA review: 

Phase 1: Selecting the Organization 

Phase 2: Confirmation and Engagement 

Phase 3: Document Request and Receipt 

Phase 4: Process Evaluation 

Phase 5: Interviews 

Phase 6: Final Assessment 

Phase 7: Remediation 

I am going to provide a brief overview of each phase. However, numerous contingencies can affect the process and outcome. Take this review as a deep dive, one that will make your company stronger and its relationship with Fannie more durable. It is not too late to get started immediately. 

PHASE 1: SELECTING THE ORGANIZATION 

Fannie Mae selects organizations for a review using risk-based inclusion criteria and provides advance notice to the organization prior to scheduling the review. A member of the review team begins the process by compiling the organization’s pertinent contact information to start the review before moving to Phase 2. 

We are often asked if there is a way to predict whether and when the selection takes place. The short answer is No. The best answer is Soon. In other words, always be prepared.

PHASE 2: Confirmation and Engagement 

There are obviously two parts to this phase: the first part involves confirmation, and the second part involves scheduling. These two parts are interfaced. What happens is your point person – in your case, the compliance manager – will discuss Fannie’s BAMS team, that is, its Business Account Management Solutions team, to discuss some basics. The MORA team is independent of the BAMS team. This is a sort of Question and Answer format where the BAMS team gathers the following information: