The document discusses operational risk in secondary mortgage marketing. It identifies several types of operational risk factors that can lead to losses, such as fraud, user error, and systems issues. It also describes processes used to manage risks like investor fee reconciliation, discrepancy resolution, and post-delivery audits to identify errors and resolve financial discrepancies between mortgage lenders and investors. Regular audits and reconciliation processes help control financial, compliance, and data quality risks.

1. Secondary Marketing
Risk Management
Albert Gabri, MBA, CMA

2. Risk Management
2
 Credit Risk
 Market Risk
 Interest Rate Risk
 Legal & Compliance Risk
 Operational Risk

3. Mortgage Banking Cycle
3

4. Operational Risk
4
 Second most prominent cause of losses
 Breakdown in execution, delivery, and process
management

5. Operational Risk
5
Operational risk factors:
 Fraud or sabotage
 User error
 Misinterpretation of business logic
 Coding errors
 Systems constraints
 System glitches
 Operational constraints
 Computer virus, worm, Trojan horse

6. Secondary Marketing
6
 Pricing
 Pipeline Risk Management
 Hedging
 Due diligence
 Product Management
 Investor Relations
 And more…

7. Investor Relations
7
 Pricing, contracts, and alliance agreements
 Investor Fee Reconciliation & Variance Analysis
 Discrepancy Resolution
 Post Delivery Audit

8. Audit & Reconciliation
8
(1) Monthly Statements
(2) Fee Reconciliation
Mortgage
GSE
Banker MBS, Loans
(3) Audit Report
(4) Investigation & Resolution

9. Fee Reconciliation
9
Investor fee reconciliation refers to a process that compares investors fees with lender’s
estimate by comparing agency’s monthly statement against internal records. The result is
saved in a Discrepancy Report which provides a summary of discrepancies between
lender’s calculated values versus investor’s invoice. Ideally, lender estimate must match
the statement.
1. Monetary Discrepancies: Occur when we disagree with the amount charged.
Discrepancies are flagged where the amount charged is under/over estimated.
2. Orphans: Orphans refer to fees that are unmapped or do not exist on either side. This
could be an overcharge by agencies or missing records on lender’s side (see example on
next slide).
Lender estimate
$34M Agency Invoice
$44M

10. Discrepancy Report*
10
* The numbers used herein are arbitrary.

11. Discrepancy Resolution
11
 Investigate discrepancies
 Identify point of failure
 Make corrections
 Settle financial discrepancies (refunds)
 Follow up

12. Process Flow
12

13. Post Delivery Audit
13
Agencies:
 Conduct regular audits of purchased loans
 Identify discrepancies between underwriting data and
delivery data
 Determine the financial loss
 Recover financial loss from lenders
Lenders:
 Investigate the issue
 Pay additional fees
 Dispute fees if not applicable

14. Benefits
14
 Financial Risk – a critical control function that drives financial health
and avoids potential losses by identifying errors before they become
actual losses on the balance sheet
 Compliance Risk – ensure Lenders comply with agency guidelines and
contractual agreements
 Data Integrity & Quality Control – maintain data integrity in all phases
of loan origination through secondary markets (operational risk)
 Workflow – achieve quicker problem resolution by configuring the
proper investigation type for each error scenario and flow back to the
correct resource (internal audit)
 Greater Financial Controls – achieve complete control of the
transaction process throughout its lifecycle (financial control)
 Best Execution – ensure financial gain and loss is achieved as
predicted.