Mortgage Industry News

Mary Kladde

This is another article we wrote earlier this year to address some of the primary concerns we see for the mortgage industry, such as national liquidity, mortgage technology adoption and quality production.

TIMELY ACTION IS REQUIRED:

With an economy in crisis, liquidity unable to meet demand and a pillar industry like housing in ruins, action is required.  The government has a unique opportunity with its newly minted FHFA and control of the GSEs to establish some standards for the industry as a whole, revolutionize it with current technology.  When or if those institutions return to the private sector, the real changes we could affect would revolutionize the industry saving cost (which are always passed on to the consumer), redundancy and confidence in our product.

The market has not responded to rising underwriting requirements or the elimination of all but most standard loan products because investor confidence has been sorely shaken.  To affect both a short and long term solution, we have to find the means of restoring that confidence in the value of quality American mortgage loans, and the more we delay, the longer we protract this market contraction.

WHY DID THIS HAPPEN?

There is any number of villains in this debacle, and they come from every socio-economic, educational and political background.  You cannot legislate against greed, but you can against the conditions which allow it to flourish.

There is virtually no transparency in the mortgage process, which has created an enormous disconnect between the primary market (origination) and the secondary market (investors, GSEs and Wall Street.)   With redundant paperwork, inaccessible documents, confusion over compliance regulations, there is no standard for defining a quality loan other than performance.  Unfortunately, performance only measures the past and as investors world-wide can attest, aren’t accurate for prediction.

Over the last decade, the mortgage market became a slave to volume over quality production in its race to meet global demand for mortgage loans, CBOs and MBSs.  As a result, there was no incentive to produce quality loans, other than personal pride.   Technology focused on speed and volume with only the operational support protesting the spiral of untenable products.

WE HAVE THE TOOLS: 

• TECHNOLOGY: PROCESS MANAGEMENT – Technology is only good when it is applied.  That has to be done by a front-end user.  There needs to be an automated system of process triggers which allow the management of quality loan production.  But it is important to recognize the value of market expertise in that production to mitigate errors and manage issues. To manage a credible result, there needs to be a business process technology that speaks to the varied software in use around the industry.   One that tracks all changes and editing from start at closing to finish at origination.  Even the partners have already been established:

- Compliance vendors to insure against TILA, HOEPA and Right of Recission error.

- Fraud vendors able to isolate fraudulent activity and fraud trends.

- Mortgage Electronic Registry System, already in place to automate expensive and cumbersome registry requirements during transfer.

- NMLS – the new licensing system coming online with unique identifier numbers

• TECHNOLOGY: ELECTRONIC SIGNATURES - The mortgage industry disseminates technology from the top down.  However, most of the industry is comprised of small and mid sized businesses that can ill-afford the expense of signature development.  For almost a decade the movement to digital signatures has been stymied by the lack of a facility to securely warehouse the collateral.   The savings to the borrower are evident, but without a credible facility warehouse lenders are unwilling to risk not having the actual signed collateral.  The technology is readily available and would easily cut down turn and cost for funding by at least 2-3 days. There needs to be a front-end investment in E-signatures.  Currently, the GSEs only require a copy of the note for purchase… and surprisingly nothing else.  They have no credit package, no appraisal, no title work – they are relying on the credibility of their approval procedures and hoping that they work.   This would provide them with enhanced visibility on the type and quality of loan produced in a fully digital environment.  Finally, it would save the industry hundreds per loan in production costs.

• TECHNOLOGY: DATABASE – Loans are still handled much the way they were before personal computers.  Cumbersome document packages follow loans around, losing pieces and getting lost.  Pieces get parsed amongst the investors, the servicers, the title agents with little remedy for a borrower trying to get their hands on any of it.  A virtual mortgage database using current technology would provide real relief.  With loan level access for mortgage regulators, investors, county recorders and potentially borrowers, would eliminate the waste and cost of warehousing and transporting millions of loans.  Most loans incur at least $80-100 in courier fees at closing, to ferry the collateral, the closing package, the credit package to multiple sources, sometimes redundantly.  The ability to manage that process through one central database would allow real performance studies and decisioning by the GSEs on product viability or the need for opening up guidelines.

COMMON SENSE NOT COMMON THINKING: 

The mortgage industry needs to evolve.  It needs to apply a transparency into the quality of it loan pool on an unprecedented level, providing investors with confidence in the value of the asset they have invested in.  There has been a consistent emphasis on the secondary and their abuse at the hands of origination; however, some of that is of their own choosing and neglect of real solutions that are both effective and inexpensive.

As FHFA and the GSEs redefine the industry, it is incumbent upon them to seek new solutions that embrace the technological opportunities unavailable until now.  We recommend that they search for answers not only amongst the secondary but right at the source…origination.