Mortgage Industry News

by Ruth Lee

Last week’s news out of Massachusetts is illustrative of what is becoming the normal climate for our industry. Our first read of the story came on Friday, January 7 from American Banker reporters Kate Berry and Jeff Horwitz.

According to that article, the Massachusetts Supreme Judicial Court rejected claims by two major banking institutions that they did not need to prove themselves the authorized mortgage holders at the time each foreclosed on properties in that state. Ironically, or perhaps for the Court’s purposes symbolically, the foreclosures considered were executed on the same day in the summer of 2007.

HousingWire’s Jacob Gaffney this week aptly examined investor and analyst responses to the ruling. I’d recommend reading it.

Nonetheless, while we tend to agree that the impact of the Massachusetts ruling on the securitization industry is likely negligible, we see other facets of portent to it. Admittedly preferring to read the tea leaves versus just drinking the brew, we see guidance from the Massachusetts court that can benefit mortgage lenders of every description.

We see three distinct messages:

• States and their multi-state initiatives have teeth they are ready to use in 2011;
• Best-effort mortgage documentation is just not good enough; and
• Timeliness of lending protocols will be scrutinized.

First, this ruling by a state court steeped in the tradition of protecting its citizens’ rights is a much-needed reminder that our industry is regulated both at the state and Federal level. Mortgage lenders of every breed – banks, mortgage bankers (retail, wholesale and correspondent alike) and mortgage brokers – are bound by the laws and interpretations of the states in which they do business.

This is especially germane for multi-state lenders operating under a complex matrix of regulation and scrutiny. Beginning in 2011, as we’ve said before [Read Here], multi-state lenders are subject to coordinated cross-jurisdictional audits. The Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) hammered out the Nationwide Cooperative Agreement for Mortgage Supervision (NCA). NCA includes eExams for compliance checks with HMDA, TILA, HOEPA, RESPA, plus relevant high-cost, anti-predatory and consumer credit mandates.

Second, the Massachusetts ruling tells us that documentation matters. Not merely “best effort” documentation, but accurate, complete and timely documentation. The distinction is important, even though to us it reeks of common sense, because it appears from the unfolding of the Massachusetts’ scenarios that both banks, when given the opportunity to rectify title record on the properties in question, produced plenty of documentation.

None of it met the court’s standards because the documentation was irrelevant to its request that clear proof of authority related to the mortgages be established. Since it is highly (we pray) unlikely that banks of sophistication and reputation would purposefully attempt to mislead or skirt the intent of the court, we deduce that these institutions did not comprehend the incompleteness and inadequacy of their documents. In other words, business as usual would appear to be sloppy documentation.

State courts do not approve.

My third and final takeaway from the Massachusetts salvo to the mortgage industry is that timeliness in executing mortgage lending, mortgage assignments, mortgage securitization, mortgage servicing and mortgage foreclosure protocols (and business process management) will be taken seriously by state courts. Authority to take actions related to mortgage loans will be based on timeliness.

Although it sounds ludicrous to the average Jane, it appears that neither the banks, nor the servicer used by both, saw anything prohibitive or unusual in the fact that clear title to foreclosed properties had not been established according to state law. This says volumes about how far off the mark our industry can be in understanding the judicial system’s perspective.

Heretofore, our industry has tolerated a loose interpretation of timeliness throughout mortgage origination to closing to post-closing, secondary marketing and securitization to servicing. Henceforth, if you read the Massachusetts ruling the way we are inclined to, timeliness and accuracy will make or break mortgage lending practices.

by Mary Kladde

There is good news and not-so-good news in our industry.  The good news is that common sense appears to be gaining ground as the business model of choice for U.S. residential lending.  That’s right, after almost totaling its viability as an economic engine, and compromising itself embarrassingly for a chance at Wall Street grade greed, the U.S. mortgage industry – public, private and non-profit players – is grappling with its own discipline issues.

From my perspective the most promising sign of this is found in Fannie Mae’s Loan Quality Initiative (LQI), which begins to address the legacy weaknesses and opportunities for mischief that persist in mortgage lending processes.  The net result of LQI implies that pre-closing and pre-funding loan review are to become de rigueur, as will pre-purchase loan review. Another step in the right direction is the collaborative effort between the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) to develop the Nationwide Cooperative Agreement for Mortgage Supervision (NCA). 

Compliance Ease co-founder Jason Roth has written an informed article about this collaboration in the September issue of Secondary Marketing Executive, but in summary, its standardized, data-intensive, multi-state approach to monitoring and auditing lenders will make it more difficult to conceal and easier to regulate mortgage lending compliance violations.

The not-so-good news is that our industry, its regulators, and policy makers continue to mistake the symptoms of our disarray for its causes.  The problem, from my personal perspective as a mortgage lending back office service provider to lenders of every size and stripe, is that this industry flies with its eyes wide shut.

And it is not for lack of data. We’ve got more data than we can deal with, literally.

As a result, we are part of a supply chain trying to assemble investable financial instruments whose underlying terms and conditions are not accurately reflected in their recordkeeping. This means that investors cannot rely on the loan files they receive from lenders unless they conduct a comprehensive loan level review, including documents.  If investors are going as a matter of policy to conduct loan level review, lenders must prepare for the scrutiny via their own loan review processes.

There is a fundamental disconnect in the mortgage lending lifecycle that will thwart even the most well intentioned common sense initiatives.  What good is data validation, even if conducted repeatedly by both the loan originator and the purchaser, if the data in the LOS does not process straight through to DU to correctly populate the appropriate document sets?

A stubborn dilemma remains.  Lenders are adding data to DU from their platforms but oftentimes loan closing documents are not synced with that data.  Clearly, if DU is taking into consideration data that is not recognizable and manageable by lenders’ doc prep systems, the document sets on these loans will be unreliable reflections of their underlying conditions.

This, in my view, reduces DU to little more than a placebo by which many in our industry will be placated into believing once again that the emperor’s new clothes are glorious and impervious to error. We need standardization of loan processing data for underwriting and accurate documentation, and every lender should be girding themselves for 100% loan level review throughout the loan and securitization lifecycle.

Mary Kladde 

Consider this a call to action. I am on a mission to standardize the mortgage industry.  Standardization is the key both to sensible regulation and to producing a valuation that is measurable on a per file basis.  Reviving investor confidence and stabilizing the mortgage market means that we need to be able accurately value a mortgage.    We need to make the quality review of a file as simple as knowing what a dollar is made up of…4 quarters, 10 dimes, 20 nickels, or 100 pennies.  Once this is accomplished, there is no more guessing associated with what’s a “good” loan.”  Do I have your interest piqued? Do you agree that standardization is a linchpin of the mortgage industry’s sustained recovery?  Spread the word and more to follow….

THE FUTURE OF THE HOUSING MARKET: 2009-2010 – Foreclosures, Recession and Loan Resets.

Ruth Lee

While the financial markets have seemingly stabilized in the wake of massive taxpayer intervention, many Americans have started to feel optimistic about the economy. Independent mortgage bankers across the country have seen enormous demand for refinances with a relative resurgence of purchase demand. However, are we feeling a little too good about the economy? Are we still solely using Wall Street as a litmus? Actually, yes we are…. because it is easy…and we still believe that the market is somehow “smarter” than we are – being able to neatly tie in economic metrics and reporting into a simple number with a plus or minus next to it. (The Dow rallies – we are golden… the Dow falls – things are not so good.) However, in truth, the Dow has been a poor harbinger of future financial information. Three months before the meltdown, financial gurus were still promoting investment in financial services – which turned out to be a “double plus ungood” financial plan.

We cannot be lazy about viewing the economy and our place in it. We cannot continue to take the “infomercial green means go, red means stop” method of analyzing our financial futures. While the media has been entirely focused on the evils of subprime… you can review the chart below to see that ARM resets are just getting started… The green bars from subprime resets have bottomed out in Q2 09… however, the tide of resets for Option ARMS and ALT A are just getting started.

What does that mean? Specifically, subprime loans were made to marginal borrowers with poor credit and/or an inability to prove income and assets enough to qualify for standard mortgages. In the early 00s, Option ARMS and ALT-A were given to marginal borrowers with good credit and/or an inability to prove income and assets.

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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.
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