Mortgage Industry News

Every day it seems there is a new volley of posturing and positioning around the fate of the GSEs.  Personally, I find the back peddling by previously outspoken critics of the government-sponsored entities irritating and hypocritical. By back peddling, I mean proposals for the reconstitution of a government-insuring role in the mortgage industry at the same time the current players are being wound down.

Just a month ago, they were flagellating on the Left and on the Right about Fannie and Freddie’s “dirty deeds,” now they are wont to pass judgment. Get a spine, I say.

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By Super Bowl Sunday, most folks that made New Year’s resolutions know where they stand. You’re either going for the goal line or you’re watching Groundhog Day. Based on our market intelligence, many mortgage lenders vowed to improve per loan profitability by trimming overhead this year. Others adopted policies to improve loan file compliance and salability by tapping deeper industry expertise. We know this is true because inbound calls and queries for our closing and post closing services poured in unexpectedly in late January and have not relented.

We’d foreseen a more traditional mid Q1 new business bounce. Typically, December is virtually a loan origination holiday and January is when senior management restores discipline. Clearly, something different is at work this year.

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The January 25 review of Andrew N. Liveris’ book Make It In America by Wall Street Journal reporter James R. Hagerty caught our attention. Reading business book reviews lets us consider ideas emerging outside our own industry that may shed light on our industry’s challenges – without reading the book. In this case, that effect became even more intriguing since Mr. Hagerty previously interviewed TLC when he covered the WSJ’s mortgage industry beat.

As for the book penned by the chairman and chief executive of Dow Chemical, on the surface it may appear irrelevant to mortgage lenders and businesses that serve them. Liveris favors incentives for U.S. manufacturers to manufacture in the U.S. as a strategy to restore and sustain a balanced, thriving economy. I think it is relevant in two aspects.

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We’ve been watching with special interest over the last few weeks the apparent acceleration of community banks adding, or thinking about adding, mortgage warehouse lending to their commercial loan offerings. Earlier this month, National Mortgage News’ Paul Muolo noted the entry of Republic Bancorp of Kentucky, and People’s United Bank, Bridgeport, Conn. TLC offers all of our best wishes to warehouse lending veteran Kevin Rost with Republic on an smashingly successful rollout.

Since we work day-to-day with mortgage lenders of every description in the course of business and have reason to keep our own ear to the ground, we are aware of other community institutions that are in the education process and are considering a commitment to the warehouse lending model.

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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 Ruth Lee

This article originally appeared last week in TLC’s Progress in Lending Column: A Bit of TLC 

Traditionally, independent mortgage bankers have prided themselves on, and in many ways built an industry upon, their sense of self-reliance.  I cannot imagine any veteran mortgage lender taking exception to being described as independent, entrepreneurial, innovative or resourceful.  In fact, it would behoove our government, Wall Street and the media to take our industry’s roots into account as they try to regulate, capitalize on and report about it.

The very same traits that drew people into mortgage banking also happen to be traits that value expedience over process, tend to dismiss details that seem extraneous and highly value their own problem-solving acumen.  When you mix those traits in a profitable, high-volume marketplace, the result can feel a lot like a rodeo.  And when the conditions are just right, a high-energy, spurs-in-the-flanks event can occur.  We just lived through that part.  That was exhilarating, yes?

Nonetheless, and with all due respect to our forefathers’ feats, the rodeo days are over.  Not because they were bad but because the way things were done in the past grows less relevant with every passing day.  Now that the mortgage industry has been spotlighted as one that can support or disrupt global economic balance, we will need to channel our tradition of self-reliance in a more risk-conscious manner.

That means either assigning the appropriate level of staffing and expertise to mission critical operations or electing to outsource the function to a qualified, reputable third party.  Now that the consequences of inaccurate, incomplete or just plain sloppy loan files can be costly and/or business ending, the value of a “do-it-yourself” approach is dubious.

Of course, outsourcing is not new to independent mortgage bankers, but the motivation and ROI have broadened.  Today, outsourcing not only delivers quick market entry and scalability, but also ensures regulatory compliance, risk management and more confident investor relationships. 

All you need to do is scan the headlines of the mortgage, financial services and business media to know that change, regulation and re-regulation are going to be the norm for the foreseeable future. Perhaps you’ve thought about outsourcing before but did not see a clear advantage or need the advantage offered.  Should you reconsider outsourcing? Perhaps. Ask yourself whether your current operation is adequately staffed by experts and professionals who can respond to the current degree of change and loan level scrutiny.  What would happen if your organization had a 20 percent increase or a 20 percent decline in volume?  Would it be able to respond and remain self-supporting?  Would you have peace of mind?

Have you taken a hard look at the costs and lost business that accumulate around your current operation?  Do you have an informed understanding of your outsource alternatives?  Have you talked with your peers who have been relying on outsourcing?

If you plan to be in Atlanta the week of October 24 – 27 and would like to discuss any of these questions or just learn more about the advantage outsourcing can give your business, drop me an email and let’s get together:  Ruth.Lee@TitanLendersCorp.com.

by Mary Kladde

Industry veterans who have weathered multiple market downturns understand that in a low volume environment, customer service is a high-value, high-visibility differentiator. Don’t get me wrong; customer service – and having the reputation for strong customer service – has always been a deal maker/breaker in the mortgage industry.  It’s just that when every penny counts, customer service and overall relationship etiquette are the opportunity to “make a difference” in your customers’ lives without adding costs.

That is why I am itching to challenge our industry’s improper use of technology as a customer service facilitator.  And by improper, I mean no value judgment.  Instead, I mean a lack of judgment, or perhaps just a lack of awareness, for when technology is no longer the best way to get things done.

For the sake of argument, let’s consider how email, the original Internet “killer app,” threatens to erode customer service.

Almost everyone who has used email as a business communications tool knows that messages sent via that medium are like chameleons.  That’s right, the message takes on the perspective, psychology and immediate mood of the receiver.  In the customer service environment when email is being utilized to communicate issues, it is safe to assume that the customer is encountering a challenge of some kind and may already be under duress.

To read the rest of the article, visit our weekly column on Progress in Lending: A Bit of TLC 

by Mary Kladde

Whoever said “the devil is in the details” was probably a mortgage banker business owner or executive.

I think this for two reasons.  One is that the mortgage lending transaction has always been detailed, on its way to becoming even more detailed.  The folks at the top of a mortgage lending enterprise typically see themselves as detail conscious but mortgage lending has not traditionally attracted or retained truly detail-oriented individuals.

The second reason I believe mortgage bankers are bedeviled by details is that they turn to companies like mine to ensure that loan file details are reviewed and correct. By outsourcing their back office or part of their back office, mortgage bankers unload some of their risk. And on some days, they hate us for doing it.  Yes, lenders sometimes find attention to detail irksome and become irritated by dogged commitment to getting it right.

For the full article, click here to subscribe to our weekly Progress in Lending column: “A Bit of TLC”

by: Ruth Lee, EVP Sales, Titan Lenders Corp

There has never been greater demand or a clearer path for community banks to become a dominant force in the mortgage lending industry.  Non-depository mortgage bankers and their third-party originators sustained a devastating blow to their reputation and are being held accountable in ways that their business models were not meant to support. Community banks not only have the presence, footprint and liquidity to absorb mortgage lending demand, but also they are the preferred source of mortgage loans for most consumers.

This evolving dynamic promises to create an unprecedented community bank/mortgage banker relationship that will transform the mortgage lending transaction and stabilize the risks that have been accepted as “part of doing business.”

Read the full article in TLC’s Progress in Lending column: A Bit of TLC

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.

NexBank of Dallas’ launch of a $100 million mortgage warehouse lending division, offering lines of credit of up to $10 million to non-depositories, illustrates the evolving relationship between community banks and mortgage bankers (www.progressinlending.com/a-bit-of-tlc). Characteristic of a regulated institution, NexBank of Dallas warehouse lending guidelines are conservative, with lines of credit limited to mortgage bankers with a net worth of at least $1 million. Targeting NexBank mortgage brokers who are trying to become bankers, NexBank says it will consider lower net worth requirements on a firm by firm basis. TLC’s William Null (william.null@titanlenderscorp.com) is an expert on how community banks and mortgage bankers are collaborating in new ways.

by Mary Kladde

Part II – in follow up to commentary by Ruth Lee

Eliminating the GSEs is like throwing the baby out with the bathwater.  It is counterintuitive and ill advised. If the GSEs are eliminated the impact on the industry as whole will be severe.  The days of 80% LTV were not – even if you can remember them – the “good old days” and is not a time to which we should aspire to return.

The problem that I refer to as dirty bathwater is, more literally, the legacy infrastructure and context of mortgage lending. Up to this point, our industry has been a bit, shall we say, unstructured, in many of its business practices.  After all, in a non-regulated environment, there are fewer and looser “standards.”

Now, with the push for greater standardization picking up heft and the FNMA Loan Quality Initiative (LQI) providing guidance and motivation, perhaps we can get those chubby, troublesome GSEs cleaned up and on their way to health once again.  And another thing – I’ve said it before and will say it again soon, I promise – Loan level review both on pre-closing side of the lender and on the pre-purchase side at investor is destined to become an industry standard, and lenders should push for it.

by Ruth Lee

Lawmakers, consumer advocates, politicos and agenda driven bystanders are all weighing in on the efficacy and relative value of the two investor giants in the market.  Lawmakers cringe at the shared liability and risk exposure of the taxpayer.  Consumer advocates want the GSEs to focus more on rental housing.  Politicos want to assess the two GSEs with blame for every conservative, liberal or otherwise economic misstep since the collapse of the market.  First, I would argue that most of these guys have a murky (at best) understanding of what they both do…and second, I think that this base misunderstanding could serve to completely destroy the housing industry if acted upon.

The GSEs don’t make mortgages.  The GSE fund mortgages.  Back in the “old days,” if you wanted $5K to buy a house, you would go to your local bank, thrift or savings and loan.  They would lend you $5K for thirty years.  They usually wanted a maximum LTV of 80%.  You would participate in the risk with your local banker.  When housing prices started hitting the stratosphere, a lot of local banks found that they just didn’t have that kind of money to tie up for 30 years potentially.  So… the GSEs were created to fund those loans through securitization and investment.  As part and parcel of that discussion, it also required some standardization, like AUS.

Perhaps there is a burgeoning private market for securitizing mortgages.  Perhaps they all have a fundamental working knowledge of how to underwrite the risk, leverage the volume and inveigh investor confidence…but I sincerely doubt it.  We struggle to push perfectly standard, qualified jumbo securitizations out in this market at any LTV or FICO.

Save us from the best intentions of ideologues and polemicists… they know not what they do.

by Ruth Lee

Like an infant growing into adolescence, the mortgage industry in the last five years reached a gawky, unattractive and undeniably destructive period in its development. It certainly looked like an adult, but there was a need for maturity and discipline behind the changing voice. If you’ve ever raised a child to that rebellious stage–from a sweet-faced, kiss and hug bundle of joy to a car-wrecking, school skipping, “truth bending”, beer sneaking teenager–you can see the similarities.

Now, of course, we are going through the discipline (e.g. regulatory compliance, public flogging in the media, and writing “We’ll always conduct thorough loan level due diligence whether we are servicing, selling or buying mortgages” 500 times). Maturity typically follows discipline and it is not surprising that not-for-profits are leading the growth curve. You might even say they are leading by example. Here’s how: Read the full article on our Progress in Lending blog… 

by: Ruth Lee 

MBA NewsLink “Survey: Industry Still 3-7 Years Away from Widespread eMortgage Use” 

I think the article is interesting…but puts the onus on the tail to wag the dog.  It doesn’t really matter what the originating lender wants or prefers…and being “paperless” is apples to oranges with advancing eMortgages – i.e. having a digital archive doesn’t have a thing to do with eMortgages per se.  It is true… the industry is slowly becoming more comfortable with digital… and we see the slow cultural shift from the tactile security of paper.   But more importantly the article misses the real impediment behind the advancement of eMortgages… that it is driven from the top down… not the bottom up.  While Flagstar is miles ahead of the mainstream industry… until all the investors and/or the interim funder/warehouse lenders embrace eMortgages… they will still be primarily the exception rather than the norm.