Although how we might get there is still unclear, there is no doubt that the GSEs will soon have more autonomy. One way or another, it's highly likely that Freddie Mac and Fannie Mae will be exiting conservatorship sooner rather than later. And unless dramatic change is brought upon them, which seems decreasingly likely, they will maintain their significant influence on the way mortgage lenders originate loans.
Obviously, there are many lessons to be learned from the subprime meltdown and subsequent government takeover of Fannie and Freddie in 2008. In the future, the GSEs and lenders seeking to sell loans on the secondary market will likely need to strike a balance between mitigating risk at the point of origination versus making mortgages available to those with less-than-prime credit ratings. They will need to maintain equilibrium, as well, between profitability and quality control (QC).
In the go-go days of the subprime boom, too many lenders passed along mortgages originated while paying little to no attention to risk. On the other hand, in these days of regulatory scrutiny and risk mitigation, lenders (and the GSEs) are spending large amounts to ensure they are compliant and that they are originating ‘safe’ loans. At times, some would argue, these efforts have artificially chilled credit and slowed mortgage lending.
Although 2014 has been a year of retooling and refocusing for the mortgage industry, it is clear that mortgage lenders cannot simply ‘hunker down’ if they wish to stay successful. The GSEs are already facing pressure to make home loans more readily accessible to larger segments of the market. The bottom line is that, in 2015, lenders will begin to lend again, in spite of the increased risks.
There are many ways in which the GSEs, especially Freddie and Fannie, can take the lead on this principle in this new era of mortgage lending. One area not to be ignored is the settlement/post-closing phase of the transaction. Although it is easy to focus on risks in selling the loan, there are significant elements of the settlement and close that will require more careful attention.
The impending changes to the Mortgage Disclosures rule highlight this. How a transaction is settled could have an impact on that mortgage as it travels into the secondary market. And that, in turn, is highly impacted by the quality and accuracy of data and reporting that a lender's partners provide in the settlement.
One trend we are seeing is a consolidation of third-party vendors. We know that lenders will be held accountable for the actions of their third-party service providers, opening a world of risk – especially for lenders working with large numbers of vendors. Although some lenders are bringing their title and/or valuation operations ‘in house,’ many more are delegating those functions to a smaller number of trusted lender service firms with national scope.
The GSEs and lenders selling loans will need to maintain high standards of QC. This includes the lender's oversight of its partners and vendors – and even the vendors being used by those third parties. Are there stringent vetting and audit processes in place? How do the vendors maintain quality control over their deliverables? Are their procedures and policies documented? Finally, how sound is the information and data used to evaluate the risk on a mortgage?
Outsourcing will be an important means by which vendors can keep costs down as compliance demands rise, but there is inherent risk to adding another touch point of liability to the equation. Consider, for example, the dozens or even hundreds of vendors (abstractors, appraisers, etc.) touching the transactions of midsize to large lenders. The opportunity for lost time, redundancy and inefficiency is significant. Much can fall through the cracks, leaving a lender (as well as the secondary market) vulnerable.
Does the lender really have the time and resources to monitor and ensure the accuracy of the data and reporting it receives from its legion of partners? Where search products or other outsourced information gathering plays a key role in the mortgage settlement, does the lender and its vendor understand how that information is gathered and verified? Is the vendor working with a reputable outsourcing or search product provider? Do those vendors, as well, have robust QC processes in place? How deep are the resources (partnerships, technology and expertise) accessible to those vendors as they gather data for their clients?
The GSEs will soon, in one form or another, completely control their own destinies once again. However, the crisis of 2008 reminds us of the price of failing to walk a proverbial tightrope between profitability and risk. A failure to be profitable can have dramatic consequences for the industry.
A failure of underwriting standards, however, can also wreak havoc. As is so often the case, the answer will not come from a single, magic bullet, but instead, from the implementation of numerous tactical safeguards – including the careful vetting of third-party providers and the outsourced products or deliverables they might use.
Corey Hulbert is with American Tax and Property Reporting, a division of SLK Global Services.
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