REQUIRED READING: Based on what transpired in the last few years, the single most important area that will influence vendor services this year is the secondary market – or, perhaps, the lack thereof. If lenders take the time to understand what is currently happening – as well as what is likely to happen – they will have a much better chance of determining what to expect in the coming year.
Secondary-market interest is not moving forcefully enough for investors to re-enter the market this year. The traditional secondary market probably will not return until next year – at the earliest – and it is more likely to be at least 2013 before we see a secondary market that resembles, in any way, the secondary market of the pre-boom, pre-crash era.
Investors will not come back until they have the confidence that our industry offers a safe enough investment. And that's just not happening right now. The industry is focused pretty heavily on what it will take to reanimate the secondary market.
Preparation does not require us to know how to get investors back in the market. But it does require us to have a plan for how to handle our businesses in the event that they do not re-enter the market – which is the most likely scenario for this year. In other words, we can hope for the best, but if we want to succeed, we should also prepare for the worst.
Assuming there is an absence of secondary-market investors, there is really no choice but for the government to remain entrenched in the mortgage segment. For the government to abruptly pull out of the market is to risk the collapse of the entire industry.
As for the much-awaited reform of the government-sponsored enterprises (GSEs), it is not likely to come in the form of a transition to privatization. Instead, it is more likely to see reform efforts targeted toward origination and compliance.
Although the number of correspondent lenders is actually getting smaller, the amount of business these correspondent lenders are transacting has actually increased over the past year. And as such, the GSEs have more concentrated risk.
So how does this impact the vendor services being sought out by originators? Well, there will be several areas where concentration is required.
This year, originators will still work hard to keep pace with the myriad of new regulatory requirements. The larger lenders will not have to worry too much when it comes to seeking advanced notice of new regulations – not because they are not held to the same standards, but because big banks are generally the ones involved in the process of working with Washington in creating new policies.
Smaller lenders, on the other hand, were, for the most part, the last to know what was coming down from Washington. As a result, many of them were scrambling in 2010 to determine the best way to accommodate the changes.
Knowing this, the smartest thing for smaller lenders to do to counter this issue and keep themselves informed is to establish strong relationships with their vendors. Established technology and service providers will have more exposure to industry sources than small lenders will.
Those providers will also be actively seeking information on upcoming and pending changes – it is in their best interest to do so, and the success of their business is dependent upon their staying on the leading edge. Lenders that have not cultivated strong relationships with their loan origination solution provider, outsourcer or other vendors need to get started. The keys to developing a successful program are time and information.Â
Take a byte
Technology will be a key element of meeting the challenges of changing regulations. Traditionally, the mortgage industry has been fairly slow to innovate and adapt to new technology concepts. As an industry, we really need to elevate our standards and start embracing technologies that have been successfully implemented in other related industries.
For example, the industry will be required to involve the borrower more throughout the life of the loan. Rather than simply sending out monthly reminders of payment due dates, there will be the need to empower borrowers with information that can help them to become better and more reliable in repaying their debt.
However, some borrowers are simply playing games with the industry – fraud remains a major focus and will continue to be throughout this year. Because the GSEs delegate underwriting, they will be likely to impart additional controls to make doubly sure that all loans are being analyzed according to a standardized, reliable method. The recent problems surrounding the servicing of foreclosed properties reconfirms that sloppy paperwork continues to be a problem.
So what does this mean for lenders? Don't be surprised to find manual underwriting and increased quality checks. Lenders will need to underwrite, and then re-underwrite.
A possible fallout of the so-called ‘foreclosure-gate’ controversy could be even more regulations. But as far as increased correspondent activity is concerned, the big banks will need to be prepared with the technologies and staff required to fulfill the additional quality checks.
As we go further into this year, whether the industry's technologies are on the leading edge or not, lenders – especially the smaller and midsized institutions – should update their technologies and make sure they have implemented the most recent upgrades. This is standard policy for most of the large lenders, many of which are chosen to beta-test upgrades.
Some lenders opt to create their own proprietary technologies and have a dedicated team to ensure that all solutions are put into place well before regulations are enforced. A lot of smaller lenders, however, often find themselves out of compliance simply because they have not taken the time to ensure they are using the most current versions of their technologies. Staying current with upgrades is imperative, and is also one of the simplest forms of preparation.
While we cannot be entirely certain of when or what types of regulations will be instated, we do know that most regulations are focused on the integrity of data and workflow methodology. As such, it would be wise to start the evaluation processes now.
It can be difficult to predict the level and amount of manpower needed once the industry settles down. Because lenders are generally focused on keeping operations lean, the question will be whether they are equipped with the staff to handle the regulatory changes that will take root this year, or whether work will need to be outsourced.
Even if there is not a rapid bounce back to full recovery before the end of this year, it is certain that the industry is heading in the right direction. In determining vendor relations for the coming year, the successful vendors will be the ones that maintain an agile and flexible stance in view of the challenges that remain. Â Â Â Â
Chetan Patel is executive vice president of ISGN, based in Bensalem, Pa. He can be reached at (215) 638-1630.
