A Bit Of TLC

The Time Is Right To Reconsider Outsourcing

By Ruth Lee

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.

Ruth Lee is EVP Sales at Titan Lenders Corp. Unlike many sales people in the industry, Ruth Lee has the distinction of having owned and operated a successful residential mortgage company for 10 years. Her sales background is extensive, but it is her “real world” experience in the mortgage broker world that provides practical insight into the advantages and disadvantages of being a banker or broker in the mortgage industry. This invaluable knowledge allows her the consulting expertise to properly serve her client’s concerns and needs. She can be reached via e-mail at ruth.lee@titanlenderscorp.com. Also follow Titan Lenders Corp. on their blog HERE.

“Just Do It” Won’t Cut It

By Mary Kladde

Low interest rates going even lower have driven a refi boom in the third quarter and show no real sign of spiking until next year. Although I’m not a confident prognosticator in unprecedented times, I’d guess that at some point in Q2 2011 and certainly by this time next year, rates will eventually trend upward.

When the shift finally occurs, the tide of borrowers motivated and qualified to refinance will recede and our industry will be staring directly in the face of what will become “The New Normal.” We’ve evaded the real impact of our industry’s new market realities as a consequence of the Fed’s repeated decisions to repress interest rates.

However, the respite will end eventually, rates will rise, and the reality of a significantly shrunken pool of loan volume will emerge. Then, I believe, our industry will experience another wave of culling among independent mortgage lenders. Unfortunate, yes, but from the evidence I see in working with a broad spectrum of mortgage lending organizations, two traits persist:

>> A mindset that some aspects of loan quality can be circumvented “when necessary;” and

>> Unrealistic expectations of “business walking in the door.”

You would think the first trait would be significantly nullified by the regulations and “cost to cure” on loans stemming from changes enacted the first of the year. It still amazes me, especially during the last days of the month, the quality details lenders are willing to “let slide” just to get a loan closed. I’d wager that nearly every mortgage banker executive within the sound of my voice knows exactly what I mean. They know either because they have allowed/demanded it, or because they have dealt with the repercussions of a loan returned by the destination investor because of it.

Regardless of why and how and judging from the exceptions we are asked to make among our client base, mortgage loans are still being allowed to close prior to receiving “clear to close.” As we’ve said before, there are elements of total loan quality (such as verification of employment protocols) that, in our opinion, add no knowable value to the loan’s integrity. However, it is in the interest of a mortgage lender’s business integrity and business continuity to apply themselves slavishly to the details – even when there is a spike in volume. Especially when there is a spike in volume!

It never ceases to surprise me that some mortgage bankers decide to outsource their back office and mortgage fulfillment operations to ensure scalability and mitigate the risk of mishandling loan details, yet ironically expect that we will allow exceptions on demand and assume the risk associated with these exceptions. Our steadfast position on quality has ended some relationships, but those relationships often boomerang after those misguided lenders experience the pain of investor-returned loans or significant “cost to cure” requirements.

May the words, “Don’t get hung up on the details, just get it done,” be banished from the mortgage banker vernacular now.

Returning to the two traits above, I’d like to caution mortgage lenders who have been gorging on refis for the last 90 days to look up from the trough. Look up and realize that your more fearsome competition is the lender committed to loan quality and strategic marketing. Here’s my advice – know what your purchase to refi ratios are and spend at least 15 percent of your time each month in creating productive realtor and/or affinity relationships. This focus will help fill your pipeline when the boom ends and positioning you for continued success in 2011.

In May of 2007, Mary Kladde decided to fully capitalize on her extensive experience within the mortgage industry by forming Titan Lenders Corp. Her 18 years of actual mortgage operations experience and exposure to all residential lending channels and processes from origination through point of sale has provided unique insight into the operational needs of lenders and investors. Her past experience includes operating and managing a successful fulfillment division for a leading document preparation provider in the industry. Prior to that, she managed the retail and wholesale closing and post closing department for a regional office of one of the larger residential mortgage banking investors in the country. Mary can be reached via e-mail at mary.kladde@titanlenderscorp.com. Also follow Titan Lenders Corp. on their blog HERE.

How E-Mail Disables The Finer Points Of Customer Service

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 e-mail, the original Internet “killer app,” threatens to erode customer service.

Almost everyone who has used e-mail 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 e-mail 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.

Typically and in my experience, the consequence of using e-mail to carry a message to a receiver who is under duress is not always positive. I have not conducted a statistically validated survey, but I would bet my boots on an inverse correlation between the number of e-mails exchanged in the resolution of a customer service issue and the resulting degree of customer satisfaction.

What I mean, simply, is that e-mail exchange often times has a tendency to escalate stress in the customer service situations.

From my perspective in providing B2B outsource services to mortgage lenders and mortgage lending-related businesses, I think rules should apply to the use of e-mail for customer service resolution and this is mine:

“If you need to exchange more than two e-mails about a customer service issue, pick up the telephone to have—and I mean this—a conversation.” The telephone is still an acceptable means of communication and technology use.

That’s right, even though it is not really my nature to become the mortgage industry’s Andy Rooney, railing about commonplace business malpractice, I want to say that “I’m tired of people using the word ‘e-mail’ as though it were an active verb—as though ‘e-mailing’ in any way implies the resolution of an issue.” It’s almost like the term “whatever.” You know what that really means right? “I sent an e-mail” often times falls into that same category.

Instead, the mortgage industry should take it upon itself to lead the financial services industry back to a saner and more humane application of customer service technology. Both the business-to-consumer mortgage lending segment and the business-to-business mortgage lending services segment could overcome many operating challenges, as well as reputation challenges, if they would rethink customer service communication.

We have a diverse customer service toolset at our fingertips. Let’s be thoughtful about using “the right tool for the right job” to get the outcome we need.

Why Mortgage Lenders Hate The Details

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.

We don’t take that personally – again, for two reasons. One is that it is our job and our nature to hound whoever is necessary to get it right regardless. Some of us have been mortgage bankers in previous careers, but we all chose to be the “detail-people” we are today.

The second reason we don’t take our clients’ occasional detail aversion personally is that we understand their frustration. Frankly, some of the data collection that goes into a mortgage file adds no real value other than meeting an investor requirement. Now, we take investor requirements seriously and we have the credentials to prove it. That does not mean we see treasure in details where we know there is only fool’s gold.

Post-closing verification of employment (VOE) – is a good example of a detail that drives lenders nuts but serves no evaluative purpose other than being something that “has always been done this way.” Some investors want a post-closing VOE three days after funding even though it could be 10 days before they actually receive the loan file. Would it not make more sense for the investor to obtain the VOE just prior to purchase?

Well, it might make sense if the post-closing VOE offered a useful piece of information. As it stands now, most investors accept a verbal VOE by telephone as a compliant means for obtaining that information. The language of the VOE query is familiar and grossly subjective. Is the borrower employed by the entity purportedly represented by the telephone number? Is there the likelihood that the borrower’s employment will continue?

Not only are these kinds of questions patently illegal to ask in some states but also add no perspective on the borrower’s risk profile. There is no way to validate a verbal VOE response except through W-2 forms or tax filings, which are already part of the loan file.

Sure, that last minute check might snare a borrower who just received their pink slip a day or two after closing on a mortgage but for many, many reasons you just can not count on the current VOE protocols.

We agree with our clients that investor requirements for loan file details need to be consistent, standardized, qualified for accuracy and aligned with relevance to risk. VOE is a reminder that we need to work on the details.

The Fate Of The GSEs

By Mary Kladde

Thank goodness for business travel. Last week’s round trip to Boston was a chance to catch up with our EVP for sales who works in the office next to me but with whom I rarely exchange complete sentences during the course of our 12-hour days. In fact, most days we rely on universal hand signals to convey our thoughts. For those of you who don’t know Ruth Lee, I can tell you from personal experience there is no more stimulating or exhausting experience than sharing two 3+ hour flights conversing with her on the state of the industry.

Of the issues we covered, the most invigorating came from contemplating the original intent, current challenges to and ultimate fate of the GSEs. Two of the more scintillating questions we ultimately left unanswered because, like most questions of real significance, they are not answerable in simple terms and need more research.

1) Why, we wondered, has Fannie Mae begun to back peddle on its Loan Quality Initiative – a gesture toward standardization and loan level review in which we found promise? LQI may not be perfect, as we’ve noted before, but the Perfect Solution can be the greatest enemy of the Much Needed First Step. Clearly, though, FNMA is changing its stance from the LQI “requirement” to the LQI “recommendation.” Was it really going to be so painful or has the agency realized that standardizing mortgage lending data would require a better understanding of which data is relevant and available for lender use?

2) And where, oh where, has Freddie Mac been this year? More importantly, why has Freddie Mac taken a backseat in guiding the mortgage industry to its post-subprime starting gate? Has it been so that FNMA would take the pummeling for requiring adjustments that make mortgage lenders whine in discomfort? Or has it been that in the absence of a meaningful conventional mortgage market that Freddie isn’t particularly relevant?

A brief history of the GSEs is helpful in thinking these things through.

Remember, Fannie Mae was chartered in 1938 to purchase, hold, or sell FHA-insured mortgage loans originated by private lenders, and its charter expanded after World War II to include VA-guaranteed home mortgages. In 1954, government backing for borrowings used to fund Fannie Mae’s secondary market operations ended. In 1968 Fannie Mae was divided, with Ginnie Mae continuing as a federal agency and a reconfigured Fannie Mae becoming a “government-sponsored private corporation”.

In 1970 Freddie Mac was created and authorized to create a secondary market for conventional mortgages. At the same time Fannie Mae was allowed to “purchase” or “dealing in” conventional mortgages although requiring the HUD Secretary to provide prior approval.

Although these agencies were created and positioned to add liquidity and stability to the mortgage economy, they were politically “morphed” into private, for-profit entities that competed both with the unregulated market and with one another. During that transformation, FNMA and Freddie Mac capitalized on the popular misperception that they were insuring security instruments comprised of U.S. backed mortgage loans.

Is the dilution of FNMA LQI and the persistent silence from Freddie Mac a sign that the GSEs are unable to survive in a standardized, transparent market or that perhaps policy makers lack the will to require it?

Might it be that the GSEs have become so far removed from their original goal of “public good” and have for so long enjoyed “a special relationship” with the market that they no longer understand the impact of their misguided decision making?

In May of 2007, Mary Kladde decided to fully capitalize on her extensive experience within the mortgage industry by forming Titan Lenders Corp. Her 18 years of actual mortgage operations experience and exposure to all residential lending channels and processes from origination through point of sale has provided unique insight into the operational needs of lenders and investors. Her past experience includes operating and managing a successful fulfillment division for a leading document preparation provider in the industry. Prior to that, she managed the retail and wholesale closing and post closing department for a regional office of one of the larger residential mortgage banking investors in the country. Mary can be reached via e-mail atmary.kladde@titanlenderscorp.com. Also follow Titan Lenders Corp. on their blog HERE.

Outsourcing Supports Mortgage Lending Business Continuity

By Mary Kladde

Although not a common vernacular for mortgage lenders, business continuity management (BCM) has long been a buzzword in the banking industry. Its implications as a business strategy came to light starkly in the wake of Hurricane Katrina, as many institutions learned the hard way the cost of relying on paper-based filing and record-keeping systems.

Now, as the prospect of a prolonged drought in lending volume increase competition, and with loan quality and transparency on the ascendant, outsourcing offers a key element of mortgage lending business continuity strategy.

A proven business model for our industry, outsourcing needs no explanation for this audience. It suffices to say that by outsourcing mission-critical operations to experts, mortgage lenders streamline their business, add scalability and insulate themselves from negative consequences. However, a refresher in business continuity strategy could be useful.

In short, BCM encompasses planning for every conceivable event that could disrupt an organization’s operations, ranging from pandemics, data breaches and identity thefts to man-made disasters such as fires, utility outages and human error.

For a mortgage banker, today’s greatest operational disruption is the inability to originate and deliver zero-defect loan packages to their investors consistently. Focusing on business continuity strategies requires unrestrained risk sensitivity. If the mortgage industry can agree on nothing else, it agrees that risk sensitivity is elemental to the future of mortgage lending.

Have a Plan

At the heart of all business continuity strategies is the development of a business continuity plan (BCP). Most experts agree that there are five stages in the development of a BCP:

Analysis
Solution Development/Selection
Implementation
Testing
Maintenance

As applied to a mortgage lender, in the analysis phase the lender deconstructs its processes into two categories – critical and non-critical. This distinction is determined by the severity of consequences for not being able to perform the indicated function/activity. In this stage, mortgage lenders should identify risks that could disrupt their operations, such as delivering noncompliant loans to investors or violating regulations.

Following the analysis stage, bankers are better informed to select appropriate lending operations alternatives that not only meet the recovery parameters set in the analysis phase, but also require the least amount of financial resources to access or acquire.

The remaining three stages – implementation, testing and maintenance – test the validity and appropriateness of the previous steps. Compiling a list of risks and solutions is pointless if the solutions fail either the data or function recovery parameters or simply fail to operate as designed. This is where outsourcing shines.

Business continuity planning does not mean mortgage lenders eliminate risks. It simply means that risk has been identified, evaluated and addressed with eyes wide open. Business continuity strategies demand discipline and maturity, and offer a reliable sextant for charting a successful mortgage lending business. If you’d like to discuss how outsourcing could support your own BCP, drop me a line.

In May of 2007, Mary Kladde decided to fully capitalize on her extensive experience within the mortgage industry by forming Titan Lenders Corp. Her 18 years of actual mortgage operations experience and exposure to all residential lending channels and processes from origination through point of sale has provided unique insight into the operational needs of lenders and investors. Her past experience includes operating and managing a successful fulfillment division for a leading document preparation provider in the industry. Prior to that, she managed the retail and wholesale closing and post closing department for a regional office of one of the larger residential mortgage banking investors in the country. Mary can be reached via e-mail atmary.kladde@titanlenderscorp.com. Also follow Titan Lenders Corp. on their blog HERE.

Flying With Eyes Wide Shut

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).

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ComplianceEase 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.

In May of 2007, Mary Kladde decided to fully capitalize on her extensive experience within the mortgage industry by forming Titan Lenders Corp. Her 18 years of actual mortgage operations experience and exposure to all residential lending channels and processes from origination through point of sale has provided unique insight into the operational needs of lenders and investors. Her past experience includes operating and managing a successful fulfillment division for a leading document preparation provider in the industry. Prior to that, she managed the retail and wholesale closing and post closing department for a regional office of one of the larger residential mortgage banking investors in the country. Mary can be reached via e-mail atmary.kladde@titanlenderscorp.com. Also follow Titan Lenders Corp. on their blog HERE.

Same Street, Same Hole, Different Outcome…Says Who?

By Ruth Lee

Our national debate over the murky future of the GSEs reveals our collective tendency towards ideology rather than steely-eyed realism. A WSJ article last week echoes recycled politically charged arguments from two years ago, proving that dogged repetition of a single point of view can assail the veracity of even well documented events. I don’t believe that history is written by the victors; rather, it is written by the most committed and repetitive.

Indisputably Fannie and Freddie, and the Clinton Administration, played a role in the mortgage collapse. Just as in some circles Alan Greenspan’s culpability was an unintended consequence of his credit-loosening response to the post dotcom crash and 9/11 tragedy. However, to infer that they were the root cause is like blaming the British policy of appeasement as the root cause of the German aggression in WWII.

To insist that the loosened credit standards for Agency loans, wrought in pursuit of affordable housing goals, are solely to blame—with only a small asterisk to note the collusion of Wall Street—is manipulative. While I don’t believe Agency was the impetus of the collapse, it certainly was the cheerleader, the psychiatrist, the priest and the mentor for it. But, to exempt the actual architects from censure…really?

For the WSJ premise to hold water, Community Homebuyer and FHA products would, by necessity, have been the most popular products in the market. But even at market rates of up to 5% less, they couldn’t compete. FHA lost almost its entire market share in the boom. High LTV products with their higher mortgage insurance rates couldn’t compete with fully deductible subprime rates or the simplistic beauty of the 80/20. Oh…and there was also that pesky “documentation” part.

If the argument is shame on FNMA and FHLMC for investing in these risky subprime loans, well then shame on everyone…my Mom, her pension fund, everyone. Rearview ethics, like hindsight, are 20/20. Shock over marginal borrowers defaulting in a recession is disingenuous. More shocking are “strategic defaults” by scores of non-marginal borrowers, incented by innocuous acronyms like HAMP and HARP. Beyond shocking is the Teflon coating that protects the worst of the Wall Street actors—who leveraged the reputation and market confidence engendered by FNMA and FHLMC to drive a market built on lies.

What should be most alarming is that barely two years out, we would consider opening the entire securitization market to unfettered privatization and expect what? A lesson in restraint?

You tell me. When courting investor confidence minus any standardization represented by the flawed GSEs (regulations/standards/AUS), what is the foundation you want to build on? The stakes are much more important than politics or polemics…the very growth and recapitalization of our industry depends on our wisdom not our greed.

Unfortunately, I must honor word count limits. For more on this topic and others, get your TLC here next week and keep an eye on the TLC blog HERE.

Let’s Rename Them Government Standardization Entities

By Mary Kladde

The Treasury Department is kicking off its reform of the housing finance industry this week – with the fate of Fannie Mae and Freddie Mac under the most politically charged spotlight. According to Tim Geithner, Tuesday’s (largely symbolic) DC gathering will feature “leading academic experts, consumer and community organizations, industry participants and other stakeholders for a conference of experts focused on the future of housing finance.” He has promised “to explore various models of reform” and “to seek input from across the political and ideological spectrum.”

There’s nothing quite as refreshing and reform-minded as mid-August in the humid, irritable confines of the Hill. In anticipation of the crucible, lawmakers, consumer advocates, politicos and agenda-driven bystanders have been 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. The media just want them to keep the pot stirring.

They say the best intentions of mice and men often go astray. I say, save us from the best intentions of ideologues and polemicists… they know not what they do.
The GSEs don’t make mortgages, they fund mortgages. Back in the “old days,” for $5K to buy a house, borrowers went to their local bank, thrift or savings and loan. They would lend $5K for 30 years. Borrowers participated in the risk with their local banker, which typically wanted a maximum LTV of 80%.

When housing prices started climbing, demand outstripped banks’ funds. The GSEs were created to fund those loans through securitization and investment, and to promote greater affordability. As part and parcel of that discussion, some standardization, like AUS, emerged where there had been none. Therein lay the greatest potential contribution of the GSEs: a mandate for standardization
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.

Eliminating the GSEs is like throwing the baby out with the bathwater. It is counterintuitive and ill advised. 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.”

It has been in the virtual absence of loan processing standards and the failure of the GSEs to either articulate or enforce such standards that an atmosphere of wanton chicanery blew in.

Now, with the push for greater standardization picking up heft and the FNMA Loan Quality Initiative (LQI) providing guidance and motivation, our best bet as an industry is to clean up our practices and require the same of the GSEs.

Community Banking And The Mortgage Banker Role Are Merging In This New Era

By Ruth Lee

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.”

Consider that there are more than 8,000 U.S. community banks comprised of a disproportionately small percentage of experienced mortgage bankers on the cusp of significant lending demand. Community bank portfolios are currently carrying more than $1 trillion three- and five-year ARM’s and balloon loans products. The pending demand and turn over posed by their current portfolios is truly the tip of an iceberg. What does this mean to independent mortgage bankers?

Moreover, community banks enjoy significant perpetual advantages over non-regulated, non-depository institutions, including:

>> Customer acquisition is drawn from existing deposit accounts;

>> Fewer licensing hurdles as chartered institutions; and (perhaps most relevant in the face of persistent liquidity constraints);

>> Cost of funds and leverage opportunities provide a great source of income over non-depository institutions

Based on these circumstances, community banks also offer real opportunities for experienced mortgage bankers to extend their careers in sustainable relationships with new mortgage lending models.

Over the last two decades, independent mortgage bankers and their third-party affiliate businesses aggressively marketed to and netted mortgage lending business from community bank account holders. In the new era, experienced mortgage bankers will demonstrate greater respect for the community bank value system and will look to community banks for:

>> Direct employee opportunities –The need to rely on seasoned mortgage bankers

>> Partnership and other Joint Venture opportunities

Today, there are numerous models for available for community banks desiring to enter the mortgage lending market including:

>> Referral only;

>> Referral for a fee;

>> Joint Venture Opportunities;

>> Authorized Agent relationships; and

>> Mortgage Banker levels of sophistication

As community banks and mortgage bankers transform and co-mingle their mortgage lending roles, they will encounter barriers created by their respective cultural differences including:

>> How mortgage banker regulators will impact the culture of community banking;

>> Managing enterprise risk impact of mortgage lending inside a community bank; and

>> Extracting and combining loan level data with call report data to manage up to the regulators.

If you want to talk with a real expert on the subject of community banking/mortgage banker synergy, reach TLC’s own William Null, Director of Business Development, Community Banking, at William.Null@TitanLenderscorp.com.Community banking offers a promising but disciplined context for mortgage lending in the post-subprime era. When community bankers and mortgage bankers realize and act upon the opportunities for synergy, the transformation of the U.S. mortgage economy will be on solid footing.

Loan Level Review: A Sign Of Maturity

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:

Earlier this year, Titan Lenders Corp, and ComplianceEase worked with the Massachusetts Housing Finance Agency (MassHousing) to create an automated loan review process that could serve as a model for many if not all state housing finance agencies (HFAs), which originate billions in mortgages annually through their first-time homebuyer affordability programs. High-volume lenders with a low tolerance for risk in their secondary strategies and the need to adhere to regulations such as Fannie Mae’s Loan Quality Initiative (LQI) stand to benefit as well from such an exercise.

In fact, 100% loan level review, whether conducted by the lender pre-closing (ideal) or post-closing, or pre-purchase by an investor, is arguably a mortgage industry best practice and should be required. Lenders should want it to be required.

MassHousing is “a self-supporting not-for-profit public agency [that] has provided more than $10.4 billion in financing for homebuyers and homeowners [since its first completed transaction in 1970], and for developers and owners of affordable rental housing . . . [MassHousing] does not use taxpayer dollars, but sells bonds to fund its programs.” In 2010, MassHousing sought outsourced mortgage purchase review services, including loan level quality review and regulatory compliance evaluation, to ensure the least risk exposure achievable in selling its loans to investors.

The outcome is a seamless and transparent loan review workflow that meets regulatory and investor criteria, while accommodating the unique HFA lending criteria. The resulting unprecedented solution accommodates data delivered directly from more than 100 MassHousing lender partners and conducts a thorough, comprehensive loan review protocol as mapped in conjunction with MassHousing.

“Over the last several years, MassHousing has dramatically increased the number of loans it makes for affordable homeownership,” said Kathy Burns, Director of MassHousing’s Home Ownership Division. “We were looking for a company to help us deal quickly and efficiently with all of the back-office tasks, so that we can continue to operate at peak efficiency, and Titan Lenders Corp demonstrated that they were the best company for the job.”

MassHousing, like many investors facing FNMA’s LQI required a real time solution to safeguard itself from burgeoning repurchase demand and compliance risk.

Doesn’t everyone?

The New Licensing Situation

By Ruth Lee

For many years, the path through the cumbersome and conflicting world of mortgage licensing could be entirely subverted through the beauty of federal preemption. In other words, rather than go through the expensive process of getting licensed in 50 states, many of whom don’t agree on financial or education requirements, the mortgage banker would simply affiliate with a subsidiary of a national bank or federally chartered thrift—and poof! you have your national licensing…or at the very least, federal preemption from said licensing.

While banks that lend mortgages have managed to escape the overall public relations crisis—they played a critical role in the industry collapse. From Indy Mac to World Savings to Ameriquest—banks were just as culpable as their non-depository colleagues. From my standpoint, they were often worse—because they had no incentive or regulatory requirement for their employees to be mortgage professionals. Following the crash, depositories became the “holy grail” of mortgage lending—requiring few professional credentials in a relatively small corporate environment…coupled with unlimited, unquestioning freedom from licensing or local consumer credit requirements, as they were only required to pay attention to regulations from the OCC and OTS.

Title X of the Frank-Dodd bill severely curtails the preemption authority of the OCC and addresses the Supreme Court ruling that extended federal preemption to subsidiaries of national banks. Watters vs. Wachovia is a great example.

How so? Under 12 U.S.C. § 484(a), national banks are not subject to state “visitorial powers,” which are inspection and regulatory powers, except when allowed by federal law. The Office of the Comptroller of the Currency (OCC), the federal administrative agency in charge of regulating banking, issued 12 C.F.R. § 7.4000, which prevents states from using visitorial powers on national banks. The OCC also promulgated the rule that the laws apply equally to national banks and their subsidiaries in 12 C.F.R. § 7.4006. Michigan argued that a subsidiary of a national bank with a state rather than a national charter should not fall under the definition of a national bank, and that preventing a state from regulating a state entity violates the Tenth Amendment.

The district court granted Wachovia’s motion for summary judgment, and the United States Court of Appeals for the Sixth Circuit affirmed. The Sixth Circuit applied the analysis used in the United States Supreme Court case Chevron U.S.A., Inc. v. Natural Resources Defense Council. Under Chevron, the courts must defer to administrative agencies unless the actions of the agencies are contrary to the statute enabling their power or are unreasonable interpretations of the statute. The court found that, although the statute was silent on the issue, the OCC’s interpretation was reasonable in light of the OCC’s power to both exclusively regulate banks and also regulate powers incidental to banking. Also, the Tenth Amendment did not apply because the National Bank Act was a valid use of Congress’s Commerce Clause power, and the Tenth Amendment only protects un-enumerated powers.

When the new Frank-Dodd law goes into effect, many of the companies structured around subverting licensing requirements will be revisiting their business model. And for the national banks?there is more to consider. The bill eliminates the OTS and merges it with the OCC—and severely restricts the OCC’s ability to establish preemption. So, let the fun begin…