The Regulatory Risks Ahead

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Get ready, because 2017 will bring a lot of new regulatory challenges. You can be sure that regulatory risk continues to weigh heavily on lenders’ minds. So, are there any specific regulatory rules coming up in 2017 that lenders should be preparing for? How about enforcement action? What hot button items do lenders need to stay away from next year?

You bet, answers Wade Hamby, national director of sales and marketing, Stonehill Group. “The new 1003 and HMDA change is going to be big next year. Servicing remains in the spotlight and will continue to be. With respect to TRID, in the fulfillment area we are seeing that it takes more time to clear stips.”

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Hamby has more than 25 years of executive experience in mortgage lending, outsourcing and quality control. He oversees The StoneHill Group’s nationwide sales and marketing activities and is responsible for expanding use of the company’s solutions in the mortgage industry.

“Further, the new 1003 will impact how you capture data,” he continued. “Lenders have to have partners that are effective when it comes to cyber security. You have to do the penetration testing and meet those compliance needs. Too many vendors don’t provide those services. There’s a lot to prepare for.”

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So, how do lenders get prepared? Many are turning to technology. One can argue that technology plays a far more significant role in today’s enforcement driven market. With so many regulatory landmines, lenders use technology to stay out of trouble, protect profitability and be as efficient as possible. That being said, how have lenders’ technology strategies evolved in the year or two? Why? In your opinion, what are the elements of an effective technology strategy in today’s market? And what is the single biggest mistake lenders make regarding technology?

“Technology is critical,” pointed out Brian Fitzpatrick, president and CEO of LoanLogics, Inc. “We are missing the boat to what technology should be doing to drive down cost, though. Technology has to embed all the rules. Technology has to take all of those rules and guidelines and embed them within the system and deploy as close to the point-of-sale as possible. Technology has to be dynamic so it can be easily changed as the rules change.”

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Fitzpatrick oversees all operations of LoanLogics. Mr. Fitzpatrick has raised industry-wide awareness of how technology plays a key role in the production and measurement of loan quality and performance.

The regulatory landmines ahead are many. “There are a number of new obstacles things coming up,” added Fitzpatrick. “For example, the required use of trended credit data will be mandated. Comments are due to the CFPB for updates to TRID. The changes will be impactful. There will be new HMDA fields that need to be captured. In 2017 we’ll see the optional use of the new 1003, which will be mandatory in 2018. All of this speaks to the need for more dynamic technology.”

“In addition, we are expecting UCD in the second half of 2017,” added Kelli Yarbrough, vice president of Loan Retention, Roundpoint Mortgage Servicing Corporation. “We are expecting a lot of guidance. In general, lenders need to resist the urge to rush into things like non-QM. You need to be well trained and have your technology in place before you wade in.”

Yarbrough is responsible for all aspects of customer contact in the loan retention process for RoundPoint’s MSR portfolio. Ms. Yarbrough is a veteran of the mortgage industry with more than 16 years of experience leading both sales and operations teams in wholesale, retail, and direct-to-consumer channels.

“As much as lenders rely on technology, often times we are catching things too late,” she noted. “A key point to a successful technology strategy is system integration. If the systems aren’t able to speak with each other they won’t last. Everyone needs to remain nimble, but we can’t forget to invest in training programs for the front line. The LOs have to understand how to use the technology and comply with the rules. I think we expect too much from our technology.”

A wild card in all of this could be the outcome of the Presidential Election. “With the election coming up, we should look at larger issues like a lack of new affordable housing,” said Fitzpatrick. “Also, rates are going to go up. So, how does all of that impact the market? The news coverage needs to focus on these issues relative to our industry, as well.”

Regardless of what happens, the smart lender has their eye on the future. “Next year will be the year that we crack open all the data,” said Brian Koss, EVP of Mortgage Network. “If you are forced to collect new data at the same time you have to deal with a new application, that should be a good thing for the space to digest. It will be a good opportunity for the industry to rethink the entire process.”

Brian Koss has more than 25 years of mortgage banking experience and has personally generated more than $1 billion in home loans. Mr. Koss has trained hundreds of loan officers over this career, including many top producers. For ten years, he served as the host for “Mortgage Mondays” on the nationally syndicated “Money Matters” radio show.

“Lenders are typically founded by sales guys that pay little attention to detail and just buy technology off the shelf,” Koss said. “It’s like self medicating. You have this ache so you take this medicine, then this other thing hurts so you pick up some medicine for that, but you aren’t aware of how those medicines work together. Lenders will some times buy something because it sounds good, but you have to look at how that new technology impacts your process and other technologies. That decision making process has to end.”

All of this change is making it more and expensive to originate a loan. “Everyone is talking about how the front end is changing and being digitized, but the real issue is that we have to figure out how to bring the cost of complying down,” concluded Fitzpatrick. “Lenders will not be effective if they are always scared of compliance enforcement. A lot of the technology on the market today is old technology that has been around for 20 or 30 years. It’s like building a new modern house on top of old knob and tube wiring system. It doesn’t work. Technology has to evolve to help lenders meet the challenges of complying.”

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The Big Picture

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The Data & Analytics Division of Black Knight Financial Services, Inc. released it latest Mortgage Monitor Report, based on data as of the end of August 2016. This month, Black Knight took a close look at mortgage refinance activity through the first half of 2016. As Black Knight Data & Analytics Executive Vice President Ben Graboske explained, borrowers are continuing the trend of drawing upon growing equity in their homes, though at nowhere near the levels at which they had pre-crisis.

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“The roughly 350,000 cash-out refinances in Q2 2016 accounted for 42 percent of all refinances in the quarter, and marked the ninth consecutive quarterly increase in cash-out lending, not only by count, but also by the amount of equity tapped,” said Graboske. “At $22.6 billion, that works out to approximately $65,000 in equity tapped per borrower. While that per-borrower number is slightly down from Q1 2016 – but $6,000 higher than one year ago – the $22.6 billion total is the largest equity sum tapped since Q2 2009. Just to put that into perspective, though, it’s still a nearly 80 percent lower equity draw than at the peak in Q3 2005. And, given that we saw over $550 billion in tappable equity growth last year alone, this equates to borrowers only tapping into 15 percent of the growth in equity over the past 12 months, without even touching the $4.5 trillion balance in tappable equity available. All in all, it’s clear that cash-outs are helping to prop up the refinance market – their 42 percent share is up from only 30 percent in early 2015 when interest rates had also dropped. What’s more, refi volumes are down from 2015 – at least through the second quarter – but while overall they’re down nine percent from Q1 2015, rate/term refinances are actually down 25 percent over that same period.

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“Today’s cash-out refinance borrowers continue to present a relatively low risk profile, historically speaking,” Graboske continued. “The average credit score of 748 among Q2 2016 cash-out refinance borrowers is 67 points higher than that of the low point recorded in Q3 2006, and is in fact nearly 60 points higher than the overall average credit score from 2005 through 2007. In addition, post-cash-out loan-to-value ratios remain low. At 66 percent, it’s slightly higher than in Q1 2016, but it’s the second lowest quarterly average recorded in over 11 years. This is nearly six percent below the 2005-2007 average and 10 percent below the highs recorded in late 2008. In addition, while not specific to cash-out refinancing, we continue to see prudent behavior on the part of borrowers. Some 40 percent of Q2 2016 rate/term refinances involved the borrower reducing their loan term, the highest share of term reductions since late 2013/early 2014.”

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This month, Black Knight also found that the remaining inventory of loans in active foreclosure is declining at the fastest rate since 2014, and the rate of reduction has been accelerating throughout 2016. Together, New York and New Jersey account for more than 25 percent of all active foreclosure inventory in the country. Nationwide foreclosure inventories are down 23 percent year-to-date as compared to 17 and 16 percent in New York and New Jersey, respectively. In New York, where fewer than two percent of active foreclosures are making it to foreclosure sale (or some alternative liquidation) on a monthly basis, the average active foreclosure has been delinquent for 4.6 years. In New Jersey, that number is 4.1 years, while in Florida – which had long been the epicenter of the foreclosure crisis, but has since outpaced the national average in terms of foreclosure inventory reduction – it is 3.5 years; for all other states the average is 2.2 years.

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