Predictive Methods: MISMO’s Role In The Mortgage Industry

*MISMO’s Role in the Mortgage Industry*
**By William E. King**

***The Mortgage Industry Standards Maintenance Organization (MISMO) has had a significant impact on the way data is stored and shared since the collapse of the housing market in 2008. MISMO is transparent by design, uses a single business vocabulary and is available across the entire mortgage finance industry. Adoption of MISMO standards represent the most significant opportunity for professionals to meet industry demands for increased transparency, access to complete data sets and more supported analysis across the rapidly evolving mortgage finance landscape.

****In 1999, MISMO was formed as an independent affiliate of the Mortgage Bankers Association with a goal to “coordinate the development and maintenance of internet-based Extensible Markup Language (XML) real estate finance specifications.” Incorporated as a 501(c)6 not-for-profit corporation staffed with volunteer participants, MISMO seeks to provide a common vocabulary and definitions  in the exchange of data in the mortgage industry to enable clear and consistent communications among professionals.

****The guidelines that MISMO’s chief architect Greg Alvord leaned on the most during its creation, and still today, is a focus on eliminating redundancy and multiple meanings. At Veros’ 2012 Predictive Methods Conference this past June, Alvord highlighted his mantra, the four points outlined below, as the essence of what MISMO does in allowing for the flow and communication of standardized mortgage data:
>> Things with the same name are the same.

****>> Things with different names are different.

****>> Be conservative in what you send and liberal in what you accept.

****>> Send what you have, I will take what I need.

****Historically, mortgage information has been provided in Word or PDF documents, making the data difficult to extract, transfer or analyze. Electronic data standards should be software-agnostic allowing different systems to “talk” to each other in a common language. In this format, data can be integrated into a wide variety of internal systems for analysis and retrieval. Many proprietary languages have been developed, but typically require purchase and maintenance of specific software and hardware. This is not inherently bad, but it adds a layer of complexity. For example, there are many types of word processing programs available in the market, but in most cases, if your computer doesn’t have the same software or the same version, users won’t be able to interact with each other.

****MISMO creates effective data standardization and communication tools in the mortgage industry by promoting transparency, accuracy and efficiency. Just as the mortgage industry continues to evolve and move toward greater sustainability, MISMO continues to change to accommodate new industry regulations and continues to play a critical role in the success of industry-wide initiatives like the Uniform Mortgage Data Program.

****The MISMO platform is experiencing a series of upgrades that are being utilized by industry participants in their systems. In my next column I will explore why more organizations in the industry need to start implementing the upgraded MISMO platform, and provide guidance on best practices for adopting the latest version.

Predictive Methods: Reconciling Appraisal Outcomes

*Reconciling Appraisal Outcomes*
**By William E. King**

***It is common for lenders to get several valuations for a single property to ensure an accurate determination of value. These valuations need to be reconciled into a single, overall property valuation that will become the basis for the lending decision. Reconciliation is a method by which an appraiser or reviewer concludes a final, well-supported valuation of the property.

****In today’s environment of The Dodd-Frank Act, UCDP, and CFPB, managing appraisal outcomes can be challenging. Chief appraisers need to “see through” appraisal reports and challenge or dismiss valuations that aren’t well supported. In light of the highly regulated landscape, this requires greater objectivity than ever before.

****Key challenges that tend occur in reconciling estimations of property value include:

****>> Appraisal Reconsideration: If the property value is deemed unjustified by the owners or loan officer, an appraiser can be approached to reevaluate the value to determine if something was inadvertently excluded from the appraisal. Although rare, third parties will sometimes claim the property was over-valued given the comparables in the neighborhood.

****>> Avoiding Undue Influence: By definition, an appraisal is an unbiased opinion of value. USPAP requires that 1) an appraiser have no bias to the property; 2) appraisal results not be contingent on a predetermined result; and 3) the appraiser’s compensation not have any bearing on the outcome. Dodd-Frank has helped reduce undue influence on an appraiser, however, pressure does still exist.

****>> Mitigating Rep & Warrant Issues: When faced with a buy-back situation, one of the first areas of focus is the appraisal to ensure that it conformed to GSE appraisal requirements. If not, lenders may be faced with repurchasing a loan and dealing with the foreclosed property directly. Due diligence in appraisal review at loan origination, including reconciling multiple valuations can go a long way in preventing Rep & Warrant related buybacks.

****>> Managing Loss Severity: It is important that a property be correctly valued to minimize loss severity in short sale and REO situations.  Multiple valuations and a thorough reconciliation of those values can save lenders from more significant losses with defaulted/foreclosed properties.

****Many tools and practices are available to help ensure a higher level of accuracy and gap management in arriving at a property valuation conclusion. Thorough appraisal reconciliations must be supplemented with appropriate analytic tools. It is incumbent on lenders, whether through an AMC or direct panel management, to ensure the quality of the vendors utilized. AMCs derive their value through quality reviews and it is important for them to focus on the factors that really drive support for the value opinion. This topic will be discussed by a variety of industry experts in more detail during a panel at the 2012 Predictive Methods Conference June 4-6 in Southern California.

Predictive Methods: Using Data To Fight Mortgage Lending Fraud

*Using Data to Fight Mortgage Lending Fraud*
**By Chuck Rumfola**

***Mortgage loan fraud has always existed in the housing industry.  Unfortunately, many have either perpetrated mortgage fraud or fallen victim to it. This has happened in all economic cycles.  According to The Treasury Department’s Financial Crime Enforcement Network (FinCEN), instances of mortgage loan fraud spiked from 9,539 cases in 2001 to 93,564 in 2011. Given the prevailing need for awareness the industry is taking steps to combat fraud early on in the loan lifecycle. The industry must continue to fight this threat using a variety of increasingly sophisticated intelligence and tools that are more readily available to industry professionals than ever before.

****The Risk Takers

****There are many risk takers in the mortgage finance system that ultimately bears the weight of a fraudulent scheme. Credit guarantors play a critical role in uncovering fraud by having access to important loan data. Historically, loan-level data had not been leveraged by credit guarantors until long after the loan had gone bad. Discovering misrepresentations in the valuation for the first time at this stage is of little to no help – the damage is done. As we have seen, the absence of proper risk management has resulted in higher default rates that have left the taxpayer with a significant bill. Given this, the mortgage industry is moving toward a process where loan-level data will be used and analyzed during the loan manufacturing process, well before the loan closes and funds change hands.

****Fraud Solutions

****Electronic appraisal delivery initiatives and appraisal scoring are two solutions that can be used to help detect fraud in its early stages.

****Mortgage originators are using automated appraisal scoring tools to immediately review and evaluate appraisal data. This enables the originators to manage the collateral risk prior to the loan closing. These automated tools provide lenders with more confidence in their lending process as well as minimize the repurchase risk down the road.

****Similarly, the electronic appraisal delivery initiatives, mainly used by secondary market participants Fannie Mae and Freddie Mac, require appraisals to be delivered in MISMO-compliant electronic format during the loan manufacturing process and prior to the loan delivery. These agencies have positioned themselves to check, analyze and evaluate appraisals electronically in order to identify appraisal-related mortgage repurchase candidates before the mortgages are securitized.

****Combating mortgage fraud will continue to be a challenge for all industry professionals. There must be an effort by all to stop fraud through the use of sound and reliable tools and data. While this column spoke at a high level of early detection of lending fraud, the topic clearly warrants a deeper dialogue.  Be an active part of this discussion at the 2012 Predictive Methods Conference June 4-6 in Southern California and hear other industry experts present their ideas and vision for collateral risk management.

Predictive Methods: UMDP Post Mandate

*UMDP Post Mandate: Signals for Current and Projected Industry Change*
**By William E. King**

***The 2008 financial and housing market crash exacerbated the need for greater accountability and transparency in gauging the risk inherent in a property, and cautioned investors not to limit focus to consumer risk alone. As the economy grappled with the ramifications of the crash, there is no doubt that significant change was necessary for the U.S. finance and housing system to effectively recover.

****A major change came in the form of the Uniform Mortgage Data Program (UMDP) and its core initiatives UCDP, UAD and ULDD. UMDP was created by the government-sponsored enterprises Fannie Mae and Freddie Mac (GSEs) under the direction of their regulator, FHFA, to enable the GSEs to capture consistent data, drive improved loan quality and manage risk effectively. It does so by developing and implementing uniform appraisal and loan delivery data standards, and a joint appraisal data delivery system allowing the GSEs to evaluate clear and meaningful data about the property pre-delivery, which had not been previously available.

****This initiative marks the first time in recent history that an effort of this magnitude has been implemented to reform the U.S. housing finance system. The scope of UMDP marks a cornerstone for success in continuing to positively evolve the U.S. finance and housing markets. It calls to mind such noticeable housing system shifts as the creation of the GSEs themselves or the subsequent creation of the mortgage-backed securities market.

****March 19, 2012 marked a significant milestone as UCDP was effectively implemented, requiring all lenders to electronically submit UAD-compliant appraisal reports for conventional mortgages delivered to the GSEs. This effort took just 22 months from introduction to mandate, which equates to moving mountains in the mortgage world in a relatively short timeframe, especially when one considers the vast and fundamental changes which had to first take root. Beginning with the process of information gathering and working with appraisal software providers and educating appraisers and lenders alike, it is clear the change was significant and one can only assume has come with a unique set of challenges.

****The current discussion is centered on how this change, now fully implemented, will evolve within the GSEs and how the lenders and other affected appraiser/appraisal service providers will adapt their business to maximize the benefits intended under UMDP. Questions remain such as, “As the industry moves toward total adoption of XML, will PDFs continue to be relevant;” and “How will the availability of standardized data in such greater quantity impact the way the mortgage industry moves toward recovery”? These questions and others prevailing in the industry all seek to encourage the further understanding of UMDP and its core initiatives as the industry forges ahead. Join us at the 2012 Predictive Methods Conference June 4-6 in Southern California to discuss UMDP’s implementation and projected evolution in greater detail.