Banking Publication

® secondarymarketingexec.com
The Journal for Mortgage Banking Professionals
Vol. 31, No. 4 May - June 2017

Reaching
The Finish Line

Developing a true paperless mortgage has been
a marathon for the industry.

page 28

Hedging ➤16

With rates on the rise, it's time for lenders
to embrace hedging fundamentals.

Compliance ➤24

Will regulatory rollback cause history
to repeat itself?



® ContEntS
100 Willenbrock Road
Oxford, CT 06478 Features

(203) 262-4670 16  These ARE The ‘Good Old Days’
(203) 262-4680 Fax
secondarymarketingexec.com With the mortgage industry finally entering a rising rate environment,
[email protected] it’s time for lenders to embrace hedging fundamentals.
Publisher & By Don Brown
Vice President
Michael Bates 20  The Fastest Path To Activating A New Correspondent Business
[email protected]
Editor As lenders launch new correspondent channels, they are discovering the advantages of
Patrick Barnard outsourcing the needed back-shop functionality.
(203) 262-4670, ext. 234 By Debora Aydelotte
[email protected]
Editorial Assistant 22  Investing In QC Tech For Secondary Success
Amanda Fava
Creative Director It is becoming increasingly evident that investors prefer to work with lenders
Dawn S. Howe that have the best QC technology in place.
Production By Teri Sundh
Angel L. Hernández
Production Coordinator 24  The Big ‘If’
Sandra Minck
Information Systems Manager As the Trump administration pushes for regulatory rollback, many are wondering
Damase Caron whether history will repeat itself.
Office Manager By Jim Alvarez
Cheryl Samide
28  Getting Past The E-Closing ‘Wall’

Lenders have been in a marathon to make the end-to-end e-mortgage
a reality - and it appears the finish line is now finally in sight.
By Stanley Street

1 16

Zackin 22

Publications Departments

President 6  Housing Markets 24
Paul Zackin
[email protected] • Existing-home sales sprung up in March
• New home sales, housing starts took nice jumps
ADVVaEnReTssISaIWNGilliSaAmLsES
(800) 325-6745, ext. 233 in March

williams@ 10  Origination
secondarymarketingexec.com
• MBA: Mortgage revenues increased in 2016
Secondary Marketing Executive (ISSN: 0891- • Flagstar to acquire Opes Advisors’ origination business
2947) is published monthly by Zackin Publica-
tions, Inc. Subscription: $48 per year. Advertising, 14  Regulatory Compliance
Editorial, Production and Circulation offices are at
100 Willenbrock Road, Oxford, CT 06478; (203) • CFPB clarifies HMDA rule
262-4670. Copyright © 2017 by Zackin Publica- • Pam Patenaude is the new HUD deputy secretary
tions, Inc. All rights reserved; no reproduction
without written permission from the publisher. 32  Secondary Market
POSTMASTER: Address correction requested:
Secondary Marketing Executive, 100 Willenbrock • MBA opposes “recap and release” of GSEs
Road, Oxford, CT 06478. • Freddie Mac completes another CRT deal

Secondary Marketing Executive ❏ May - June 2017 3

FRONT OFFICE

Strange Days Indeed

Patrick Barnard

These are strange, confusing times in the mortgage in- to ensure that the companies have adequate buffers to pre-
dustry. On the one hand, we have an administration vent treasury draws.
in the White House that is dead set on rolling back
“[The] FHFA has explicit statutory obligations to ensure
financial regulation, yet it can’t seem to get anything done that each enterprise ‘operates in a safe and sound manner’
in that area because its proposals lack the needed support and fosters ‘liquid, efficient, competitive and resilient na-
in Congress. Plus, there are a million other distractions oc- tional housing finance markets,’” Watt told the committee.
curring both domestically and globally that are constantly “To ensure that we meet these obligations, we cannot risk
causing regulatory rollback and government-sponsored en- the loss of investor confidence. It would, therefore, be a
terprise (GSE) reform to fall back to the bottom of the pile.
serious misconception for members of this committee, or
Practically every week, we see headlines to the effect of for anyone else, to consider any actions [the] FHFA may
“Dodd-Frank Needs To Be Rolled Back Now,” yet propos- take as conservator to avoid additional draws of taxpayer
als like the Financial CHOICE Act currently don’t appear to support either as interference with the prerogatives of Con-
stand a chance in the Senate, where measures need a mini- gress, as an effort to influence the outcome of housing fi-
mum of 60 votes in order to even get voted on.
nance reform, or as a step toward recap and release. [The]
We also keep reading that “GSE Reform Needs To FHFA’s actions would be taken solely to avoid a draw dur-
Happen Soon,” but, as far as the White House and the ing conservatorship.”
Republican-led Congress go, we don’t seem to be much
As I said in my last editorial, the lack of certainty with
closer to achieving that either. Yes, there are some solid regard to GSE reform and regulatory rollback is resulting
proposals out there: In April, the Mortgage Bankers As- in a lack of certainty over where the mortgage market is
sociation (MBA) unveiled its plan
headed. Yes, mortgage lenders are
for GSE reform, which has gener-
ally seen strong support from the Now is not the time to sit generally supportive of relaxing
some of the regulations that were
industry. But GSE reform remains
an incredibly dense and complex on the sidelines. put in place following the crisis,
but as is to be expected, the devil
topic for Congress to tackle - and
is in the details: Which parts of
it would seem that with all of the
the Dodd-Frank Act and/or which
other things going on, it’s unlikely that our elected officials parts of the Consumer Financial Protection Bureau’s rules
will have time to dissect the proposals that are currently on pertaining to mortgage origination should be eliminated or
the table and come away with a definitive plan.
changed? And what is the correct process for doing that?
At the same time, there is an increased urgency right The same goes for GSE reform: Everyone has got to be on
now for GSE reform to happen soon. In mid-May, Mel Watt, the same page.
director of the Federal Housing Finance Agency (FHFA),
Meanwhile, the market fundamentals aren’t looking all
told members of the U.S. Senate Committee on Banking, that bad: Unemployment is at pre-crisis lows, wages are
Housing and Urban Affairs that Fannie Mae and Freddie starting to finally inch up, home prices continue to rise,
Mac need to be recapitalized and taken out of conservator- mortgage rates continue to hold at near-historic lows, and
ship as soon as possible because, starting in 2018, there is consumers are generally positive about the housing mar-
a risk they could need Treasury draws if they sink into the ket. We’ve even seen some indication that economists’
red. That’s because, as of Jan. 1, 2018, the amount of “buf- forecasts for home purchases this spring were accurate -
fer” that the GSEs have for their operations under their Se- for example, the National Association of Realtors recently
nior Preferred Stock Purchase Agreements (PSPAs) with the reported that April existing-home sales increased 4.4%
U.S. government will shrink to zero.
compared with March, and the MBA’s Mortgage Applica-
“At that point, neither enterprise will have the ability to tions Survey shows that purchase volume has been steadily
weather any loss it experiences in any quarter without draw- increasing since the end of February.
ing further on taxpayer support,” Watt told the committee.
All the mortgage industry can do, for now, is stay fo-
Although Watt said he believes that comprehensive GSE cused on the regulations that are in place and try to capi-
reform should be entirely up to Congress, not the FHFA, he talize on the market dynamics that are in play. At the same
indicated that his agency will likely start recapitalizing the time, everyone in the industry needs to keep close tabs on
GSEs over the next few months while plans for the transi- the legislative proposals that are on the table. Now is not
tion are being developed. He emphasized that the FHFA the time to sit on the sidelines. The industry must be ac-
would do this not to help facilitate proposed (and contro- tively involved in the legislative process if it is to have any
versial) plans to “recap and release” the GSEs, but rather control over its destiny.
SME

May - June 2017 ❏
4 Secondary Marketing Executive



HouSing MarkEtS

Existing-Home Sales Sprung Up In March

Existing-home sales in March - the most recent month of 90 days in March, while foreclosures sold
for which data was available at press time - reached in 52 days and non-distressed homes took
an annual pace of 5.71 million, up 4.4% from a 32 days (which is the shortest since NAR
downwardly revised 5.47 million in February and up began tracking in May 2011). About 48% of
5.9% compared with March 2016, according to the Na- homes sold in March were on the market for
tional Association of Realtors (NAR). less than a month.

It was the strongest pace for existing-home sales in 11 The fact that mortgage rates have de-
years. creased for the past several weeks certainly
helps.
Only the West saw a decrease in existing-home sales in
March. Existing-home sales there were down 1.6%, month Roughly 32% of existing-home sales
over month. The Northeast surged 10.1%, while the Mid- in March went to first-time home buyers -
west jumped 9.2% and the South increased 3.4%. unchanged from February and up from 30%
compared with a year ago.
The report includes sales of townhouses, condomini-
ums and co-ops. About 23% of transactions were all cash -
down from 27% in February and down from
Lawrence Yun, chief economist for NAR, says the in- 25% a year ago.
crease in March means things look more “promising” for
the spring home buying season. Individual investors, who account for
many cash sales, purchased 15% of homes
“A rising number of households dipped their toes into in March - down from 17% in February but up from 14%
the market and were successfully able to close on a home a year ago. About 63% of investors paid in cash in March.
[in March],” Yun says in a statement. “Although finding Distressed sales, including foreclosures and short sales,
available properties to buy continues to be a strenuous represented about 6% of sales in March - down from 7%
task for many buyers, there was enough of a monthly in February and down from 8% a year earlier.
increase in listings in March for sales to muster a strong
gain. Sales will go up as long as inventory does.” Pending Home Sales Dipped
0.8% In March
The median existing-home price for all housing types in
March was $236,400, up 6.8% from $221,400 in March After jumping 5.5% in February, pending home sales
2016. dipped 0.8% in March, according to the National Associa-
tion of Realtors (NAR).
As of the end of March, there were about 1.83 mil-
lion existing homes available for sale, which is up 5.8% Still, pending home sales were up 0.8% compared with
compared with February but down 6.6% compared with March 2016.
March 2016.
The month-over-month dip in March was not due to a
That’s about a 3.8-month supply at the current sales lack of buyer demand but, rather, low inventory, which
pace. resulted in many would-be buyers not being able to sign
contracts.
Properties typically stayed on the market for 34 days
in March - down from 45 days in February and 47 days a “Home shoppers are coming out in droves this spring
year ago. and competing with each other for the meager amount of
listings in the affordable price range,” says Lawrence Yun,
Short sales were on the market the longest, at a median chief economist for NAR, in a statement. “In most areas,
the lower the price of a home for sale, the more competi-
May - June 2017 ❏ tion there is for it.”
6 Secondary Marketing Executive
Yun says low inventory is part of the reason why first-
time buyers have yet to make up a larger share of the
market this year. He worries that the painfully low sup-
ply levels this spring could push home prices up higher,
which, in turn, will create more affordability problems.

About 42% of homes in March sold at or above list
price, which is the second-highest percentage since NAR
began tracking pending home sales in December 2012.

“Sellers are in the driver’s seat this spring, as the intense
competition for the few homes for sale is forcing many
buyers to be aggressive in their offers,” Yun says. “Buyers
are showing resiliency, given the challenging conditions.
However, at some point - and the sooner the better - price

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not an advertisement for the extension of credit to customers.

HouSing MarkEtS to come. Building permits in March were at a rate of about
1.260 million, an increase of 3.6% compared with 1.216
growth must ease to a healthier rate. Otherwise, sales million in February and an increase of 17.0% compared
could slow if affordability conditions worsen.” with 1.077 million in March 2016.

Existing-home sales are forecast to reach about 5.64 Permits for single-family homes were at a rate of about
million this year - an increase of 3.5% from about 5.45 823,000, a decrease of 1.1% compared with about
million in 2016, Yun says. 832,000 in February. Permits for multifamily homes were
at a rate of about 401,000, an increase of 18.3% com-
The national median existing-home price this year is pared with about 339,000 in February.
expected to increase around 5%.

In 2016, existing sales increased 3.8%, and prices rose
5.1%.

Housing Starts Fell 6.8% In March CoreLogic: U.S. Home Prices
Housing starts in March were at a seasonally adjusted Continued To Climb In March
annual rate of 1.215 million, a decrease of 6.8% com- U.S. home prices increased 1.6% in March compared
pared with a revised 1.303 million in February but an with February and increased 7.1% compared with March
increase of 9.2% compared with 1.113 million in March 2016, according to CoreLogic’s home price index report.
2016, according to estimates recently released by the U.S.
Census Bureau and U.S. Department of Housing and The firm notes that it revised its estimates for February.
Urban Development. As of the end of March, U.S. home prices were 2.8%
within the peak set in June 2006. It should be noted that
Starts of single-family homes were at a rate of about the report represents the average U.S. home price - home
821,000, a decrease of 6.2% compared with about prices are increasing across most of the country, but pock-

875,000 in February. Starts of multifamily dwellings ets remain where home prices are far below the peak set
(five units or more per building) were at a rate of about in the pre-crisis years.
385,000, a decrease of 6.1% compared with 410,000 in
Currently, CoreLogic is forecasting that home prices
February.
will increase 0.6%, on average, between March and April
The estimates for building permits, however, indicate and rise 4.9% from March 2017 to March 2018.
that housing starts should start to increase in the months
“With a forecasted increase of almost five percent

New Home Sales Took Nice Jump In March over the next 12 months, the index is ex-
pected to reach the previous peak during

New home sales in March were at a seasonally adjusted annual rate the second half of this year,” says Frank
of about 621,000, an increase of 5.8% compared with a revised rate of
about 587,000 in February and an increase of 15.6% compared with Nothaft, chief economist for CoreLogic, in
about 537,000 in March 2016, according to figures recently released
by the U.S. Census Bureau and the U.S. Department of Housing and a statement. “Prices in more than half the
Urban Development.
country have already surpassed their previ-
It was the third straight month that new home sales increased on a
month-over-month basis. ous peaks, and almost 20 percent of met-

The median sales price of new homes sold in March was $315,100. ropolitan areas are now at
The average sales price was $388,200.
their price peaks. Nationally,
As of the end of March, there were about 268,000 new homes avail-
able for sale in the U.S. - about a 5.2-month supply at the current sales price growth has gradually
rate.
accelerated over the past
[The March] increase in new home sales is aligned with solid builder
confidence and shows that the spring home buying season is off to a half-year, while rent growth
strong start,” says Granger MacDonald, chairman of the National As-
sociation of Home Builders (NAHB), in a statement. “However, builders for single-family rental
are concerned that ongoing increases in building mate-
rial costs will hurt housing affordability, especially given homes has slowly deceler- Frank Nothaft
[the recent] proposal by the Department of Commerce ated over the same period,
to impose a hefty tariff on Canadian lumber.”
according to the CoreLogic Single-family
“The March sales numbers are the second highest on
record since the Great Recession, which is especially Rental Index, recording a three percent rise
encouraging considering the poor weather conditions
throughout many parts of the country,” adds Robert Robert Dietz over the year through March.”
Dietz, chief economist for NAHB. “With tight existing-home inventory,
rising household formations and continued job creation, we can expect “A potent mix of strong job gains,
further growth in new home sales moving forward.”
household formation, population growth
Regionally, new home sales increased 25.8% in the Northeast, 16.7%
in the West and 1.6% in the South. Sales fell 4.5% in the Midwest. and still-attractive mortgage rates in the face

of tight inventories are fueling a continu-

ing surge in home prices

across the U.S.,” adds Frank

Martell, president and CEO

of CoreLogic. “Price gains

were broad-based, with 90

percent of metropolitan ar-

Frank Martell eas posting year-over-year
gains. Major metropolitan

areas were especially hot, with CoreLogic

data indicating that four of the largest 10

markets are now overvalued. SME

May - June 2017 ❏
8 Secondary Marketing Executive

CELEBRATING

YEARS

We believe in making homeownership a wish that comes true. Through our MPF
partnership with local community lenders, we have helped more than 1.6 million
households over these 20 years achieve the dream of homeownership. The
American dream of being able to qualify and afford your own home should be
attainable and available in your local community. Our members, partnering with us,
have made this happen. Join us in celebrating this amazing achievement and let’s
look forward to helping many more people reach their financial and housing goals.

VISIT WWW.FHLBMPF.COM OR CALL 877.463.6673

ORIGINATION

MBA: Mortgage Revenues Increased In 2016,
But So Did The Cost To Originate

The average profit per mortgage originated increased end of the year,” says Marina Walsh, vice president of
to $1,346 in 2016 - up from $1,189 in 2015, ac- industry analysis for the MBA, in a statement. “Including
cording to the Mortgage Bankers Association’s both production and servicing operations, 94 percent of
(MBA) Annual Mortgage Bankers Performance Report, the firms in the study posted overall pre-tax net financial
profits in 2016, from 92 percent in 2015.”
which is based on data reported by independent mortgage

bankers. Flagstar To Acquire Opes Advisors’
Mortgage Banking Business
What’s more, the average loan balance reached a study

high of $244,945 for first mortgages - up from $242,480

in 2015. It was the seventh consecutive year of rising loan

balances on first mortgages. Flagstar Bancorp recently acquired the mortgage bank-

This translated into higher revenues, which also ing business of Opes Advisors Inc. Terms of the deal,

reached a study high of $8,555 per loan in 2016. which closed in May, were not disclosed.

At the same time, production expenses reached a study Opes Advisors has 39 retail locations in California,

high of $7,209 per loan, offsetting the increase in revenue. Oregon and Washington. Most of these locations are in

Total loan production expenses - commissions, compensa- wealthy areas, resulting in high credit quality originations.

tion, occupancy, equipment, and other expenses and cor- In 2016, Opes’ 160 mortgage advisors closed approxi-

porate allocations - increased to $7,209 per loan, up from mately $3 billion in originations - mostly purchases.

$7,046 in 2015. The company also has a wealth advisory arm that cur-

Personnel expenses averaged $4,801 per loan in 2016, rently has approximately $325 million in

which is up from $4,699 per loan in 2015. assets under management.

All together, lenders originated 11,161 loans, or nearly Flagstar will operate Opes Advisors as a

$2.7 billion per company, in 2016 compared with 9,906 separate division with its own brand, pro-

loans, or about $2.4 billion per company, viding a strategic expansion to Flagstar’s

in 2015. retail home lending franchise, Flagstar says

For the mortgage industry as a whole, in a release. Alessandro P.
DiNello
the MBA estimates that production volume Alessandro P. DiNello, president and
CEO of Flagstar, says the acquisition fits
reached $1.89 trillion in 2016 - up from

$1.68 trillion in 2015. in the bank’s strategic goal of growing its retail mortgage

The report, which was released in April, Marina Walsh business. In addition, it is a “good fit culturally,” he says.
also shows that mortgage lenders with ser-
“We like the deep mortgage experience of their manage-

vicing portfolios experienced significant fluctuations in the ment team; we like their strong purchase mortgage origina-

valuation of their mortgage servicing rights related to cor- tion focus; and we like their long track record of success,”

responding interest rate fluctuations during 2016. DiNello says. “We look forward to working with the entire

“Most servicers reported net servicing financial losses Opes Advisors team to share best practices and create a

in the first half of the year, followed by recoveries by the first-class borrowing experience for our customers.”

May - June 2017 ❏
10 Secondary Marketing Executive

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ORIGINATION

The deal follows Flagstar’s acquisition of the residential buyers in 2016 - up from 15% in 2015 to reach a survey
mortgage delegated correspondent lending platform of high.
Stearns Lending LLC, along with certain related assets, in
late February. Foreclosure rates, meanwhile, dropped more than a
quarter percent to 0.37%, down from 0.63% in 2015.
Survey: About 9% Of Mortgages In
2016 Were Non-QM Loans According to the survey, heightened regulation remains
Non-qualified mortgage (non-QM) loans represented a major concern for bankers, followed by rising interest
rates, compliance requirements under the TILA-RESPA In-
about 9% of total originations in 2016 - down from 14% tegrated Disclosures rule, and insufficient inventory in the
housing market.
in 2015, according to a survey recently conducted by the
Average Number Of Days To Close
American Bankers Association (ABA). A Mortgage Fell Again In March

The survey further reveals that more than 30% of banks Refinances fell to 37% of all loans flowing through Ellie
Mae’s Encompass loan origination system in March, the
are restricting lending to QM segments only, and 45% are mortgage software firm reports in its Origination Insight
Report.
making non-QM loans only to targeted markets or with
It was the lowest refinance share since July 2016, ac-
other restrictions. cording to the firm’s data.

High debt-to-income levels, in addition to insufficient The average number of days to close a mortgage for all
loan types was 43 days, down from 46 days in February to
documentation, continue to be the most common factors reach the shortest time to close since February 2015. It was
the third month straight that the average number of days to
prohibiting mortgage loans from meeting QM standards, close fell.

the survey finds. The average time to close a refinance loan was 43 days,
down from 47 days the month prior. The average time to
“Non-qualified mortgage loans have close a purchase loan was also 43 days, down from 45 days.

been subject to heightened regulatory re- The closing rate in March, as per Ellie Mae’s data, was
67.9%, down from 70.6% in February. The closing rate on
quirements and risk, reducing the willing- refinances was about 64.4%, and the closing rate on pur-
chases was about 74.8%.
ness of banks to extend these loans to even
The average FICO score for all closed loans was 721,
the most creditworthy borrowers,” says Rob- up slightly from 720 in February. About 68% of all closed

ert Davis, executive vice president of the Robert Davis loans had FICO scores over 700.
ABA, in a statement. “Despite ongoing reg- About 71% of purchase loans had

ulatory hurdles, community banks remain resilient in their FICO scores over 700. About 66% of refi-
nances had FICO scores over 700.
ability to manage risk levels, increase productivity and

introduce more first-time home buyers into the market.”

Despite the regulatory challenges, banks have managed

to show positive trends in loan production. For example,

16% of single-family mortgages went to first-time home

MBA: Mortgage Credit Availability
Decreased Slightly In April

After increasing 3.2% in March, mortgage credit availability decreased Land Home Financial
Services Completes First
0.2% in April, falling to a score of 183.0 on the Mortgage Bankers Asso- E-Closing

ciation’s (MBA) Mortgage Credit Availability Index (MCAI). Mortgage lender Land Home Financial
Services Inc., in collaboration with MER-
The March index score was 183.4, and the February score was 177.8. SCORP Holding Inc. (MERS) and Fannie
Mae, recently completed its first e-closing
The index, which was benchmarked to 100 in March 2012, uses data via its retail origination channel.

from Ellie Mae’s AllRegs Market Clarity business information tool to arrive The lender reports that it has been
working toward a compliant, next-
at its estimates. A decrease in the MCAI indicates that lending standards are generation digital mortgage solution for
about the past year. This completely elec-
tightening, while increases in the index are indicative of loosening credit. tronic closing process involved the use of
an e-note.
Looking at the four component indices, credit availability for conform-
“Offering e-closing has long been
ing loans decreased 0.9%; credit availability for conven- a goal at Land Home, as it unifies the
needs and desires of our clients with the
tional loans decreased 0.6%; credit availability for jumbo regulatory ambition of the Consumer Fi-
nancial Protection Bureau,” says Brad
loans decreased 0.4%; and credit availability for govern- Waite, president and CEO of Land Home,
in a release.
ment loans remained unchanged compared with the previ-

ous month.

“After some program changes early in the year and

some merger activity among investors, credit availability Lynn Fisher
held fairly steady in April, with little discernible change

in the composition of the supply of credit for government and jumbo

programs,” says Lynn Fisher, vice president of research and economics

for the MBA, in a release. “Conforming credit availability has slipped a

bit since the beginning of the year, with fewer program offerings along a

range of credit characteristics and no particular culprit.”

May - June 2017 ❏
12 Secondary Marketing Executive

Many lenders are now adopting e- increased focus on compliance, is fueling an increasing
mortgage technology in order to meet the
needs of millennials, who are almost en- demand for digital e-mortgages,” adds Michael Cafferky,
tirely using online and mobile technology
to shop for homes and apply for mortgages. product development manager for Fannie Mae. “We are
The goal is to create a more simplified and
seamless mortgage experience - from appli- eager to continue support of our customers like Land
cation through closing - that takes less time Brad Waite
and involves far less paper. Home in driving their business forward with innovative

Land Home also worked with PeirsonPatterson LLP, a mortgage solutions.”
Dallas-based financial services compliance and technol-
ogy firm; FirstFunding Inc., a Dallas-based privately held The MERS e-registry is the system of record that identi-
non-depository (non-bank) financial services company;
and Placer Title Co./National Closing Solutions to process, fies who is in control of the e-note.
update and secure its first e-closing.
“The model Land Home Financial Services and First
“This is just one of many steps we are taking to improve
the customer experience and drive efficient, on-time clos- Funding are using to register e-notes on the MERS e-
ings to support our community-based branches and real
estate partners across the nation,” says Brenda Usher, chief registry is a truly collaborative effort,” says Katie Paolange-
operating officer for Land Home.
li, vice president of e-commerce and industry initiatives
“The demand for speed and certainty, coupled with an
with MERS. “FirstFunding does the registrations on Land

Home’s behalf, which is a model we believe could work

well for many other companies and their trading partners.

This was an integration effort that really came together to

create value for all parties.”

Established in 1988 and headquartered in Concord, Ca-

lif., Land Home has more than 80 branch office locations

across the nation and continues to expand into local com-

munities. SME

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New York, NY 10019 Lending• 2001: Cunderskov
Phone: (777) 777-1177 Møbelfabrik was founded
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Contact Vanessa Williams John smith nectem aut harchilis consequo ium
For Remaining Space CEO, Founder quae dolor as etur sint et
(800) 325-6745, ext. 233 quossum vero cone net
[email protected] Webinars hillab ipsam, officae plibus.
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volore non nusdae
landitiusam fugitatiusam

Secondary Marketing Executive ❏ May - June 2017 13

REgulatoRy CoMplianCE

CFPB Clarifies HMDA Rule

The Consumer Financial Protection Bureau (CFPB) in the rule after it was first introduced in 2014 by exempting
April issued a set of clarifications to its 2015 Home lenders that originate fewer than 25 mortgages a year and
Mortgage Disclosure Act (HMDA) rule and has gath- by allowing financial institutions with high volume to sub-
ered industry feedback on the proposed changes. mit HMDA data on a quarterly basis rather than an annual
basis. The bureau also sought to align HMDA data require-
The changes reflect “the bureau’s ongoing and substan- ments with well-established industry data standards.
tive engagement with stakeholders in the marketplace and
will help [the] industry meet its new reporting obligations,” Regardless, most mortgage lenders feel over-burdened
says Richard Cordray, director of the CFPB, in a release. by the new rules: Not only do they make mortgage opera-
tions more complex and costly, but they also could poten-
The 150-page set of changes was open for public com- tially result in major enforcement action by the CFPB, as
ment for 30 days after its publication in the Federal Regis- well as lawsuits, due to minor errors resulting from techni-
ter, which took place in April. cal glitches.

The bulk of the new reporting requirements, as per the Keith Noreika To Serve As Acting
2015 final rule, are to take effect Jan. 1, 2018. Comptroller Of The Currency
Keith A. Noreika will serve as acting comptroller of the
The bulk of the proposed changes simply clarify lan-
guage as opposed to adjusting the rules themselves. Among currency, filling in for departing Comptroller of the Cur-
the numerous technical corrections and minor changes is
clarification of certain key terms, such as “temporary fi- rency Thomas J. Curry, who left the posi-
nancing” and “automated underwriting system.”
tion on May 5.
The proposal would also establish transition rules for
two data points, loan purpose and the unique identifier “Serving as comptroller of the currency
for the loan originator. The transition rules would permit
financial institutions to report “not applicable” for these has been the highlight of my career,” Curry
data points when reporting certain loans that they pur-
chased that were originated before certain regulatory re- says in a release. “The comptroller is a
quirements took effect.
special job, and I am proud to have served
Dan Berger, president and CEO of the National Asso- with 4,000 men and women who showed Thomas J.
ciation of Federally-Insured Credit Unions (NAFCU), says Curry
although the association “appreciates the clarifications, such deep dedication to the agency’s mis-
the rule still represents a huge regulatory burden for credit
unions.” sion of ensuring the safety and soundness of the federal

“NAFCU strongly encourages the bureau to reconsider banking system and the fair treatment of its customers.”
its enormous expansion of the HMDA data collection set,
raise the exemption thresholds and delay implementation Curry, who completed his five-year term on April 9,
of this rule to give credit unions more time to prepare,”
Berger further adds in a statement. plans to return home to Boston, according to the release.

The CFPB dialed back the reporting requirements for Noreika is currently a partner at Simpson Thacher &

May - June 2017 ❏ Bartlett LLP and was a partner at Covington & Burling,
14 Secondary Marketing Executive
specializing in banking regulation. He has extensive expe-

rience advising regional, multinational and other banks on

structuring their operations, including compliance with the

Volcker Rule and Consumer Financial Protection Bureau

regulations, as well as the Bank Secrecy Act and anti- development, real estate and public policy.
money-laundering rules.
She is president of the J. Ronald Terwilliger
Noreika has represented national banks before the
Supreme Court and has worked extensively with all fed- Foundation for Housing America’s Families.
eral bank regulatory agencies. He has also served as an
adjunct faculty member at the University of Pennsylvania She previously served as assistant secretary
Law School and the University of Virginia School of Law.
for community, planning and development for
Trump Taps Pam Patenaude To
Become Next HUD Deputy Secretary HUD during the George W. Bush administra-

The Trump administration in late April announced its Pam tion. She is also the former director of housing
intent to nominate Pam Patenaude to serve as the next Patenaude policy at the Bipartisan Policy Center.
deputy secretary of the U.S. Department of Housing and
Urban Development (HUD). “Pam is an exceptional choice for the po-

Patenaude - who some previously speculated would be sition,” says David H. Stevens, CMB and president and
Trump’s pick to become HUD secretary - has more than
25 years of experience in housing, community economic CEO of the Mortgage Bankers Association, in a statement.

“Personally, I have worked with her for a number of years,

and she is exactly the kind of leader who will help sup-

port the secretary and also address the critical issues ahead

for HUD. She has a well-informed understanding of the

agency and essential technical knowledge of the real estate

finance industry. I would encourage the Senate to move

swiftly in confirming her nomination.” SME

Financing the th
American Dream
45 Annual

Western Secondary
Market Conference

July 19-21, 2017

Westin St. Francis
San Francisco

www.CMBA.com

Secondary Marketing Executive ❏ May - June 2017 15

n
HEdging

These ARE The
‘Good Old Days’

Over the past eight years, mortgage banking has extremely low. However, in the context of the recent past,
been prosperous, thanks to a low rate environ- it certainly represents a rising rate trend - an environment
ment in which refinances have abounded. the industry has not experienced since the middle part of
However, this may be changing. We are just now see- the last decade. To navigate this environment, lenders will
ing the beginning signs of a long-anticipated rising rate have to be prepared for the change in their pipeline’s dy-
market. The tale is told in the numbers. The Fannie Mae namics to measure performance and focus on maximizing
par rate reached its low point in early July, at 2.25%. Since efficiency by implementing available technology.
then, the industry experienced a choppy but steady in-
crease in rates. Change in cashflow
The most immediate and significant change lenders
From July to early November, there was a gradual creep-
up from the low to 2.5%. Then, rates rose quickly - another will experience in a rising rate environment will be in
50 basis points (bps) in November. After that surge, the mar- their cashflows. Rather than the nagging and disruptive
ket reverted to a more choppy but consistent upward march settlement charges lenders pay to the broker/dealers on
- another 20 bps to where it is now, in the range of 3.18%. their hedge positions in an improving market, they will
experience the opposite in a declining market. Loans will
Let’s face it: In a larger historical context, rates are still

May - June 2017 ❏
16 Secondary Marketing Executive

be sold below the price at which they were locked, and correlation between the IRLC and the trades used to man-
the lenders will realize lump sum cash infusions from the age the risk incurred when one provides a potential bor-
broker/dealers on the monthly settlement dates. rower with an IRLC.

In an improving market, most lenders tend to migrate First, there is the pull-through assumption. Any hedge
away from a best efforts strategy. In an improving market, makes an assumption as to how many IRLCs will mature
cash flows on a regular basis, as loans are sold. Due to into saleable loans. Regardless of how one arrives at that
improved market pricing, those loans are worth more at assumption, the dollar volume of the IRLCs in the hedge
the time of sale than they were when the lender gave the and the amount of coverage will not match. This alone
borrower the interest rate lock commitment (IRLC). Con- makes it impossible to designate which trades would be
versely, a lender’s hedge position is generally in a losing attributed to specific loans; and consequently, it is impos-
posture, which causes lumpy cash outlays on settlement sible to accurately calculate the exact gain or loss on any
dates. specific loan.

These cash outlays can be confusing and disconcert- Additionally, to manage a hedge position efficiently,
ing. The key to overcoming this concern is to understand it is often wise not to trade in and out of coverage with
clearly the gain on sale, on the loan side. To measure that, each new IRLC. For example, if $1 million of new IRLCs
the lender needs to know the base price when the IRLC are granted on Monday and one has a pull-through as-
was granted to the borrower, the predetermined profit sumption of 80%, one would establish a hedge position

With the mortgage industry finally entering a rising rate environment,
it’s time for lenders to embrace hedging fundamentals.

By Don Brown

margin the lender priced into the loan, and the by selling forward $800,000. Let’s assume the lend-
final commitment price when the lender agreed er is using to be announced’s (TBAs) as its short
to sell the loan. These numbers should be readily position.
available in the lender’s secondary reporting and
should enable management to understand how the On Tuesday, another $1 million is locked, and
gain on the sale of the loans compensates for the $500,000 falls out. The lender now has a total
negative hedge position. position of $1.5 million. However, unless the lock
periods or note rate of the new IRLCs was significantly
The opposite occurs in a declining market. In that case, different, one would not pair out of $400,000 of the cov-
the loans are being sold at a lower price than what they erage and then sell forward another $800,000. Instead,
were valued when the IRLC was granted. The positive the lender is more likely to simply sell forward another
hedge position should offset this decrease in value. How- $400,000 of TBA coverage. The result is that the lender
ever, with cash coming in from both investors and broker/ has now “muddied the waters” in trying to figure out
dealers, it tends not to raise the red flags that the improv- which hedge position applies to which loans.
ing market cashflow pattern creates. Finally, there always will be a mismatch between the
dollar value and the coupon mix of the IRLCs and that of
To get to one’s overall profitability, however, the same the hedge position. The hedge, or short position, is estab-
analysis applies. If one can understand one’s pricing and lished in $500,000 or sometimes $250,000 increments.
one’s margins, then one can quickly determine one’s prof- If one’s IRLCs in a day, after pull-through assumption,
itability. equal $549,000, one can sell forward either $500,000
or $750,000. With the former, one will be long $49,000
The key is having the right data at one’s fingertips. At (more IRLC than trades), and with the latter, one will be
our firm, we provide customers with an executive summa- short $201,000.
ry, as well as a mark to market report, that enables them The same mismatch happens because the note rates
to quickly identify all of the necessary information so they don’t match exactly the hedge coverage that the lender
can clearly explain to management the cause and impact put in place. The result is hedge inefficiency, some of
of the changing cashflow due to the deteriorating market which is inevitable in managing any pipeline. The key is
environment. to minimize the inefficiency by understanding the hedge
position as clearly as possible and preferably in real time.
The unicorn For the foregoing reasons, we encourage customers to
Here’s a warning against attempting to determine - and, wean themselves off of the loan-level market to market
as a key performance indicator. There are some firms that
subsequently, manage by knowing - the overall loan-level choose to attempt to identify this measure; just know that
profitability. This measure might as well be called “the any such calculation by its nature involves assumptions as
unicorn”: It seems like it should exist - and its beauty is to what security was used to cover what IRLC and what the
alluring as a key performance indicator. However, what is price of that security was at the time the IRLC was granted.
easy in a best efforts world is not so easy in a mandatory
environment.

The reason for this is that there is no one-to-one

Secondary Marketing Executive ❏ May - June 2017 17

n Generally, in a rising rate market environment, we an-
HEdgiNg ticipate that the character of the pipeline will change. The
portion that is for purchases, rather than refinances, will
The better practice is to transition from a loan-level take center stage. Generally, pull-through on purchase
performance mechanism to a periodic (typically monthly loans tends to be more stable. Borrowers are focused on
or annually) pipeline performance measurement. Using closing their real estate deals. Once appraisals have been
the data points described previously, a lender can measure completed, the borrower has a much greater tendency
its secondary performance over its predetermined profit to stick with the rate unless there is a significant market
margin and come up with numbers that will make sense change. Accordingly, we anticipate modeling pull-through
to its accounting team as it balances the books. coverage at a higher rate.

No margin calls However, in the era of big data and massive computing
Getting back to the declining market posture, another power, the need to speculate has decreased immensely.

positive outcome is that broker/dealer margin calls Our practice is to study pipeline behavior across multiple
loan characteristics and then to adjust the model based
are unlikely. In an improving market, one’s hedge on the results of that analysis. For example, one’s pull-
through may be affected by the status of the loan, the type
position runs negative. of loan, the originating branch or loan officer, the state,
the sales channel, or a multitude of other potential loan
Depending on the policy Regardless of characteristics.
of each broker/dealer,
one may be subject to a the market Additionally, it may be that multiple factors are working
margin call if that posi- in concert. For example, the impact of a market change
tion mounts beyond the circumstances, on pull-through is likely to be great in the early stages
threshold. In a deterio- it is always of the origination process. Loans in the coastal states are
likely to be more volatile, as are loans from a call center
rating market, the hedge important to origination process. The amount of adjustment necessary
position is in the posi- remember the can be extremely nuanced. The best practice is to review
tive, so there is no longer one’s pull-through at least quarterly - or more frequently if
one starts seeing actual pull-through percentages diverging
any need to prepare for a fundamentals from one’s model.
margin call.
Those margin calls, al- of pipeline Back to fundamentals
Regardless of the market circumstances, it is always
though necessary to keep management.
the broker/dealers finan- important to remember the fundamentals of pipeline man-
agement.
cially healthy (as they are always required to post
First, it is important to systematize one’s processes
their margins with their clearing house), can be to gain efficiencies. No longer is it necessary to rely on
spreadsheets with manual data entry or mark to market
disruptive to one’s cashflow and cash planning func- valuations that estimate the value of an IRLC. Modern
software-as-a-service platforms allow lenders to manage
tions. In a declining market, they are not an issue.

Net income

It is also critical during a declining market to keep an
eye on one’s net income. Normally, volume will drop as
rates rise. This will lead to a decreased net income, pri-
marily because of the decrease in volume. It is important
to distinguish that decrease in net income from one’s
hedge performance.

Just because the market is declining does not mean that
one’s hedge performance has deteriorated. It may feel like
it when one looks at one’s net income, but the culprit is
not the hedge.

On the net income report we provide to our customers,
we are careful to pair that information with overall market
movement. This gives our customers a clear visual to see
how the net income is tracking with the market. If there is
a divergence between the two, there may be an issue with
one’s hedge performance or operational challenges. How-
ever, it is critical to keep these concepts separate.

Pull-through
Modeling pull-through accurately is the single-biggest

variable in effectively managing a pipeline. Historically,
there has been a lot of focus on market movement as
a critical variable affecting one’s pull-through assump-
tions. That focus is changing, mainly due to the regula-
tory changes over the past decade, as well as the relatively
consistent low-volatility environment.

May - June 2017 ❏
18 Secondary Marketing Executive

the post-lock origination process as one consistent plat-

form. It’s important to insist on a model that accurately

values one’s IRLCs, based on one’s specific secondary

marketing investors and/or commitment strategies. Such a

valuation certainly should have eligibility factored in. If a

loan can’t be sold to a certain channel, there is no sense in

using that channel as a source of valuation.

Such practices also enable a lender to diagnose why

changes are occurring in its pipeline, giving it the ability to

pinpoint and resolve any inefficiencies in the hedge and/

or origination process in real time. This will give the lender

the ability to maximize its processes and, just as important,

provide clear, accurate reporting to management, regula- MBA AnnuAl
COnVEnTIOn
tors and auditors. October ISSuE

Second, a system enables one to increase the frequency 2017

with which one reviews one’s pipeline. Once a day is no

longer adequate. The ultimate goal is a real-time view,

aided by a system-to-system integration with your loan

origination system. A lender should be uploading both

pipeline and market data several times a day to make sure Your ad in this issue comes
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hedge and commits loans leaving the pipeline. Simply put,

an analysis that relies on yesterday’s market data is no lon-

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whether direct trade, AOT or co-issue, we have a much Ibusam ut la qui con pelesendit est aut hilitat
undi nectur, quaspictium quas disquis duci
deeper relationship with that originator and can improve offic tem dus aut ad quid quis aute con perovit,
core alitia nus estrum voluptametur re necab
pricing over the long run accordingly.” It is important for iliti quati ut eumqui ratium fugia doluptatur, ni-
magni hicima con plam qui volum qui dolentis
lenders to know who they can rely on when the waters Visit Our Booth On Level B magni hicima con plam qui volum qui dolentis

of the market are rougher and murkier than the relatively

calm seas we are sailing on today. Deadline: Friday, September 22

Certainly, there are several critical items to be aware

of in a rising interest rate environment. However, the

fundamentals don’t change, and technology is constantly

improving. Lenders should review the technology they are

using often to make sure they don’t fall behind, know their

cashflow, maintain solid relationships, and have clear in-

sight into the dynamics that affect their pipeline and their

profitability. SME ®

Don Brown is founder and managing director of Optimal Blue Vanessa Williams
Secondary Services, providing content-managed mortgage eligi- [email protected]
bility, pricing, real-time compliance, pipeline risk management,
best execution, and loan allocation software and services. He can (800) 325-6745, x233
be reached at [email protected].

Secondary Marketing Executive ❏ May - June 2017 19

n
OriginatiOn

The Fastest Path
To Activating A New
Correspondent Business

As lenders launch new correspondent and other critical aspects of the transaction.
channels, they are discovering the ad- Outsourcing also allows investors to take advantage
vantages of outsourcing the needed
back-shop functionality. of a variable and contained cost structure. Rather than
spending time and money building out infrastructure
By Debora Aydelotte (identifying space, recruiting and hiring employees, buy-
ing equipment, training, etc.), investors can partner with
Despite open uncertain- a vendor that’s already fully outfitted. Further, typical out-
ty about potential reg- source contracts use a per-unit pricing model, introducing
ulatory and monetary variability to the cost structure and giving investors peace
policy changes under the new of mind that resources will remain at full utilization rates.
administration, interest in the
loan purchase/correspondent Timing is key for organizations entering a new business
investor market remains high. channel, and outsourcing can easily shave months off a
Early this year, credit ratings agency DBRS predicted that firm’s entry timeline. One example of this type of service
2017 would see a resurgence in the residential mortgage- is our firm’s “correspondent in a box” option, often used
backed security (RMBS) market, citing the tendency of by firms activating a new correspondent business. The ser-
rising interest rates to drive down refinances and make se-
curitization more financially appealing. In April, data from vice offers all of the components needed for sellers to start
Standard & Poor’s Global Ratings confirmed that RMBS delivering within a matter of weeks, including a technolo-
issuance in the first quarter of 2017 was double that of the gy platform with optical character recognition technology
same period in 2016. and exception-based conditioning and rules. Investor loan
programs are compiled within the system, and monthly
From Ventana Home Mortgage to GSF Mortgage, nearly analytics can be used to drive seller scorecards and
a dozen loan aggregators and investors have announced decision-making.
plans to grow or launch a correspondent channel in the
last few months. With crisp execution, this business chan- At a time when seasoned back-office personnel is
nel should be less expensive, with higher profitability than scarce and at a premium, outsourcing can have recruiting
wholesale and retail branch operations. advantages, as well. Expertise in the correspondent chan-
nel is a rare commodity that requires knowledge of mul-
One option more and more firms are considering tiple programs and an understanding of multiple investor
- especially when first entering the purchase market - is approaches. Effective communication with sellers is also
hiring a vendor partner to support the entire back-shop critical insofar as back-office staff serve as representatives
functionality. of their investor clients. Firms often find that a limited sup-
ply of these specialty skills in the local talent pool is a real
Outsourcing offers tangible benefits obstacle to standing up a new correspondent investment
Outsourcing arrangements have the potential to deliver channel. Fortunately, vendor partners often have access to

to investors an array of benefits. First, consider that typi-
cal back-shop functions include receiving and indexing
document images, conducting pre-purchase review, coor-
dinating the satisfaction of closing conditions, approving
and denying purchase notifications, and providing seller
performance analytics. Transferring these important but
often administrative responsibilities to a vendor frees cor-
respondent investors to focus their efforts on relationships

May - June 2017 ❏
20 Secondary Marketing Executive

an employment base that differs from their client firms’ • Can the vendor furnish evidence of its information
geographical footprint, allowing for quicker identifica- security certifications, protocols and commitment to ISO
tion and hiring of appropriate talent. standards?

Cultivating a close relationship with a trusted vendor Professional representation
team increases the value of the outsourcing arrangement • Is all work completed by tenured industry experts
for investors over time. For example, strong vendor rela-
tionships might evolve to include assistance with such at a fully SAFE ACT-compliant, onshore location? (The
tasks as upfront counterparty due diligence and risk as- vendor should furnish licensing information as evidence.);
sessment or even improving the process of organizing and
and assessing seller application packages to expedite
decisions. • Does the vendor provide its services on a “private
label” basis?

Choosing the right vendor partner Project management support

The current cycle promises rewards to correspondent • Does the vendor provide a well-organized imple-
investors that can move confidently with the knowledge mentation plan for onboarding your business?
that their back-shop T’s are crossed and I’s dotted. How,
then, should firms go about selecting the right third-party • Is the plan executed by a dedicated project manager?
partner? and

Before choosing the vendor with which one will • How often does the vendor conduct perfor-
entrust his business - or at least his new business chan- mance reviews to identify and resolve gaps or challeng-
nel - it’s critical to first identify what is important to the es related to onboarding and/or ongoing performance?
firm. A thorough understanding of one’s needs should
guide the development of one’s request for proposal, as Mortgage finance will always be a business of cyclic
well as one’s evaluation of each vendor’s information
or live presentation. Using a standard scorecard ap- opportunity that requires successful organizations to think
proach is a best practice to ensure consistency across
all assessments. The scorecard should allow vendor-by- and act with agility. An agile mind set helps companies
vendor comparison on the following mission critical
criteria: identify opportunities - such as the promise of today’s pur-

chase market - as they arise. An agile outsourcing partner

can help savvy investors translate opportunity into profit

by cost-effectively supplying exactly the right expertise at

exactly the right time. SME

Debora Aydelotte is chief operating officer of Altavera Mortgage
Services, a Computershare company providing outsourced loan
origination and due diligence services, including closed loan re-
view. She can be reached at [email protected].

Specialized expertise
• Does the vendor have experience with cor-

respondent/conduit business processes, flow and
responsibilities?

• Do managers and team members have specific ex-
perience with pre-purchase review? and

• Can the vendor provide client references to support
its claims?

Investment in technology
• Does the vendor use a system specifically designed

for due diligence rather than improvising with old tech-
nology or spreadsheets?

• Is the system up to date with critical regulatory de-
velopments, such as TILA-RESPA Integrated Disclosure
rule comparative analysis?

• Does the system incorporate a rules engine that in-
tegrates investor loan program guidelines? and

n
TEchnology

ISnevceosntidnagryInSQucCcTeescsh For

It is becoming increasingly evident that investors prefer to work
with lenders that have the best QC technology in place.

By Teri Sundh procedures and request copies of a
lender’s previous QC reviews to gain
The impact of technology on mortgage an understanding of the overall level
quality control (QC) is undeniable, and of loan production quality. In addi-
investors are taking note. With Fannie Mae tion, it is certainly standard operating
embracing technology as part of its Day 1 procedure for lenders to supply current
Certainty initiative and Freddie Mac adding new QC reports to investors once a relationship has
capabilities in a similar vein to its Loan Advisor been established.
Suite, the two largest mortgage investors have signaled to When compared with the advanced QC
the industry their belief in the power of technology to im- technology at the industry’s fingertips today,
prove loan quality, and where Fannie and Freddie go, the spreadsheets can seem a bit antiquated. Although loan
rest of the industry will soon follow. quality is always going to be paramount when an investor
is evaluating a potential lender partner, that lender’s QC
The technology being embraced by the government- methodology is going to be of interest, as well, and inves-
sponsored enterprises (GSEs) has focused on select ele- tors can’t help but be impressed by a more sophisticated
ments of a loan, such as appraisals and the automated platform designed specifically for mortgage QC.
verification of income, assets and employment, leaving The bottom line is investment in QC technology says a
ample opportunity for defects to occur in other areas. lot about a company’s commitment to loan quality. Most
Thus, lenders must still keep their eyes squarely focused lenders have made some investment in technology on the
on quality to remain in good favor with the GSEs and front end of the process, whether it’s a point-of-sale solu-
other investors. tion, a loan origination system or some other origination-
focused tool, because they have recognized the ability
Given the GSEs’ wholehearted acceptance of technol- for technology to deliver much-needed efficiency and en-
ogy, the wise mortgage lender would look to incorporate hance the quality of processes being automated.
technology into its QC process. Not only does this align However, for a lot of lenders, technology investment
a lender with the GSEs’ vision, but it also unequivocally stops at the closing process, forcing back-end departments
demonstrates a commitment to loan quality from the top like QC to resort to work-around solutions (i.e., spread-
down, which can go a long way in inspiring investor confi- sheets). Efficiency and process optimization are equally
dence. as important to the evaluation of loan production as they
are to the production process itself, and investment in QC
Unfortunately, there are still far too many mortgage QC technology is a commitment from management to keep
departments using spreadsheets to track loan defects. Al- the back end of the business equally as technologically
though spreadsheets are a useful tool for general database driven as the front end.
management, they fall short in managing mortgage QC A lender’s commitment to QC is really a commitment
data because spreadsheets fail to create a unified system to its investor to limit that investor’s exposure on the loans
of record. the lender is packaging and selling to them so that the in-
vestor can be confident in the loans it’s purchasing. When
QC isn’t something that just happens once or in one investors are confident in a lender’s production, they’ll
specific area of a lending organization. Most, if not all, purchase more loans. Quality breeds success. Therefore,
lenders are conducting both pre-funding and post-closing investment in QC technology also conveys to investors
QC, and many lenders are also shrewdly deploying QC that an organization believes so deeply in delivering a
in additional departments, such as servicing. With mul- quality loan product that it has committed significant re-
tiple departments and multiple auditors conducting QC sources to ensuring that outcome.
reviews, it can be next to impossible to create a cohesive,
enterprise-wide view of loan quality using the spreadsheet
method.

Furthermore, using spreadsheets for QC simply sends
the wrong message to investors. It’s not uncommon for
the GSEs or other investors to inquire about a lender’s QC

May - June 2017 ❏
22 Secondary Marketing Executive

What a QC audit platform really provides is total defect their design aesthetic so that they are straightforward and
management across the organization, not just simply pre- readable while also being highly detailed.
funding and post-closing QC, by serving as a single system
of record for all of a lender’s QC findings. When QC find- Being able to present QC findings in an easy-to-read,
ings are centralized, it makes it easy for lenders to uncover highly visual format ensures that the quality of the reports
root causes of defects, address those causes through cor- matches the quality of the loans, and as most QC audit
rective actions and then track the effectiveness of those systems include report-building functionality, QC staff no
actions to ensure the issue has been totally resolved - all of longer have to rebuild and manage reports each month,
which improves the quality of loans being sold to investors. which delivers significant efficiencies to a department that
is often short on time and resources. In addition, having
Because of the labor involved with tracking defects via detailed information readily available prepares lenders to
spreadsheets, most defects aren’t even reported until the immediately respond to investor questions or concerns,
end-of-month QC report, which means there is at least thus reaffirming the investor’s confidence in the lender.
a 30-day lag time between when a defect is discovered
and when it is addressed. This creates a long tail effect, Ultimately, improvements to a lender’s QC process trans-
wherein defects continue to occur even after they have late directly into greater secondary market success for that
been identified because the current process doesn’t allow lender, and the use of technology unequivocally improves
for immediate notification and action. the QC process by allowing lenders to address loan defects
in real time and track the success of corrective actions.
In contrast, a QC audit platform makes it easy to deliver
real-time notifications on loan defects so that issues can At the end of the day, what investors want to see when
be addressed immediately. This capability is especially they conduct a QC review on their lenders is an organi-
powerful in the pre-funding QC process because it en- zation that is knowledgeable about the loan origination
ables lenders to catch what might be systemic defects be- process and that is committed to loan quality by tracking,
fore loans reach investors. reporting and addressing loan defects. Results certainly
count for a lot, but perception also plays a role. When
A truly robust QC audit system will allow lenders to investors see that a lender has invested in the tools and
aggregate their QC findings from any source, whether it’s technology to optimize its loan quality, that increases their
a GSE/investor report, findings from a third-party vendor confidence level in that lender significantly.
or the result of internal auditing, and deliver a cohesive
report that provides an enterprise-wide overview of loan Investor confidence is the currency on which the mort-
quality broken down across multiple categories, including gage industry operates. If investors have placed their confi-
investor, loan type, etc. dence in technology, shouldn’t lenders do the same? SME

The importance of reporting cannot be stressed enough. Teri Sundh is CEO of Salt Lake City-based TRK Connection, a
Not only do investors want to see comprehensive QC re-
ports, but they also expect those reports to be simple in provider of mortgage quality control and origination manage-

ment solutions. She can be reached at [email protected].

Secondary Marketing Executive ❏ May - June 2017 23

n
ComplianCe

The Big ‘If’

For whatever reason, stock market-themed flicks have possible, we need to go back to “42.” President Clinton
been among Hollywood’s most popular movies. In was no different from any other U.S. president; he ran on
1987, who didn’t dig Charlie Sheen and Michael economy-based campaign promises. Upon election, his
Douglas in “Wall Street”? In 2013, we fell in love administration changed consumer and banking laws. The
with Leonardo DiCaprio in “The Wolf of Wall Street.” More intent was to make financing for housing more available
recently, the “Big Short” was the big deal. It’s hard to pin- and affordable. This wasn’t an original idea, but wouldn’t
point why we love these movies so much. Maybe it’s the ex- you know it, the plan worked! The Clinton years are best
cess - or it’s as close as it gets to real life without any of us described as a return to economic prosperity, which in
actually having to go to jail. What we can take from these many ways set the stage for “43,” or President George W.
movies is that life can be stranger than fiction. Who’s to say Bush, who had a governing philosophy of deregulation,
that in today’s “fake news” world, life won’t repeat itself? which is eerily familiar in today’s news cycle. The further
easing of regulatory requirements under “43” has been
To understand these story lines, we need to go beyond said to have opened the doors for risky loan programs.
the headlines, sound bites and movie titles such as “Too
Big to Fail.” A good movie has a sexy story line. In this tale, The view from the proverbial time machine tells us that

As the Trump administration pushes for regulatory rollback,
many are wondering whether history will repeat itself.

By Jim Alvarez

it’s the economic meltdown. It has plot twists, he- conventional loans were the only game in town
roes and villains. back then. Lenders eventually developed alternative
financing programs to assist in qualifying the self-
The start of the meltdown involves understanding employed borrower. If you were self-employed with
the importance of money in America. Greenbacks tons of write-offs on your tax return, it was nearly
have always been part of our national obsession. impossible to get a loan. That need gave birth to the
Many of the things we hear on the news or around “stated income” and “no-income, no-asset” (NINA)
the water cooler are related to the economy in one programs of the past.
way or another. Stories about cash, or the lack thereof, go To better understand these loans, we need to under-
as far back as the days of our founding fathers. The ability stand the lingo. Loan to value (LTV) is the loan amount
to get credit has literally won our independence and built compared against the value of the property, reflected as a
our industry. percentage. The basic formula is to take the loan amount
and divide it by the appraised value. For example, a
The challenge in the game of life has always been get- $50,000 loan being made against a property valued at
ting a fair shake when it comes to credit. Believe it or not, $100,000 is 50% LTV. Second mortgages (junior liens)
there was once a time when lenders could consider an have the same equation to consider. This is called com-
applicant’s race, sex and ethnicity when evaluating a loan bined loan to value (CLTV). Back then, the riskier the loan,
application. Luckily, consumer protection laws were put in the lower the LTV/CLTV someone would get. The higher
place since then. Today, we look to the Fair Housing Act. It the LTV/CLTV, the less equity in the property, which trans-
was established to protect buyers and renters from sellers’ lates to a lesser chance for a lender to recoup its monies
or landlords’ discrimination. There’s also the 1974 Equal in the event of foreclosure.
Credit Opportunity Act, which prohibits discrimination In later years, something called a “credit score” came
based on race, color, religion, national origin, sex, marital along. Once these triggers got configured, a loan approval
status or age. Another noteworthy law is the 1968 Truth-In- was based on the credit score, LTV/CLTV and income
Lending Act (TILA). For the most part, the acts collectively verification type (full doc/NINA or stated). As lending got
ended old-school discriminatory lending practices. more aggressive after Y2K, higher LTVs on stated loans
with lower-scored borrowers became the norm. Eventu-
In this money-themed story, rules were needed to protect ally, stated and NINA loans were for everyone, not just
consumers from higher-priced mortgages. Laws such as the the self-employed. Anyone who took out a loan could refi-
Home Owners Equity Protection Act (Section 32) were cre- nance fairly quickly back then. Refis masked defaults that
ated to fill that need. Section 32 became law in 1994 under were likely to happen, if they played out. As time went on,
“42.” That’s how we identify presidents these days - by their high-cost tests for mortgages related to rate and charges,
numbers - and “42” is Bill Clinton. Under Section 32, lend- including ensuring a consumer’s ability to repay (ATR),
ers are required to provide certain disclosures. The law also were at the forefront of consumer protection laws. This
imposed restrictions on high-cost loans. was a great time to be a consumer and a banker - it meant
cheap money.
In addition to Section 32, state regulators instituted their Like in the movies, borrowing money became fast and
own state-specific, high-cost laws. Those laws regulate furious. Mortgage brokers were popping up everywhere.
the annual percentage rate and costs an applicant can be
charged. The rule of thumb is to use whichever law pro-
vides the most protection to the consumer.

To diagnose how the Wall Street implosion was even

Secondary Marketing Executive ❏ May - June 2017 25

n That box we once loved had a new name, and it was
CoMplianCE real estate owned, or “bank-owned.”

Consumers were buying and refinancing at an insane and There is a good plot twist in this story of woe. To curb
unsustainable pace. To feed the beast that had become the the hysteria surrounding the economic meltdown, mea-
mortgage machine, bankers looked to Wall Street to sell sures were considered and eventually implemented by pol-
their mortgage-backed securities and collateralized debt iticians from both parties. This was done to stay a potential
obligations. This was the time when securities went from run on banks. Under “44” (President Barack Obama), the
Main Street to Wall Street. This process was known as ver- Dodd-Frank Wall Street Reform and Consumer Protection
tical integration. Act (DFA) was enacted. The intent of the DFA was to set up
an agency that would restore consumer confidence in U.S.
It was about that time that the “villains” of our story ap- financial systems and better regulate lending practices.
peared. Players including Lehman Brothers Bank, Merrill
Lynch, Bear Stearns and Goldman Sachs were all vilified Under the DFA, the Consumer Financial Protection
by the media. Oh, and let’s not forget Countrywide Mort- Bureau (CFPB) was established. The CFPB is responsible
gage, which was purchased by Bank of America (it, too, for consumer protection in the financial sector. The
was front-page news). Oh, and don’t forget the scammers, CFPB’s jurisdiction includes banks, credit unions, securi-
such as Bernie Madoff. Collectively, they were the primary ties firms, mortgage lenders, servicers, foreclosure relief
figures in the blame game - and deservedly so. All of this, services, payday lenders, debt collectors and other finan-
coupled with the amount of mortgage fraud going on, cial companies. Mandates were also put in place that re-
was unreal. Aside from Madoff, the jury hasn’t completely quired banks to meet liquidity thresholds (stress test). New
condemned or indemnified the rest. One main reason is standards of lending practices were also established.
that laws back then made it all possible. We also need to
consider that the ratings agencies kind of knew what was As a result, stated and NINA loans became a thing of
up, but they signed off on subprime loans. the past. A multitude of lending
mandates were established to regu-
Real estate professionals, from top to bottom, and con- late and curb the declining markets
sumers alike knew these loans weren’t right. Yet, consum-
ers couldn’t sign on the dotted lines fast enough. As long Despite all of the
as everyone got paid, everyone was happy. With this in controversy about the
mind, there’s another movie title that goes well with this CFPB, markets have
story: “Reality Bites!” since rebounded,
and credit is being
As it turns out, Forrest Gump was a prophet - or was extended.
it his Mama? Either way, she, or Forrest, said, “Life is like
a box of chocolates: You never know what you’re gonna and foreclosures that dominated
get.” Back then, people really didn’t know what they the news. A provision was estab-
were getting; they just knew they were getting “what they lished that created certain man-
wanted.” Easily, this can be described as the unintended dates for lenders to utilize appraisal
consequences of prosperity. What exactly was in that box management companies. This was done to build consumer
of chocolates? Figuratively speaking, it was real estate. confidence and show consumers that lenders and origina-
We should have checked for the expiration date on that tors were not colluding to create property values.
box. What we didn’t know in 2006 was that home prices
would be leveling off. It triggered a mess, as high LTV/ But wait - there’s more. On Nov. 20, 2013, the CFPB
CLTV loans became un-refinanceable. The risk spread integrated the Real Estate Settlement Procedures Act
into the mutual funds, pension funds and corporations that (RESPA) and TILA. This is known as the TILA-RESPA Inte-
owned these derivatives. grated Disclosures (TRID) rule. Under TRID, lenders are
required to use integrated disclosure forms for consumers
For industry insiders, once stated loans with high LTVs at the time of application and settlement. These forms are
and CLTVs up to 100% were available to first-time home known as the loan estimate and the closing disclosure.
buyers on non-owner-occupied properties, the writing was
on the wall. First payment defaults and early payment de- This was a lot to consider. In fact, TRID was the most
faults were suddenly on the rise, and it set off alarms. That comprehensive change in lending in years. Eventually, a
is when default rates began to spike. Not only did they sense of normalcy took hold in the markets.
spike, but the values that were once on the upswing also
reversed themselves. The market correction that analysts Despite all of the controversy about the CFPB, markets
had feared had begun. have since rebounded, and credit is being extended.

It was predicted that this market correction could take Yogi Berra once said, “It’s like deja vu all over again!”
down industries and municipalities reliant on real estate As a result of the resurgence in lending activity, programs
sales, refinances and taxes collected from those transac- such as stated and high LTV/CLTV programs are resurfac-
tions. Not only was this fear a domestic concern, but ing. Alternative-credit and lower-credit-score products are
the dark economic forecast also took on a global feel. popping up, too. Those, coupled with a resurging housing
The long and short of it was that the subprime mort- market, have some fearing there is a sequel in the works.
gage crisis happened because of banks selling off too
many high-risk mortgages; then, investors bit into that box
of chocolates, and it was not good. Reality does bite!

May - June 2017 ❏
26 Secondary Marketing Executive

With all due respect to Yogi, we can all breathe a little ter all, JPMorgan Chase recently entered into a $13 billion
easier these days. Lenders have more prudent qualify-
ing practices. Certain programs such as the home equity civil settlement with the U.S. Department of Justice stem-
line of credit and reverse mortgage (a.k.a., home equity
conversion mortgage) loans are now the new “in” loans. ming from the bank’s mortgage-bundling practices that
Adjustable-rate mortgages (ARMs) are also coming back.
helped plunge the country into the Great Recession. Other
Let’s give the mortgage industry a little credit. Despite
higher rates and the more recent trend of lower loan ap- players such as Goldman Sachs fared no better. It, too, will
plications, it could have given in to temptation. Thankfully,
the industry hasn’t brought back the 2/28 Interest-Only pay about $5 billion to resolve state/federal investigations.
loan. Instead, it has gone with a 7/1 ARM, which is much
better for the consumer. Depending on what side of the fence you’re on, there

The need for existing laws was justified. However, are definitely different perspectives.
as with all laws, their overall effectiveness should be
reviewed from time to time. Even Thomas Jefferson sug- Going forward, there are things going on that will help
gested laws should be reviewed every 19 years to ensure
they reflect the sign of the times. There’s always temptation consumers. As of July 1, judgments and most tax lien
for any new administration to simply repeal and eliminate
laws that may not sync with its campaign promises. data will be scrubbed from consumers’ credit reports. This

In a perfect world, lawmakers would consider what’s means credit scores will be higher. That leaves us with the
best for the consumer over anything else. To simply
million-dollar question: Will this new reporting artificially
change when a change may not be need-
ed could have an opposite effect. Con- inflate scores? Will it also create riskier loans for lenders?
sumer groups suggest that if the DFA were
to be repealed or gutted, and if the CFPB Reporting agencies are collectively working with U.S.
were dissolved altogether, it could have
an overall negative effect. Other mea- credit card issuers to use alternative data to identify cred-
sures that could have adverse impacts
include removing the high-cost lending itworthy individuals. This can be concerning because S&P/
laws and ATR mandates. These mandates
insulate poorer and elderly consumers. Experian recently reported that first and second mortgage
Then again, there’s the argument that
these laws, which are intended to protect default rates increased slightly in February. Is this a trend?
consumers, are actually penalizing them.
Maybe - maybe not.
If history has taught us anything, it is
that we cannot rely on good intentions Where to next? As the cycle repeats, the new admin-
alone. We do need laws that compel us all
to fly right. Admittedly, that may be a cyni- istration under “45” (President Donald Trump) has lots of
cal view. There are countless honest and respectable indus-
try professionals and consumers out there today. With all campaign promises to fulfill. Many revolve around repeal-
things being equal, there were plenty of those people back
in 2008, too. As for mortgage compliance, there are many ing certain laws created under the previous administra-
opinions on this topic. Some say that the financial invest-
ment, as well as upgrades in technical infrastructure to tion, which has happened.
adhere to TRID requirements, has been substantial. Other
industry professionals suggest it would be borderline crimi- As it relates to this story, we have to ask ourselves, has
nal to simply go back to the Wild Wild West, the “anything
goes” mentality in lending. confidence truly been completely restored? If so, is there
For bankers, liquidity mandates are a tough nut, but
they are a big reason consumers have more confidence in still a need for some of these laws? There are other things
the nation’s financial systems. Luckily, there hasn’t been
a true measurement scenario to see if these requirements to consider - there are other rumors floating in the air. Ru-
really matter. Some say this is limiting the positive impact
that a more robust lending system could offer. mors include adjustments in the manner in which the U.S.
Recently, JPMorgan Chase Chairman and CEO Jamie
Dimon called on regulators to overhaul many of the mort- Department of Housing and Urban Development/the Fed-
gage rules put in place after the financial crisis. He cited
the difficulty for “the average American” to get a home eral Housing Administration, Fannie Mae, and Freddie Mac
loan. Consumer groups find irony with that statement. Af-
operate, as well as easing banking regulatory mandates.

There are still many unknowns. But one thing is for

certain: Greed and fraud have become a cultural phenom-

enon that was a vital cog leading to the crisis. Greed is

hard to legislate. Regardless of what “45” does or doesn’t

do, greed remains the “devil in the details” and the un-

known variable. If we don’t eliminate it from our DNA,

this story is destined to be a sequel.

The bottom line is that it’s challenging at best for any

president to lead us to economic prosperity while main-

taining integrity in our financial systems.

Whatever we do, hopefully we won’t inadvertently

mortgage our future to correct our past. Only time will tell

if “45” will have the dubious distinction of being a hero or

a villain in this story.

Meanwhile, Jefferson’s words continue to inspire us. He

said he likes the dreams of the future better than the his-

tory of the past. Hopefully we don’t end up having dreams

of DiCaprio singing a Talking Heads song from the bow

of the Titanic, bellowing out, “You may find yourself in a

beautiful house, with a beautiful wife, and you may ask

yourself, well, how did I get here?” SME

Jim Alvarez is director of risk management for Financial Asset

Services Inc., a national asset management company specializing

in providing asset management, property disposition and valua-

tion services to mortgage companies and financial institutions.

He can be reached at [email protected].

Secondary Marketing Executive ❏ May - June 2017 27

n
Cover story

Getting Past The

Lenders have been in a marathon to make the end-to-end e-mortgage
a reality - and it appears the finish line is now finally in sight.

E By Stanley Street and National Commerce Act (ESIGN). Both laws
very April, more than 30,000 runners take established equal legal status between electronic
off from Hopkinton, Mass., to compete in transactions and paper signatures. ESIGN also re-
the world’s most famous marathon - the moved barriers to electronic interstate commerce
Boston Marathon. And as they do, thou-

sands of them encounter what is known as “the and international financial transactions, as well as

wall” - the point during the race, usually about legalized notarizations in which the notary signs

two-thirds of the way through the course, where electronically.

they experience severe and sudden fatigue. At this Although the progress of electronic closings

point, only good preparation and training, and seems to be crawling at a snail’s pace, 16 states

some extra carbs, will get them to the finish line. now permit e-notarization for face-to-face transac-

Indeed, marathons are not for the weak of heart, body tions. An e-notarization is the same as a paper notariza-

and mind. In some ways, the same is true for the mortgage tion except the document is in digital form and the notary

industry, which is experiencing its own marathon of sorts signs it with an electronic signature. Depending on the

when it comes to a true paperless mortgage. In fact, it state law involved, the notary’s seal could be placed on

seems much longer than 17 years since the first paperless the document electronically through a graphic image or

mortgage was completed in Florida. With most lenders other means.

preoccupied today with compliance or an improving pur- The most convenient form of an e-notarization will take

chase market - or both - one might wonder if we’re ever place over the Internet. But right now, there is little legal

going to reach the electronic finish line. standing for remote notarizations. No title insurance com-

The reality, however, is that we’re in the home stretch. pany will insure them, and Fannie Mae and Freddie Mac

Little by little, many pieces to the mortgage transaction will only support e-notarizations if they take place face-

have been automated and made paperless, forming the to-face. Although the technology for remote notarizations

building blocks that will eventually lead to most mort- exists, it creates a very large risk most lenders are unwill-

gages being closed electronically. That’s not to say there ing to take.

are hurdles, as there are more than a few. Recently, there have been efforts to remove this bar-

rier. Virginia, for example, recently enacted a law that

Legal hurdles allows notaries with the proper audio/video equipment
The legal bedrock for electronic closings was created to conduct online notarizations by letting those signing a

nearly two decades ago through the Uniform Electronic document “appear” before the notary by using a webcam

Transactions Act and the Electronic Signatures in Global or other technology. Both face-to-face and long-distance

May - June 2017 ❏
28 secondary Marketing executive

E-Closing ‘Wall’

e-notarizations are also permitted in Montana. Similar closings but hybrid e-closings. These are loans with docu-
pending legislation in other states is drawing support from ments that are signed in ink and then scanned and submit-
those who believe remote notarizations will create a new ted electronically for recording or loans in which the note
business-friendly option for consumers. and mortgage are signed in wet ink and the remaining
closing documents are signed electronically. Far fewer
Other players out there are helping, too. For example, e-closings are fully paperless, in which the loan is elec-
Pavaso, a company that provides an electronic closing tronically signed with an e-note. By definition, e-notes
platform for settlement service providers, is also working are created using either SMARTDoc v.1 or SMARTDoc v.3
on an e-vault. It has a very close relationship with clos- standards, and after closing, the loan file is registered on
ing agents, who are the boots on the ground in closing the MERS e-registry and in its e-vault. In addition, each
environments. Pavaso is training agents on how to conduct party to the transaction will need its own e-vault provider.
electronic closings and walking them through the entire
process. It’s quite a different approach to providing closing For obvious reasons, e-notes are the better option for
services, but in some cases, it will take outside-the-box everyone involved. Not only are they more convenient
thinking to make electronic closings a reality. for consumers, but they also ensure higher data quality.
e-notes also make it much easier for lenders and third
And though many county recorders now allow elec- parties to perform automated reviews, as opposed to re-
tronic recording of lien releases, some do not allow viewing loan files manually, which is a leading cause of
e-recording for the seven other common types of mort- soaring loan costs.
gage documents, such as the mortgage/deed of trust and
loan modifications, which creates another hurdle. Efforts So why aren’t more lenders doing e-notes? One big
should be made to find out why certain states are hold- reason is money. Lenders that choose to do e-notes often
outs. Is it a lack of technology at the county level or a discover that many of their partners do not currently ac-
lack of understanding on how e-notarizations are done? cept them. These lenders have the option to do both e-
The Property Records Industry Association is one of the notes and hybrid e-notes, but that is expensive. If paper
entities taking lead on removing this hurdle by conducting processes still work, many lenders are simply deciding to
direct outreach to county recorders offices and with state stick with them.
officials and by working with the Mortgage Industry Stan-
dards Maintenance Organization (MISMO) to educate and Another hurdle involves education. Many lenders
train public agencies on the benefits of e-recording. simply don’t know how to get started. For example, e-
notes require lenders to partner with a vendor that offers
Cost and awareness SMARTdocs. Many lenders are unaware of what these
Of course, the mortgage industry has its own barriers vendors are. Once they find one, they still need to spend
time and money training their staff on how it works.
to overcome. For example, lenders’ reluctance to adopt
electronic closings remains a significant obstacle. To un- To help move things along, Street Resource Group has
derstand this obstacle better, as well as how to remove it, been participating in an eMortgage Educational Webi-
it’s helpful to understand the two types of electronic clos- nar Series created by MISMO and the Mortgage Bank-
ings. Most e-closings, for example, are not fully paperless ers Association and administering monthly calls for the
e-Warehouse Workgroup. Since the beginning of the

Secondary Marketing Executive ❏ May - June 2017 29

n Indeed, it appears we’re in
COVER STORY
the final stretch of the mara-
year, we have been hosting a
series of workshops designed thon to make paperless mort-
to educate mortgage bank-
ers and warehouse lenders gages a reality for all. In the
on the benefits of electronic
closings. We recently held next several years, it’s very
workshops on e-mortgages,
and later this summer, we will likely the mortgage industry
hold workshops on e-closings,
post-closings and delivery. In will have achieved a true end-
October, our workshop series
wraps up with a workshop on to-end, standardized e-mort-
how to sell e-notes to the sec-
ondary market. gage, with e-notes that can

Already, we’re seeing con- be compliantly and secure-
siderable progress and in-
creased adoption of e-notes ly transmitted from vault to
in the warehouse sector.
Merchant’s Bank of Indiana, vault, as well as e-notarization
Santander Bank and FirstFund-
ing are just a few warehouse that makes investors feel con-
lenders that have begun using
e-notes. These adoptions offer fident.
proof to other industry partici-
pants that e-notes can and do To reach the finish line, it
work.
will take the collective, con-
Heading down the home
certed efforts of all of the par-
stretch
Although we have been fo- ties involved in the mortgage

cused on the remaining hur- business to not only under-
dles to e-closings, it helps to
remember how much progress has already been made stand the benefits of these in-
toward paperless mortgages over the past two decades.
More than half of all borrowers now turn to the Internet novations, but also create a
when shopping for mortgages, according to a recent
survey by Fannie Mae, and many of these borrowers are path for them to be adopted.
filling out applications, too. They can expect approvals
in minutes, thanks to new automated verification tools. It will also take continued
Electronic disclosures are widespread, thanks, in part, to
the Consumer Financial Protection Bureau and the TILA- grassroots efforts with mort-
RESPA Integrated Disclosures rule. MISMO has created
a data dictionary that allows lenders and the secondary gage bankers to help them
market to deliver and authenticate disclosure data with
greater efficiency. And today, roughly half of all county re- make the transition to e-notes
corders offices nationwide allow mortgage documents to
be recorded electronically. and continued outreach to

public officials to support

these efforts.

It can be frustrating to see

so clearly the benefits of pa-

perless mortgages without

seeing widespread adoption. On the other hand, it wasn’t

meant to be easy. It really is a marathon - and like a mara-

thon runner who reaches “the wall,” the ability to move

forward can only happen when the runner has prepared

properly and put in the required work, which would have

begun months or even years prior.

It may help to know that, as challenging as the Boston

Marathon is, over 95% of entrants finish the race. When it

comes to paperless mortgages and e-closings, there should

be no doubt we’ll make it to the finish line, too. SME

Stanley Street manages the strategic vision of Street Resource
Group Inc., a provider of information systems and business pro-
cess consulting to the financial services industry. He can be
reached at [email protected].

MortgageOrb invites you to receive its email newsletter.
Stay informed about the mortgage industry’s latest news!

mortgageorb.com/newsletter-signup

May - June 2017 ❏
30 Secondary Marketing Executive



SEcondary MarkEt

MBA’s Stevens: ‘Recap And Release’
Of GSEs Would Be A Big Mistake

One thing that David Stevens, president and CEO of long of a period of time, and we need a solution.” In ad-
the Mortgage Bankers Association (MBA), made dition, Mark Calabria, Vice President Mike Pence’s chief
perfectly clear during his opening remarks dur- economist, said in March that “a set of principles” for GSE
ing the MBA’s National Secondary Market Conference and reform would likely emerge in the coming months. Still,
Expo, held April 30 to May 3 in New York City, was that many others point out that GSE reform will likely take
recapitalizing government-sponsored enter- years to implement, even if a definitive proposal is ap-
prises (GSEs) Fannie Mae and Freddie Mac proved this year.
and releasing them back to the private sec-
tor “as is” would be an irresponsible means There are some - including investors who held onto
of achieving GSE reform. their stock following conservatorship - who feel that the
best thing to do is to return Fannie Mae and Freddie Mac
“Advocating for ‘recap and release,’ es- back to the private sector under the current rules under
pecially without significant reform first, which they operate, and if they fail, they fail.
is crazy,” Stevens told the crowd of mort- David Stevens
gage bankers and secondary market participants. “And Stevens implied that to do so would be a huge mistake.
you know the definition of insanity: doing the same thing “Simply put, ‘recap and release’ is more like rewind and
over and over again hoping for a different result. We have repeat,” he said. “It would return the GSEs to their previ-
come too far. Let’s move forward, not backward, and rec- ous state without safeguards to ensure the positive progress
ognize that this is moving forward one way or the other.” during conservatorship remains and without any guarantee
the agencies will operate in a manner that protects the tax-
Indeed, the topic of GSE reform was front and center payer going forward. This is dangerous ground that destabi-
throughout much of this year’s conference. That’s partly lizes the system and does nothing to protect our economy,
because the MBA recently released its own proposal for our homes or taxpayers from another bailout. Rather, recap
GSE reform in the form of a white paper, “GSE Reform: and release is a ‘solution’ designed to protect the personal
Creating a Sustainable, More Vibrant Secondary Mortgage pocketbooks of a select few.
Market,” which calls for the GSEs to be “congressionally “This misguided dialog threatens to recreate the very
re-chartered” - in other words, re-privatized but operating crisis it purports to avoid and destabilize the level playing
with an “explicit guarantee” on the mortgage-backed se- field for all eligible lenders to compete in this market equal-
curities they issue. The white paper offers a more detailed ly,” Stevens added. “The financial crisis plainly exposed the
description of the MBA’s previously announced GSE re- structural conflicts, misaligned incentives and other weak-
form proposal, which was first introduced in January. nesses associated with the GSE business model and regula-
tory framework. The result was a catastrophic failure of the
Whether any of the MBA’s recommendations actually secondary mortgage market that required more than $187
make it into GSE reform legislation - and further, whether billion in direct taxpayer support and a continuing federal
any legislation is actually drafted - remains to be seen. As commitment of more than $240 billion.”
Stevens pointed out, the Trump administration and certain Stevens, however, acknowledged that the GSEs, un-
Senate and House leaders have indicated that GSE reform der their regulator, the Federal Housing Finance Agency
is a “top priority” for this year. For example, Secretary (FHFA), have made great strides to fix the operational prob-
Steven Mnuchin said during a recent interview that he is lems that led to these failures.
“committed that under this administration, we’re going “[The] FHFA has made significant progress mitigating
to have housing reform so that we don’t just leave these some of the key flaws in the GSEs’ operations that distorted
entities the way they are. They’ve been sitting there for too

May - June 2017 ❏
32 Secondary Marketing Executive

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SEcondary MarkEt client adopters of the new portfolio monitoring solution,
CoreLogic says in a release.
the market in the run-up to the crisis, including bringing
parity and transparency to their pricing models, moving Using this new solution, organizations will be able to
toward a single security, and developing the common se- proactively monitor their entire mortgage portfolio, which,
curitization platform,” Stevens said. in turn, will help them properly set reserves. Users will
also gain insight into changes in mortgage portfolio valu-
Still, “simply recapitalizing the firms and releasing ations. The solution will help them to identify trends and
them - without structural reforms - would threaten to bring risky markets early and better align risk with business
back the same flawed incentive structures that contributed policy, the company says.
to the GSEs’ failure,” he said.
Freddie Mac Completes Its
Regardless, Stevens said he is optimistic that GSE re- Second Seasoned Credit Risk
form is finally going to happen this year. Transfer Offering

“While we have come a long way and made many As part of its ongoing effort to transfer mortgage credit
substantial changes to protect the housing system, GSE re- risk away from taxpayers and into the private market,
form is the last piece of unfinished business before we can Freddie Mac recently completed its second Seasoned
move forward with true housing recovery,” Stevens said. Credit Risk Transfer offering - a rated securitization of ap-
“On the Hill, within the administration and among major proximately $1.12 billion of both guaranteed senior and
stakeholders, activities around housing run high, showing unguaranteed subordinate securities.
a lot of promise for housing finance reform.
More specifically, the deal includes the issuance of ap-
“Both Congress and the administration are pursuing proximately $926 million in guaranteed senior certificates
GSE reform legislatively - that is a fact,” he later added. and approximately $190 million in unguaranteed mezza-
“The teams are on the field, and the game is in play; the nine and subordinate certificates.
choice is to either stand on the sidelines and protest or get
in the game. [The] MBA plans to get in the game to help The collateral backing the certificates is 4,361 fixed-
craft a solution that works for all lenders, consumers and and step-rate modified seasoned loans. These loans were
the housing finance system. There is no other option but to modified to assist borrowers who were at risk of foreclo-
engage and lead on this subject.” sure to help them keep their homes and have all been
performing for at least 12 months as of issuance, the com-
CoreLogic Introduces New pany says in a press release.
Mortgage Portfolio Valuation Tool
The loans will be serviced by Select Portfolio Servicing
CoreLogic has introduced a new tool to help lenders Inc., which will service them in the same careful and thor-
and investors evaluate and understand the collateral value ough way that a pool of nonperforming loans would be
of their mortgage portfolios on a periodic basis. serviced.

The new, self-service, on-demand, fixed-cost solution, To date, Freddie Mac has sold about $7 billion in
dubbed Total Home Value for Portfolio Monitoring, lever- nonperforming loans, securitized about $26 billion in re-
ages CoreLogic’s suite of automated valuation models performing loans and transacted about $2 billion in struc-
(AVMs). tured offerings as part of its effort to get more distressed
assets off its books.
The company claims its AVMs deliver the highest levels
of accuracy, as well as excellent geographic coverage.

Valuation hit rates of 97% have been achieved by early

Clayton Holdings Now Offering Enhanced Internal Audit Services Program

Clayton Holdings says it has developed an enhanced internal audit process reviews/enhancement; and reme-
internal audit services program designed to help bank
and lender clients develop, manage and enhance their diation of gaps in existing audit programs.
internal risks and controls programs, as well as comply
with new government-sponsored enterprise (GSE) and “The GSEs, investors, corporate boards and regulators
Consumer Financial Protection Bureau (CFPB) require-
ments. are all focusing on the importance of managing internal

The new internal audit program leverages Clayton’s risks and controls,” says Jeff Tennyson,
in-depth industry knowledge and combines it with sea-
soned professionals to deliver operational efficiencies, president of Clayton. “Fannie Mae now
the company says in a release.
requires seller/servicers to have inter-
The provider of loan due diligence, surveillance, real
estate owned management, consulting, valuation, title nal audit and management control pro-
and settlement services says this new audit program will
help lenders strengthen their internal audit activities in cesses, and the CFPB is mandating and
several areas, including risk assessment design/perfor-
mance; turnkey development of internal audit functions; examining for compliance management

Jeff Tennyson systems. Our new offering helps clients
identify gaps and inadequacies in exist-

ing functions before GSE and regulatory reviews and to

design and build stronger processes. Depending on the

client’s need, our role can range from reviews to train-

ing and from problem remediation to turnkey audit pro-

cess development.” SME

May - June 2017 ❏
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