There was a recent debate between the two candidates for president around the idea that the government does not force change. But I would argue that it has the power to influence, impact and support markets, both positively and negatively.
Most industry professionals would be hard-pressed to point to another source that has had such a dramatic influence over how we do business today. A brief overview of the influence of the government demonstrates this influence. While it’s not my intent to rehash all the activities and events that have impacted our business through the years, some brief history may put recent events into context and perspective.
The mortgage market really was a carryover from England as new settlers financed land and homeownership. The basic product was no more than an extension of a bank loan to finance a five-year loan with 50% down payment. It was not until after the Great Depression, as part of New Deal, that Franklin D. Roosevelt created the FHA in 1934 and the 30-year fixed rate mortgage was developed as a vehicle for financing home ownership.
Four years later in 1938, to stimulate additional investments, the government formed the Federal National Mortgage Association, (Fannie Mae) to buy FHA loans and securitize them into loan pools. As a result, the “secondary market” was devised to bring new and more cash into the marketplace.
In 1944, with WWII veterans coming back from the war, the Veterans Administration, (like the FHA) was given the right to guarantee loans, but with less money down. The result of the “baby boomer” market generated more demand for financing and housing. Hence the formation of the Federal Home Loan Mortgage Corp. (Freddie Mac) in 1970 to increase funds to commercial banks, credit unions and other mortgage lenders.
AUS Technology Drives Business
But it wasn’t until the introduction of Loan Prospector by Freddie Mac in 1995 and later, Desktop Underwriter by Fannie Mae, that we began to see a real pickup in the automation of the loan approval “process” to handle increased loan volume. LP went from 38,248 loans in 1995 to doing that volume daily in 2001, surpassing the 10 million loan mark within six years!
“Freddie Mac's Loan Prospector tools have forever changed the mortgage origination process,” David Glenn, former Freddie vice chairman and president said in a 2001 press release marking the occasion.
In 1995, Freddie Mac fundamentally transformed the mortgage process by pioneering, Loan Prospector, the first statistically-based automated underwriting service for residential mortgages. Loan Prospector was also the first system to automatically underwrite FHA and VA loans. In addition, in June 1999 Loan Prospector on Internet became the first system available at the point-of-sale via the Internet.
In 1992, Freddie Mac introduced their Home Value Explorer and Home Mortgage Value Estimator automated valuation models. Fannie Mae advanced the idea of an Electronic Quality Control Check process by resubmitting DU results and checking to make sure there is a green light accept throughout the origination process.
Federal Housing Finance Agency
In 2008, the Federal Housing Finance Agency took control of Fannie Mae and Freddie Mac. In 2010, it developed the Uniform Mortgage Data Program to address the loan quality issues that created some of the mortgage meltdown mess. Like the AUS and AVM initiatives, the result is all about verifying loan quality and changed forever the way we do appraisals and loan delivery. A nuance is that now, the FHFA had endorsed the usage of MISMO 2.6 and 3.0 data specs to consistently enforce data level compliance.
Around the same time Dodd-Frank legislation was passed and the Consumer Financial Protection Bureau was created to protect the consumers and enforce a more fair and transparent process of disclosing information to borrowers around an array of financial loan products. Where previous mandates were about ensuring an automated, systematic loan quality data validating process, this law is focused on ensuring a clear and compliant loan disclosure process to the borrower. Whether it’s on the origination side with the new RESPA disclosure to a new borrower or servicing disclosures and notifications, the government is mandating and enforcing guidelines on what you need to do to ensure a complaint process.
This by no means covers all the different systems and processes that have been mandated by government institutions, but most industry professionals would find it difficult to name another source that has had such a significant impact to our business.
One side note: It is interesting to know that Fannie Mae holds more than a hundred patents not only over technology, but processes as well. It will be interesting to watch how an institution that has such control over mandating change will manage the use of these patents in the future. This is something I hope that both the MBA and MISMO will look into as we create automated solutions to address these and future changes.