JPMorgan Chase’s $13 billion mortgage-backed securities settlement intensifies the industry’s need to control both originations and loans bought on the secondary market.
“What that really raised to me was the importance of technology and a new operating paradigm that really enables investors to see everything that’s happened on this loan,” says Brian Fitzpatrick, president and CEO, LoanLogics.
“The mortgage securities market I’m sure has taken careful notice of this settlement and I think the secondary market will adjust its level of due diligence accordingly,” says Ed Kramer, executive vice president of regulatory affairs at Wolters Kluwer Financial Services.
Once the pending qualified mortgage and qualified residential mortgage rules come into play it should address the kind of loan underwriting problems that led to the concern as these rules require lenders to scrutinize the loan quality.
“The underlying problem of the poorly underwritten and poorly documented loans will be eliminated,” he says. “The root cause of the problem should no longer exist. The credit environment that we’re in today makes our situation a lot better.”
“The loan underwriting guidelines are stronger so by the very nature of that we’re going to get a lot more quality, but the real the real issue here is the transparency,” says Fitzpatrick.
The settlement’s size takes the push for origination scrutiny that exists due to these pending regulations one step further.
“We now seem to be talking about billions rather than hundreds of millions. The level has gone up significantly,” he says.
Settlements could get even bigger.
“It seems to me and other commentators that this is the largest we’ve ever seen,” says Kramer. “Whether it will be six months from now, I guess we’ll have to wait and see. We know there are other settlements on the horizon.”
The size of the JPM settlement also could make lenders more cautious about acquiring distressed institutions and their loan books in government-assisted transactions or otherwise.
“I think financial institutions are going to be reluctant in the future to inherit this compliance risk” if reform fails to prevent such situations from recurring in the future, Kramer says.
The settlement shows that “from the very beginning of the manufacturing process of a loan, there has to be an objective third party that’s overseeing the quality,” Fitzpatrick says.
The settlement also shows that lenders have to take action on their third-party reviewers’ findings to avoid concerns.
This adds to the push to ensure written policies and procedures are both detailed carefully and “in fact being followed and adhered to by all the policies involved,” Kramer says.
“It’s one thing as to whether lenders listened or not to what the third parties said, but what is very important is the question, ‘How did the investors know what was really going on? How could they see whether something was overridden or not, or how could they see somebody didn’t heed the warnings associated with the loans?’ I think therein lies the very, very key issue of transparency.”