The improvements in mortgage industry technology in recent years should have helped to improve loan quality and compliance. Yet, as a discussion put together by Origination News during the recent Mortgage Bankers Association annual convention in Chicago thrashed out, there is still a long way to go to effectively use automated processes. As several panel members noted, it is easier to hire more people to throw at the problem than to install new technology.
The first part of the panel's discussion appeared in the Oct. 31 issue of National Mortgage News. It started off as a discussion about improving compliance at lender shops and quickly moved into defining what is meant by compliance in the first place. It then evolved into what is being done in terms of technology to help lenders improve products and practices.
Later in the conversation, the panel discussed the implementation of new laws and regulations. One panelist felt that sometimes mortgage lenders “buried their heads in the sand” when it came to dealing with new rules, while another member said a lot has to do with the industry not receiving any clear guidance on implementing the changes in the first place.
In fact, the term “clear as mud” was used to describe the situation when it comes to bringing new rules on line. Even technology providers have problems meeting the changing whims of regulators when it comes to making sure all the documentation and disclosures being provided are correct.
Joining ON managing editor Brad Finkelstein on this panel are Jonathan Corr, chief strategy officer for technology vendor Ellie Mae; Vladimir Bien-Aime, president and CEO of appraisal technology provider Global DMS; Dan Thoms, executive vice president and chief strategy officer of All Regs, which made its mark providing online access to secondary market seller/servicer guidelines; Becky Walzak, president of Looking Glass Group and an industry expert on risk management; Mary Kladde, president and CEO, and Ruth Lee, executive vice president, of outsource back office fulfillment provider Titan Lenders Corp.; and Daniel Jacobs, president of retail branching at Residential Finance Corp.
CORR: If you just put more requirements on an underwriter, more overlays to review, more verifications, and you don't use automation to push quality control at the front of the process, that is a problem.
KLADDE: It is more than that. Our industry traditionally is used to throwing bodies at the problem. We throw bodies at the problem, we don't automate. In terms of technology, people have to invest in technology, they have to accept standardization. I went to a [Mortgage Industry Standards Maintenance Organization] conference not too long ago, and it was really interesting. The concept is getting out but I don't think there has been huge adoption. MISMO is coming out with version 3.1, but I know vendors that we work with that are not even close to using version 3.0. We have a vendor that we interface with that is on version 1.7. Additionally, I think as we move towards e-mortgages, that will eliminate some of the issues with discrepancies between paper and the file. We have huge issues when we do audits where the data doesn't match the paper. Where is that happening? It is because every one is not on the same platform or using the same standards.
LEE: I was talking with someone about servicers and UMDP and how that is going to work. We can generate data, but if the data doesn't match the loan that was originated, you have data but you still don't have quality. Therein lies the question, we have to figure out how to make those two align.
THOMS: With all the new people and departments and roles that we have to comply with all the new rules, I see as many mistakes being made as ever. I'm not sure having more people is helping, because the controls aren't there. You've got a lot of people who have a narrow focus, they are not looking at the whole loan because the loan is being sliced and diced.
CORR: In many ways automation and process change is about technology adoption. What we saw was the early adopters, as soon as the regulations changed; they tried to do (compliance) with technology upfront. The lion's share of the industry step back and realize they still have gaps. They put spackle in there to prevent them from—at least in their perspective—missing things. Then they say “look at my processes, can I embrace technology to take out some of these costs that have thrown by having to react to the changes in the marketplace?”
BIEN-AIME: It seems so much easier to get approval to hire a person than to implement a whole new technology. That is a fundamental flaw. “I can hire three people because the way the budget works, that is no problem. But if I want to bring an entire new system, that involves risk.” Banks from a business perspective are risk-adverse. No one has ever gotten fired for hiring people. If you bring in a new system and it doesn't work out, they are going to chop you.
LEE: In technology, there is some that is really good and there is some that misses the mark. We heard about end-to-end all the time, but what beginning to what end? Everybody has a different business need and a different purpose. Nobody has any clear answers; it's what can you defend. People want to know where the bodies are buried now, whereas before, they were like “skeletons in the closet, no problem. We'll deal with those if they show up.” They've shown up.
WALZAK: I think back to the S&L crisis; after they went through all of that the whole industry really changed. Now after this crisis and B of A pulling out, are we going to start to see the banks starting to shy away from being heavily involved in mortgages?
BIEN-AIME: It already has begun. There are a lot of changes. Interest rates are at 4% but there is not a massive boom in originations. Our business has risen in the last three months, but nothing like it was in 2003, 2004 or 2005.
WALZAK: If the banks pull out, who is going to take their place? There are a lot of people that seem to be getting into the wholesale business and I am saying do they know something?
CORR: Bank of America, I don't think is symptomatic of the business today. It was that they bought something that was pretty toxic, they never really corrected it, and they have broader issues as a financial institution. The easiest thing for them to shoot right now is mortgages. If you look at the Basel III stuff that will come out in 2013 and how those costs will be higher upon depositories, I think that is going to open the door to bringing in private money that is interested in investing in quality mortgage assets.
BIEN-AIME: Without transparency nobody really knows how it works. Without that transparency that technology brings I don't think we'll secure private investors at all. There is going to be a market for it, so either they are going to figure out how to bring transparency to the industry or they are going to take chances again.
KLADDE: It will be really interesting to see, because we have lots of players that don't participate in technology from a transparency standpoint. Warehouse lenders, they really don't participate, they are not buying in. So how do you get them to participate so that we can create standardization and participation?
FINKELSTEIN: For warehouse lenders, their collateral is that loan package.
KLADDE: Which is paper. Until you have correspondent investors that are purchasing e-notes and e-mortgages, they won't adopt. It is the chicken and the egg. Until a warehouse lender accepts an e-note, at what point it that is going to happen.
CORR: The correspondent investors that will come in to backfill some of the capacity from the money center banks, they are the folks most apt to adopt technology. If you look at Wall Street and how they have invested in technology over the years, they are much more open to that then our industry. Where are the private investors going to come from? They are going to come from REITs, hedge funds, private equity guys and they're very open to adopting technology.
THOMS: It is more complex than just our industry. At the end of the food chain is MERS and we're wondering what happens with mortgage transactions at the local level when you've got local governments involved. These are governments that operate like a bureaucracy and to adopt a hot technology of some type is not something that they do. They got Ethel and Mary that type in all the transactions, and it is another factor and complication that affects our industry. How do you incorporate every state government and local government?
LEE: The industry needs to know that if we adopt standards, that if there is another crisis that the legal autopsy won't be at our feet. We have to know that lawyers cannot come back and dismantle the rules of law.
WALZAK: The Consumer Financial Protection Bureau has no Congressional oversight. It can kind of do what it is going to do. The QM requirement has a $100,000 for each mistake you make, and what's to stop somebody three years down the road who is being foreclosed on from saying, “You knew I couldn't make the payment. How could you give me that loan?”
KLADDE: Therein lies the rub. How much can technology do? It needs to be supported by state and local governments, only if they buy into the notion that this fixes the problem.
JACOBS: It goes back to trust. Are the local governments trusting of our industry? Not really. But is our industry trusting of our own technology? I think the answer is no. With the changes in the [Good Faith Estimate] in 2010, everyone created departments to order appraisals to make sure we didn't order them too early and to create upfront disclosures to make certain we didn't get outside of our tolerances. How many of these departments have been dismantled in favor of technology to control that—not many. Why not? The people I talk to don't trust the technology to control those areas.
WALZAK: The next generations (of consumers) are much more trusting of technology, it is part and parcel of what they do every day. When I started in this business, technology was an electric typewriter. Is that why we don't trust it, because we've grown up with it and seen some of the problems? Or is there some other reason?
JACOBS: I think it is because too much of what we call our technology is an electric typewriter. I think that we have a nice wrapper on basic functions and it doesn't do everything we want or need it to do.
