Treasury urges mortgage sector to embrace digital tech
WASHINGTON — The Treasury Department's recent report on how to regulate nonbanks drew praise not just from tech startups but also from mortgage industry insiders.
In addition to recommendations for a new federal fintech charter and that regulators pull back from payday lending rules, the report contained a section that might be music to a mortgage banker's ears, including support for the industry's automation efforts and another call to soften the use of the False Claims Act against lenders.
The report discussed ways to accelerate adoption of electronic promissory notes — or eNotes — in federal mortgage programs, as well as automated appraisals.
“My sense right now is that the industry is really at a tipping point in terms of adoption of digital mortgage or e-mortgage technologies,” said Michael Fratantoni, chief economist for the Mortgage Bankers Association. “The technology is there, the industry desire is there, but there are some regulatory hurdles and the Treasury report identified some of them.”
Treasury endorsed the use of electronic promissory notes at Ginnie Mae, the Federal Housing Administration and the Federal Home Loan banks, noting that the FHA would first need the budget to do so. The department still uses an older mainframe-based operating system, and officials have emphasized the desperate need for technology upgrades.
But one challenge is that while Fannie and Freddie accept e-mortgages, Ginnie Mae does not, although it has outlined a plan to eventually adopt the technology.
The Home Loan banks also do not currently lend against eNotes, and Treasury recommended that they work toward a goal of “accepting eNotes on collateral pledged to secure advances.”
The department also encouraged the FHA to develop enhanced automated property appraisals to “improve origination quality.”
Industry representatives welcomed the Treasury report's recognition of the FHA's need for technology upgrades.
“CHLA supports recommendations in the Treasury Report to fully fund FHA IT needs, to improve their automated appraisal capabilities and to provide more clarity on the False Claims Act,” said Scott Olson, executive director of the Community Home Lenders Association.
In a February report, Moody’s warned that alternatives to traditional property appraisals — including automated valuation models — could weaken the credit quality of residential mortgage-backed securities if risks are not mitigated.
In its report, Treasury suggested that property appraisal programs explore offering targeted appraisal waivers where a high degree of property standardization and information about credit risk exists to support automated valuation.
"Treasury recommends FHA and other government loan programs develop enhanced automated appraisal capabilities to improve origination quality and mitigate the credit risk of overvaluation," the report said.
Regardless of whether the FHA moves forward with automated appraisals, new alternatives to the process are emerging and continue to make the practice simpler, said Rob Zimmer, head of external communications for the Community Mortgage Lenders of America.
“On appraisals, we’ll see what happens,” he said. Regulators and agencies "will continue to find ways to streamline the appraisal process.”
In a move sure to please lenders that have shied away from working with the FHA because of rigid False Claims Act standards, Treasury also recommended that the Department of Housing and Urban Development establish transparent standards to determine which violations it considers to be most harmful in order to help the Justice Department decide which abuses to prosecute.
“Enforcement of the False Claims Act is critical to ensuring integrity of any federal program and protecting it against knowing violations,” Treasury said in the report. “At the same time, FCA enforcement actions can impose significant costs on a defendant both in terms of financial and reputational damages.”
MBA members are “very, very happy” that the administration appears to be recognizing and validating the concerns lenders have about working under the False Claims Act, Fratantoni said.
“This has really been a constraint and it’s impacting access to credit and it’s impacting the FHA program as a whole because they have had a number of both large and midsize lenders back away from the program because of this risk,” he said. “It’s been an ongoing issue for a time.”