Despite laudable efforts to protect markets and consumers from systemic risk, the myriad new compliance requirements mandated since the housing crisis have in many ways unintentionally created a fractured regulatory framework for the financial services industry. This has the potential to create a scenario where this mass of regulations operates in silos, with the same result as having no regulations, but at many times the cost of compliance and reporting.
To combat this, organizations must take a comprehensive approach to addressing regulatory requirements that streamlines efforts and maximizes efficiency.
While economic cycles and housing bubble formations are inevitable, there are significant differences in the current housing finance structure from seven years ago. Old and new regulatory agencies implemented rules with sometimes unintended consequences, causing a dramatic change to the housing market landscape in less than a decade. For example, risk aversion in the market has given rise to players outside of traditional banking, while the increasing use of technology has disrupted traditional business processes.
A work-in-progress example of the drive toward standardization is the development of the Common Securitization Platform by the Federal Housing Finance Agency. The CSP provides a common infrastructure for Fannie Mae and Freddie Mac to securitize loans and help ensure consistency in terms of security onboarding, pricing and transparency. Efforts to create a single security between Fannie Mae and Freddie Mac are another step toward bringing consistency in the housing finance market.
From a guidelines perspective, defined standards, such as Basel III, Private Mortgage Insurer Eligibility Requirements and Servicer Total Achievement and Rewards program, all help manage counterparty service levels and risk management. While each of these is undoubtedly helping to mitigate some of the risks and eventualities which led to the meltdown, an analysis of the potential unintended impact of these regulations is also worth examining.
Having in place a greater number of regulations has affected operational costs for many organizations, including the cost of enhancing data, regulatory compliance reporting and adherence to different rules and standards. In certain segments of financial services that are heavily dependent on legacy infrastructure, the costs have been dramatic as new regulation has forced wholesale re-architecting of business processes and the systems that support them.
The changes in housing finance regulations, in particular, should encourage organizations to think more strategically about their operational and technology investments. Although this task is by no means easy, the mortgage industry can take a few steps to help them with the task.
Increasing investment in enterprise data integration programs to consolidate both structured and unstructured data is crucial. While most organizations have already invested in enterprise wide data management, the consolidation and availability of data, rather than its production, is rapidly becoming the key to unlocking its potential.
Likewise, making investments in standardized enterprise data transfer mechanisms and protocols — whether through defining canonical data models for the enterprise or participation in key industry standards like those championed by the Mortgage Industry Standards Maintenance Organization — is increasingly critical to reducing integration and change management costs to help drive these efficiencies.
Originators can also use their partners to mitigate business risk. For example, the recent elimination of automated underwriting system fees will make it easier for originators to run the same underwriting checks as the enterprises. The ability of primary and secondary market parties to work with their technology partners and other enterprises to co-invest in software and share best practices would be of immense benefit to the overall housing finance ecosystem.
For many of these programs, the key success criteria are adoption, making investment in an enterprise wide adoption and change management program critical. An example of one way to drive adoption across the firm could be through compliance scorecards with funding linked to quarterly goals for business units.
While home prices have seen significant appreciation since the U.S. mortgage market bottomed out in 2012, in part thanks to a renewed focus on affordable housing and upward trending jobs data, questions are being asked on the sustainability of this appreciation. There is already mention of the lead up to the start of the next housing bubble.
It will be interesting to see in the next few years how technology and partnerships on both sides (regulators and market participants) may help reduce systemic risk and lower associated operational costs. With the right investments in technology and standards, regulators and organizations may be able to better integrate regulatory frameworks, dynamically access the right information and make more informed decisions proactively through the use of advanced analytics and visualization techniques.
Hans Godfrey is a vice president at Sapient Global Markets based in Washington, D.C.