Headlines promulgating JP Morgan Chase’s recent transgressions reveal capricious trading practices, resulting in record-breaking losses to the institution that has otherwise experienced recent recondite growth and profits. As a result, the financial services industry is in the hot seat once again, reigniting the question of effective banking regulatory oversight. Ultimately, regardless of your political persuasion or position on the regulatory environment, the underlying issue is defining the line that divides strategic capital growth from secure wealth management. In the aftermath of the mortgage crisis, the empirical question remains: What impact on quality and oversight will these events have on the mortgage markets?
The global meltdown of the mortgage system has left a far-reaching divide that, many years later, continues to raise issues of loan quality management. While government efforts continue to define the parameters of a qualified residential mortgage, the Consumer Financial Protection Bureau, CFPB, seeks to revolutionize the way lenders communicate with consumers. Fannie Mae and Freddie Mac, once pillars of the mortgage banking community since 1968 and 1970, respectively, face uncertain futures as a result of this regulatory turmoil. Even the Federal Reserve Governor, Elizabeth A. Duke, has weighed in on the issue, discussing the necessity to standardize quality control procedures. In the end, consumers will always need homes and banks will be there to lend the requisite capital.
In a recent meeting of the National Association of Realtors, Duke emphasized the critical message that loan quality cannot be compromised in favor of growth as mortgage lenders are preparing for this growth. Positive market data inferring the real estate bottom has been reached is beginning to capture headlines. Just this month, Fox News reports "Foreclosed Americans Find Way Back to Homeownership", chronicling new purchase applications on the rise for buyers affected by foreclosure. Forecasting growth in a burgeoning purchase market comes with the onus of managing loan quality in this new risk-centric environment. The days of no income, no asset, no verification loan programs are well-behind us and lenders now understand the far-reaching implications of poor quality control. As a result, industry practices demand an increased focus on managing loan quality.
From regional credit unions to large national lenders, independent quality control oversight coupled with a return to manual underwriting are now the buzz words of responsible mortgage banking. Duke states "If technology and data standardization can be used to enhance quality control reviews at the time of purchase rather than after the loans became delinquent, it would allow errors to be corrected much earlier, resulting in better outcomes for taxpayers, borrowers, investors, and lenders." The industry is responding to quality requirements by moving away from check-list underwriting introduced by Fannie Mae and Freddie Mac’s Desktop Underwriter and Loan Prospector systems introduced in the 1990s. The trend today is the return to comprehensive manual underwriting and independent quality control reverifications not seen in almost two decades.
Credit risk professionals are striving to balance these enhanced quality demands with now-increasing production. Emerging mortgage quality control technology is expected to bring the independent component to loan reviews the GSE’s are requiring. Lenders have developed new underwriting guidelines that are reminiscent of old in their down payment and ability to repay rules. Industry experts are hopeful that the combination of constrained loan programs, technology and the emphasis on consumer education will provide the foundation the American mortgage banking industry needs to reestablish itself. In the face of much adversity, lenders are finding new ways to meet their objectives of profitability while keeping alive the American dream of home ownership.