Opening today’s paper to more reports about the apparent processing problems involving foreclosures, I was struck by the near total absence of any discussion concerning ways to constructively address this dilemma. Instead of framing the discussions in the useful context of “root cause” and “solutions”, the dialog has too often been cast in terms of “victims” and “villains”.
I would suggest that if we hope to move the housing finance industry from its current challenged state to one that is stable, sustainable and able to support the housing needs of this great nation over the next 70 years, then the time is now to end the blame game and get to the hard business of redefining and recasting the industry.
I would point out that the current foreclosure issues should come as no surprise to anyone. They are the predictable by-product of an industry that made scant little investment over the past decade in these back-end processes and systems. Instead, the lions share of investment was quite understandably made in support of the front-end systems that enabled customer capture and management, loan processing and underwriting. These were the investments that supported revenue growth, and in the absence of these investments, there is no doubt that the industry would have been unable to grow from $800 billion in origination in 1999 to nearly $3.2 trillion in 2005.
Before the discussion of foreclosures ends, I predict we will see other similar problems exposed by the industry’s under investment in these non-revenue generating processes and systems. For example, we will soon begin reading reports of lost or misplaced documents, including promissory notes and other important documents. And, again, why the surprise? For years, with only a few exceptions, the industry (lenders, title agents and attorneys, investors, servicers and for that matter regulators) have labored under the burden of managing the insane volume of paper associated with the typical mortgage loan and these entities for the most part have been slow to implement integrated document management systems. And the same can be said for the many other systems and processes that support such functions as data integrity and transparency, fraud detection on a broad scale, and the list goes on and on.
But where to begin … and as I’ve said, identifying the problems is only half the challenge. We must also address solutions...
The breakdowns in the system we are witnessing today are evidence of larger structural deficiencies throughout the mortgage finance industry - due no doubt to the massive under investment as discussed above, but also the result of the failure of the industry to evolve over the past 40 years in ways to support the increased importance of housing to our nation during that period. And to rectify these issues, the industry will need three things … time, money, and leadership.
As for leadership, I propose that FHA and Ginnie Mae be permitted to step forward and demonstrate the thought leadership and excellent execution that will be necessary to guide the industry to a more sustainable, scalable footing. But to do this, both organizations will require money – and more of it than Congress has been willing to consistently allocate in the past – despite the fact that both generate tons of free cash flows. So, lets untether both the FHA and Ginnie Mae from HUD - and permit them to operate as standalone, self-funding instrumentalities of the federal housing system. Leave the housing policy issues with Congress to debate and HUD to implement.
Without doubt, the private sector would take cues from such a bold step, and the uncertainty that today plagues this industry would begin to abate.