• Abstract and Figures
• Public Full-text

• Cognizant Reports U.S. Lending Industry Meets Mortgage Process as a Service Executive Summary plan to wind down the GSEs and support the private The U.S. subprime mortgage crisis ended a sector’s efforts to become the dominant provider prolonged period of growth and prosperity within of mortgage credit is a positive sign. the housing industry. Rapidly increasing home prices and residential mortgage backed securi- In addition to the government’s proposed role, ties (RMBS) increased home lending. The housing it is clear that private investment will rely bubble burst, and with it, many private investors heavily upon improved risk management and and originators exited the housing finance market. clearer visibility and understanding of the risks Government-sponsored enterprises (GSEs), oper- within an investment pool prior to ramping up ating as government conservatorships, increased private investment efforts. their position within the housing finance market in an effort to stabilize the housing industry. The shift to a primarily private investor-driven market with clearer management and under- The GSEs have become the dominant players standing of risk is one of three primary factors in the mortgage market in the absence of pri- affecting the revitalization of the housing finance vate investment. Investors have been waiting for market. The role of government regulation in the direction from the U.S. Department of the Trea- housing market is the second factor affecting the sury regarding the future of the GSEs. In Febru- revitalization of the housing finance market. The ary 2011, a report to Congress from the Treasury February Treasury report provided insights into Department was released, which discussed a plan the gradual change within the GSEs. Moreover, to “responsibly reduce the role of the Federal The Dodd-Frank Wall Street Reform and Con- National Mortgage Association (“Fannie Mae”) sumer Protection Act has given broad directives and the Federal Home Loan Mortgage Corpora- regarding what constitutes a qualified residential tion (“Freddie Mac”) in the mortgage market and, mortgage, reasonable lending practices and risk ultimately, wind down both institutions.”1 retention requirements for loan originators and mortgage securitizers. A lender’s and/or inves- Industry players speculate that the gradual tor’s ability to effectively and efficiently address and measured reduction of the GSEs’ mar- and manage regulatory change is a critical ket dominance will provide opportunities for component to successful growth within the new private investors to re-enter the housing finance RMBS space. market. Although the Treasury’s plan lacks the specific details that would draw a clear incen- The stabilization of the housing market is the tive for private investors to re-enter the market final factor. There are emerging signs that the during ongoing challenging economic times, the housing market is beginning to stabilize, including cognizant reports | september 2011 a decline in foreclosures, increasing household increased. In most cases, subprime originators formations, increasing corporate profits, increas- provided a guarantee to investors (private-label ing consumer confidence and home affordability. mortgage securitizers) to repurchase a loan if These factors point to a gradual positive turn in it went into early default or if there was a mis- the mortgage industry. Mortgage banks will need representation in the terms of the loan when it to gear up proactively in order to capitalize on was purchased. market opportunities as they begin to emerge. Subprime mortgage originators became insolvent The emerging suite of services referred to as due to improper forecasting of defaults and were “mortgage process as a service” (MPaaS) offers unable to repurchase their mortgage loans. Many several solutions to revitalize the housing finance of the subprime lenders went bankrupt or closed market. Ensuring loan quality and providing data lending operations. Heavily leveraged private- transparency will help reduce risk and increase label mortgage securitizing companies suffered private investment. Loan origination data will be large losses and exited the secondary mortgage collected, verified and presented in a standard- market, defaulted on RMBS payments to their ized manner, which will improve credit under- investors or filed for bankruptcy. This led to a dra- writing decisions for the originator and deliver matic decline of private investment in the housing improved due diligence services to private inves- finance market. tors. Enhanced loan information quality will result in fewer mortgage repurchases and poten- The decline of the housing finance market caused tially reduce early loan default rates by provid- many to question existing regulatory oversight. ing deeper, more accurate and more meaningful Banking regulators reassessed the secondary information during the loan origination process. mortgage market and housing finance to deter- mine what oversight and rules could be imple- By removing the cost of ownership of technol- mented to avoid the mistakes of the past. Con- ogy infrastructure, applications, platforms and gress and other regulators (Federal Housing people, as well as adopting a pay-per-use model, Finance Agency, Office of the Comptroller of the MPaaS enables banks to save money. They can Currency, etc.) have provided guidance and regula- then focus on increasing market share, while rely- tory requirements to banks and private investors. ing on their MPaaS partners to streamline pro- cesses, manage and extend systems capabilities A major directive came from the Dodd-Frank Act, and provide meaningful loan information to help whose extensive consumer banking provisions them make better business decisions that comply added stringency to existing lending requirements with government regulations. (e.g., defining a qualified residential mortgage), detailed acceptable lending practices and man- How We Got Here dated 5% credit risk retention requirements for There are many opinions as to whom and what is originators and mortgage securitizers. The intent responsible for the exit of private investors from of the legislation is to promote a safer housing the secondary mortgage and housing finance finance market by spreading the share of risk in markets. Key contributors include the easing of securities for originators and mortgage securitiz- lending standards (such as Fair Isaac Corporation ers and improving lending standards and practices. (FICO) scores, loan-to-value (LTV) ratios, debt-to- income (DTI) ratios, etc.); exotic mortgages (such As banks and private investors work to implement as adjustable rate mortgages, interest-only loans, and comply with these new regulations, change is stated income loans, etc.); the government’s occurring within another department of the U.S. desire to increase home ownership; shareholder government. The exit of many private investors in pressure on companies to stay competitive and the RMBS issuance business resulted in the GSEs increase revenue; heightened speculation in the emerging as dominant players in the secondary housing market; appraisal fraud; broker fraud; mortgage market. The U.S. Treasury directed the and borrower fraud. GSEs to stabilize the housing market by provid- ing liquidity. Private investment has remained As delinquencies spiked due to borrower defaults, on the sidelines, waiting for business conditions demands for mortgage repurchases from to improve. investors (mortgage securitizers) to originators cognizant reports 2 The February Treasury report to Congress pro- Private investors anticipating a return to the sec- vides the Treasury’s plans to significantly reduce ondary mortgage market are interpreting this the GSE’s presence in the mortgage market. It is release as a positive signal for developing plans evident that the reduction in the GSEs’ market to re-enter the market. As the conditions of the share will be gradual and measured. The report housing market begin to improve, private invest- states, “Our plan presents several proposals for ment will increase (see Figure 1). structuring the government’s long-term role in a housing finance system in which the private sec- tor is the dominant provider of mortgage credit.” Forces Driving the U.S. Mortgage Industry Area Drivers Impact Implication Unemployment rate estimated Increased demand for housing to stabilize at 5% after 2013 Household formation to Increased demand for housing average 1.2 million/year over the next decade Early signs of Improving credit scores, deleveraging, Improving credit quality of gradual revival Economic declining delinquencies borrowers for housing Environment Declining price-to-income ratio Increased affordability and mortgage borrowing Low mortgage interest rate scenario Increased affordability Rising rental incomes Improved attactiveness of ownership Slow rise in consumer confidence Improved willingness to borrow Industry Lower net interest margins Lower profitability levels Drivers scenario Declining foreclosure filings Demand and prices for homes will stabilize Revival of lending and Increase in all-cash deals Traction in housing market RMBS Jumbo deals activity in Revival of investor risk appetite business RMBS market Uptick in ABX index Improving prospects of secondary RMBS market Regulations Prospect of significant reduction of Revival of private players' interest the role of GSEs Heightened regulatory oversight Increased compliance and reporting Increase in cost Risk retention norm Capital

Load more

  17

Copy Link