“… because TRID provides a mechanism for the CFPB to
collect data on every loan, increasing transparency and lender
liability, it is more important than ever for lenders, mortgage
brokers, real estate brokers and settlement agents to
collaborate on every Closing Disclosure Form.”
Proven Data, Proven Loans
By Wes Miller
NOVEMBER 2015 ■ National Mortgage Professional Magazine ■
NationalMortgageProfessional.com
62
“‘Data! Data! Data!’ he cried impatiently. ‘I can’t make bricks without
clay.’”—Sherlock Holmes
Many in the mortgage industry
can relate to the above quote from
the brilliant fictional detective,
Sherlock Holmes. Lenders, loan officers, title agents, real estate agents
and other industry professionals
can all attest that problems with
loan closings most likely start at the
granular level with incorrect or
insufficient information.
The mortgage crisis of 2008, for
example, really began in 2005 and
2006, when sparse and sub-standard loan data contributed to the
housing bubble.
Since then, the industry has seen
many changes. The Dodd-Frank legislation created the CFPB. The CFPB
instituted major changes with
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Qualified Mortgage rules, and now
there’s TRID, which creates additional buyback risk and civil liability.
And because TRID provides a
mechanism for the CFPB to collect
data on every loan, increasing transparency and lender liability, it is
more important than ever for
lenders, mortgage brokers, real
estate brokers and settlement
agents to collaborate on every
Closing Disclosure Form. The importance of getting the data right is
greater than ever. TRID creates additional buy back risk and now adds
the element of civil liability and
class action lawsuits.
Bad data, however, still exists. A
recent survey found 11 percent of
QM loans were mis-categorized
across a 700,000 cross-section audit,
and another 4.5 percent failed Safe
Harbor tests. Is it any wonder that
private investors are still hesitant to
put their faith in residential mortgage-backed securities (RMBS)?
Many financial institutions might
say, “Loan production isn’t perfect;
it’s the nature of the beast; erroneous or missing data is inevitable,”
Or, “There are too many moving
parts. Not every loan is the same.
Participants in the transaction use
their own processes and systems.
Investor guidelines are open to
interpretation, and CFPB rules are
too vague.”
A typical RMBS investor, for
example, looks at buying a pool of
1,000 loans. He cannot analyze
every data and document on every
file to be sure they are all qualified
mortgages and are compliant with
regulations. He’ll perform a random
audit to identify potential issues.
Here’s the problem, however: Just
because he picks 10 that are QM
doesn’t mean that the other 990 are
QM as well.
It’s not really until the money
stops coming in that people take a
real hard look at the data.
In the end, the lender may be
able to prove that most of the loans
in an RMBS are complete and error-
free. But the assumption that some
errors are inevitable is overly general in itself, and dangerously
inductive reasoning fraught with
its own inaccuracies. Consider the
following inductive argument:
● I leave for work at 7:00 a.m.
● I am always on time.
● I will always be on time if I
leave at 7:00 a.m.
The problem with inductive reasoning is that specific instances
cannot prove a wider set of experiences. Here’s what inductive reasoning looks like with a mortgage
loan:
● That loan is a Qualified
Mortgage (QM).
● That loan will not contribute to
buyback risk.
● Therefore, no QM loans will
contribute to buyback risk.
Broad generalizations based on
specific instances allow for error.
However, deductive reasoning, the
opposite of inductive reasoning,
can prove that something is always
true. For example:
● All cows are mammals.
● That is a cow.
● Therefore, that cow is a
mammal.
Instead of hoping for something
to be true based on a few, or even
hundreds of instances, deductive
reasoning starts with a proven fact,
and narrows the focus to a particular instance. An example with
mortgage terminology would look
like this:
● All the loans in this RMBS have
been proven as QM.
● That is a loan inside the RMBS.
● Therefore, that loan is proven
as QM.
As Sherlock Holmes would say,
“Any truth is better than indefinite
doubt.”
Of course, for deductive reasoning to be sound, the original statement must be true. And there’s the
rub! Proving every loan to be a QM
2. No version control
Different industry professionals use
different systems to input the
homebuyer’s information; so several versions are often generated. If
the consumer’s home address is
entered one way on the lender’s
system and another way on the title
agent’s system, there is no way of
3. Lack of transparency
attracts mortgage predators
It’s an unfortunate fact that in the digital age, companies have trouble safeguarding non-public personal information (NPPI). When data in the mortgage
process is not protected, it is easy for
fraudsters to use it in any number of
schemes. Wire fraud, straw buyers,
stolen identities, escrow theft, hacked
e-mails—the list goes on.
The above three points are just some
of the problems that continue to plague
the mortgage process, and they can all
be traced back to one root issue: incorrect, insufficient and unprotected data.
But technology can help fix these
issues. Instead of hoping each individual working on a loan is a reputable
professional based on a referral (inductive reasoning), a network where all
participants are vetted and verified can
provide a list of professionals who truly
are who they say they are.
Instead of mile-long e-mail threads
and using separate systems to input
borrower data, appropriate parties—
including the homebuyer—could collaborate on one document in one
online vault. This will help to verify the
loan as it is being created, and eliminate the problem of separate versions
floating around.
Technology can even proactively automate the comparison of data from
lenders, settlement agents, real estate
brokers, appraisers and borrowers, ensuring the data is correct prior to close.
With technology that connects all
parties and provides for accurate, transparent sharing of data, each loan in a
RMBS pool can meet investor and regulatory demands—it can be deductively
proven.
There’s a big difference between
looking at something as an investment
and looking at it as loss mitigation. If
industry professionals could view everything through the lens of loss mitigation then there wouldn’t be as much
risk involved.
Proven data equals proven loans,
and technology can take us further
than ever in making them an everyday
reality.
Wes Miller is CEO and co-founder of ATS
Secured, a new technology category for
the real estate closing industry. He has
cial products. He may be reached by email at [email protected].
www.nationalmortgageprofessionalmagazine.com
63
www.LykkenOnLending.com
■ National Mortgage Professional Magazine ■ NOVEMBER 2015
1. The homebuyer is minimally
involved
Isn’t it odd that the consumer, the
one the whole loan file is about,
does not have access to the systems
where their data is filed? Is it any
wonder that data is sometimes
incorrect or missing? The homebuyer needs to be much more involved
in the creation of their loan—
instead of just viewing it after the
fact. They need to be able to verify
the information during the process,
so they can catch inconsistencies
and errors as they occur.
knowing because they cannot easily extensive experience in developing and
marketing both core and ancillary finanshare data.
NationalMortgageProfessional.com
seems impossible. Too complicated,
too many moving parts, and too little time to verify every loan packaged into a RMBS pool. There is
always a chance that incorrect or
insufficient data will slip through.
With new technology, however,
this can change. In fact, it’s already
happening.
The TRID Rule that went into
effect on Oct. 3 is supposed to make
the mortgage process more transparent to homebuyers, so the
industry will create better, safer
loans. The rule takes four forms
(the Initial TIL, GFE, Final TIL and
HUD) with overlapping, inconsistent
messaging and combines them into
two new forms: the Loan Estimate
and the Closing Disclosure. It also
stipulates that the new forms have
to be in the homebuyer’s hands at
specific times to avoid last-minute
changes in the loan file.
Helping borrowers understand
the process is a step in the right
direction, certainly. However, the
homebuyer isn’t the only one who
contributes information to the loan
file. The information is, for the
most part, about them and the
property, but the rest of the loan
participants are the ones compiling
the data.
There are several problems with
this process: