So many industry professionals have been wrestling with it in 2014 that “compliance” may have become the industry’s word of the year. The jury’s still out but it’s never too early to joke about it.
Happy holiday season!
The New York Times ran an article recently titled “How Not to Be Fooled by Odds” in which the author defines what is meant by a statement such as “the odds of a Republican takeover of the Senate is about 74%.” Stating that “there really is a difference between saying something will almost certainly happen and saying that it is more likely to happen than not,” the author goes on to explain what is and is not meant by the statement. Concluding that “…a prediction that puts a 74 percent chance on an outcome should be “wrong” about 26 percent of the time,” he presents a list of situations that occur about 26% of the time, including:
In the same way, we need to be careful about what is actually being asserted by other statistics. For example, in the third year of California’s drought, we are quite focused on rain. So what is meant by the statement “There is a 40% chance of rain” (technically, the PoP or ‘Probability of Precipitation’)? Consulting the National Weather Service, we find the following:
Mathematically, PoP is defined as follows:
PoP = C x A where “C” = the confidence that precipitation will occur somewhere in the forecast area, and where “A” = the percent of the area that will receive measureable precipitation, if it occurs at all.
So… in the case of the forecast above, if the forecaster knows precipitation is sure to occur ( confidence is 100% ), he/she is expressing how much of the area will receive measurable rain. ( PoP = “C” x “A” or “1” times “.4” which equals .4 or 40%.)
But, most of the time, the forecaster is expressing a combination of degree of confidence and areal coverage. If the forecaster is only 50% sure that precipitation will occur, and expects that, if it does occur,it will produce measurable rain over about 80 percent of the area, the PoP (chance of rain) is 40%. ( PoP = .5 x .8 which equals .4 or 40%. )
In either event, the correct way to interpret the forecast is: there is a 40 percent chance that rain will occur at any given point in the area.
As you present your quality control findings to others, be sure that everyone understands what they mean. A clear definition of your terms at the beginning or end of any report is a good first step.
The threat to Fannie and Freddie appears to be over.
Mel Watt, the Director of the Federal Housing Finance Agency, announced in a speech last week at the Brookings Institution that he plans to maintain the role played by Fannie Mae and Freddie Mac in the housing finance market. We think this is good news for the housing recovery, and also good news for those involved in risk management in the mortgage industry.
The housing industry recovery has been hampered by the uncertainty about the future role of Fannie and Freddie, and the pending legislative initiatives designed to unwind them. With that legislation now apparently stalled, and with Watt’s statements about supporting a continuing role for the agencies for the foreseeable future, the housing market should be lifted by the prospect of greater clarity and stability in the near term.
For risk managers in the mortgage industry, who have been tasked with implementing the myriad changes required under the new FHFA regulations imposed on lenders and servicers, the stability provided by this shift in policy toward Fannie and Freddie should be welcome. For decades, the agencies have been a primary source for risk management guidelines for the industry, and the threat of their demise – and the uncertainty about what would replace them – was a big added worry that can now be put on the shelf.
Link to May 13 Wall Street Journal blog post: http://blogs.wsj.com/economics/2014/05/13/six-takeaways-from-mel-watts-speech-on-housing/
Link to May 14 New York Times article: http://www.nytimes.com/2014/05/14/business/Melvin-Watt-shifts-course-on-fannie-mae-and-freddie-mac.html?hpw&rref=business
As a vendor of risk management tools for loan quality and compliance, Cogent’s focus is on developing effective software solutions that accommodate the needs of different types of lenders. Our software automates and optimizes business processes, while our clients, together with their legal and compliance departments, decide what kinds of audits they need to perform based on their business lines.
However, Cogent is occasionally asked for references to useful information in creating audit checklists. The Tools & Resources section of our website provides this sort of information, including links to FNMA, FHLMC and HUD quality control guidelines. In this post, we briefly mention two new sources of information:
This list shows the loan defects, by categories, identified by Fannie Mae in post–purchase review of their acquisitions. These defects (which may be eligibility violations [i.e. subject to repurchase]) are referenced in reporting to lenders on the quality of their deliveries. These defect categories can become the basis of a lender’s audit checklist structure. A link to this loan defect category document is included among other useful links on FNMA’s Loan Quality web page, which we recommend bookmarking.
This relatively new publication offers substantive and in-depth coverage of issues for “legal, regulatory compliance, risk management and quality assurance professionals.” In addition to monthly issues, the publication also publishes weekly ‘newslines’, one of which recently offered a high-level approach to determining what CFPB rules and regulations apply to your organization. Cogent will shortly be a contributor to this publication.
Several articles in the last week have provided useful insights into the mortgage industry’s new regulatory environment and its impact on lenders’ and servicers’ business models. In no particular order, we suggest the following:
“The rapid growth and increasing regulatory scrutiny of nonbank mortgage servicers could “severely” affect the whole industry, Mortgage Bankers Association Chairman-Elect Bill Cosgrove said. “…we are keeping a very close eye on ongoing regulatory activities aimed particularly at nonbank servicers,” Cosgrove said in prepared remarks. “Nonbank firms have become an increasing part of the servicing ecosystem, and it is clear that they have captured the attention of regulators and policymakers.”
“Lenders remain reluctant to outsource for control and liability reasons. But with volumes down and compliance expenditures up, more have, particularly among midsized firms with limited resources.”
“According to… panelists, the compliance burden and need to add additional controls and oversight tripled compliance expense over the last couple of years. At the same time, the revenue has been flat and in some cases we have even seen compression in the top line as the bid for MSRs increased.
“But there was general agreement that the current economic model is tough (to put it mildly) for a new servicer, and it might be impossible for a new mono-line single-focused platform in today’s environment.”
“We’ve gone from a default crisis to a compliance one.” How to cope:
This one is from September 2013 but gives a sense of who the new players in servicing are and why the traditional players are scaling back.
“Private-equity firms and hedge funds are increasing their control of the rights to collect America’s monthly mortgage payments, an almost $10 trillion market that banks are retreating from amid looming regulations.”