Why We All Need To Know More About Mortgages

August 27, 2014 at 9:31 am 1 comment

The SEC was literally asleep at the switch during the early days of the mortgage meltdown. Although it has made some marked improvements in its oversight of the financial industry, its glacial movement in implementing Dodd-Frank mandated reforms makes it quite clear that it is as reluctant to impose requirements on its regulated entities as the CFPB is zealous in dreaming up new and creative ways to protect the American consumer from himself.

So it’s big news whenever the SEC finally gets around to implementing Dodd-Frank requirements and even bigger news when, on balance, the proposal is one that makes a lot of sense. In fact, at the risk of insulting the CFPB, the proposal the SEC is reportedly finalizing today should nudge the CFPB to take a second look at its proposed revisions to HMDA regulations. Humor me a little bit and you will see where I am going on this one.

Asset-backed securities are a broad categorization of bonds comprised of pools of assets ranging from student loans to car loans to everyone’s personal favorite in the industry — mortgage backed securities. Purchases of these bonds are repaid with the revenue from consumer loan payments. These bonds are typically broken into tranches with more conservative investors getting less of a return but being first in line to get paid in the event that the loans start going delinquent.

As credit unions are painfully aware, in the pre-financial crisis days regulations permitted institutions like the corporate credit unions to rely on ratings agencies when deciding whether or not it was safe to buy an asset backed security like one comprised of mortgage loans. With 20-20 hindsight, we all know that this assumption was dangerously naïve. For the last several years, the question has been with what should the old system be replaced? New regulations require that institutions, including credit unions, no longer rely exclusively on rating agency determinations when buying securities, but as I have complained in previous blogs, it is unrealistic to think that most institutions have the expertise or access to information necessary to make the type of decisions for which they relied on the rating agencies. In addition, remember that all this is taking place against the backdrop of litigation in which credit unions have billions of dollars at stake in which the primary issue is the extent to which the bundlers and underwriters of mortgage-backed securities knowingly provided inaccurate information when selling securities that faded quicker than the Yankee’s playoff hopes. (Hey, at least we have the Jets and Giants to look forward to…Right?).

According to several news reports, the SEC will be finalizing regulations mandated by Dodd-Frank that require the issuers of asset-backed securities to provide more loan-level data about the assets that are being bundled and sold into securities. As a result, before an institution purchases a mortgage-backed security, for example, it will be able to examine the individual mortgage loans comprising the security.

Similar proposals have been floating around since 2010. So why the holdup? According to press reports, privacy groups have been concerned about how regulators planned on protecting such a huge treasure trove of personal financial data and a way that protects the individual homeowner. These are, of course, legitimate concerns, particularly since hackers have demonstrated on an almost daily basis that it is about as easy to steal computer-protected data as it is to find a first-term Senator who thinks he should be President. As legitimate as this concern is, the benefits of the proposal far outweigh its harms. By putting buyers on notice that the information is available to assess a loan’s quality, we’re creating a mechanism to improve credit quality before bonds go bad as opposed to trying to deter recklessness almost exclusively with after-the-fact law suits.

So where does HMDA and the CFPB come in? Currently, the agency that never sleeps called a Bureau has out for public comment proposed revisions to Regulation C, which implements HMDA. These mandate that you log information about mortgage loans you provide. Dodd-Frank gives the Bureau the authority to mandate the creation of a truly universal loan identifier. In an ideal world, regulators and lenders could track every loan from its creation to its payoff.  This would benefit housing advocates who believe that, with just a little more information, they can prove that lenders are somehow to blame for every mortgage not given to anyone who wants one and every foreclosure that takes place. It would also benefit lenders, many of whom already have to comply with unique loan identifier requirements if they participate in the MERS system. But the Bureau notes in the preamble that it isn’t planning a formal universal identifier proposal at this time. It should reconsider.

Given the nationalization of mortgage finance and the benefit to the financial system of insuring that all parties to complicated financial transactions have as much information to perform adequate due diligence as possible, the CFPB should consider speeding up its timeline for implementation of a universal loan identifier system. I understand that this process won’t be quick but the sooner a mortgage tracking system is implemented the sooner consumers and lenders can benefit from a more transparent lending system and resulting efficiencies.

On that note enjoy your day and, if you are in the Albany area, I’m giving you permission to leave early and take advantage of this beautiful weather while it is still around.

 

 

 

 

 

 

Entry filed under: Advocacy, Compliance, Mortgage Lending, Regulatory. Tags: , , , , .

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1 Comment Add your own

  • 1. www.alzzalinux.com  |  October 9, 2014 at 3:57 am

    Howdy! I could have sworn I’ve been to this blog before but after browsing through some of the post I realized it’s new to me.
    Anyways, I’m definitely delighted I found it and I’ll be bookmarking and checking back
    often!

    Reply

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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