Filling the radar screen

Mortgage Banking, Dec, 2005 by Neil J. Morse

DISCUSSING THE PROMISE OF TECHNOLogy and the sometimes-related overcapacity among lenders hungry for origination volume, Jeff Lebowitz, founder and president of survey company MORTECH LLC, Guilford, Connecticut, mused, "In 1992, Angelo Mozilo of Countrywide [Financial Corporation] said that all the elements were in place for processing an eMortgage; and this is 2005, and we're not quite ready for that yet." Speaking at GHR Systems Inc.'s Annual Client Conference last September in Colorado Springs, Colorado, Lebowitz said: "It's easier to see [change] than it is to do [it]. There will be a big fight for volume in 2006, a direct result of overcapacity, which is reaching into the secondary market."

Said Lebowitz, "What's happened in the secondary market is they're running out of players [sellers]." In particular, he sees this as just one more problem for Fannie Mae and Freddie Mac. "It's not an accident that they are being dismembered," Lebowitz remarked. "It's not an accident either that we're seeing lots of acquisitions in the mortgage technology space. It's happening because there is excess capacity in the business. There's not enough [potential customers] for a large number of independents to stay independent."

Attempting to explain current court tangles involving home-equity lending in the state of Texas, Robert Cook, a partner with Hudson Cook LLP, Hanover, Maryland, told attendees at the Texas Mortgage Bankers Association's (Texas MBA's) 55th Annual Educational Seminar and Marketplace in Dallas in November that challenges by the New Orleans-based Association of Community Organizations for Reform Now Inc. (ACORN), if upheld, would make it impractical to do business in the Lone Star State. ACORN wants Texas to cap lender fees at 3 percent of the loan amount, which makes the fight about what constitutes lender fees, said Cook.

"If you're the lender and you're paying for the credit report, right now that is not an amount paid by the borrower that should be included in a 3 percent cap. [However,] ACORN says the lender is somehow getting repaid, and it should be included in the cap," Cook said.

"I don't think there's a way to close a loan in Texas or anywhere else without incurring third-party costs and lender expenses of at least 3 percent, and that's what ACORN is asking the judge to consider [limiting]." Cook advises that a forthcoming Texas court decision could be stayed upon appeal, leaving lenders in a gray area and jeopardizing secondary-market sales.

"Wall Street doesn't like an adverse court decision or a stay, [so] whoever you sell your loans to ... make sure they are going to still buy Texas home-equity loans pending the appeal, because you don't need loans you can't sell," he cautioned.

Some gloomy assessments on fraud in the mortgage industry were presented by one lender and one law enforcement agent sharing a panel at the Texas MBA event. Bruce Morris, executive vice president of quality control for Saxon Mortgage Services Inc., Glen Allen, Virginia, drew muffled gasps when he proclaimed, "Every portfolio in the country has fraudulent loans in it." Morris then charged that too many industry members tolerate fraud. "We are our own worst enemies, believe it or not, [and] we can't have a tolerance for it--we just can't," he said.

Meanwhile, Federal Bureau of Investigation (FBI) Supervisory Special Agent Kellee Casebeer, with the agency's Dallas field office, said white-collar crime was the No. 1 priority of the FBI on Sept. 10, 2001. "But after the terrorist attacks on 9/11, combating white-collar crime became No. 7. All the issues of terrorism moved into those first six slots," she said.

What's worse, said Casebeer, is that "within white-collar crime, financial institution fraud is No. 4 and within that is mortgage fraud. So, unfortunately, you're No. 4 of No. 7," she told mortgage professionals in the Texas MBA audience, drawing some laughs. "As a result of shifting priorities, at this time we're not going to be able to expend resources on fighting fraud," said Casebeer.

Although she invites reports of fraudulent activities, Casebeer said the FBI must carefully prioritize cases to pursue; one consideration is whether there will be formal prosecution. "If the United States Attorney's Office will not prosecute, we won't investigate [cases]," said Casebeer.

Further on fraud, Saxon's Morris predicted problems "for all of us who made these wonderful [new] loans in California, where [for] 19 percent of all the loans made in 2004, the borrowers would not have qualified for a traditional 30-year mortgage." He told the Texas MBA event, "We're going to see that pop us, too. It's going to happen. Right now we have rising appreciation value, [but] when they start hitting the wall--every one of them--we're going to find some problems."

Morris urged fellow lenders to train their staff properly. "Give them training and tell them to have a jaundiced eye. And underwriters need to be a little cynical." According to Morris, his company is "seeing [fraud] with the 660 and 700 credit scores, just like we do the 500 and 550 [scores]. The higher the credit score, the more concerned I get," he said, adding: "'Prevention, prevention, prevention' is our company philosophy."