In an initiative that could reduce fraud and boost investor confidence in mortgage-related securities, two of the mortgage origination industry's most powerful organizations are developing a plan to register the unwieldy network of 30,000 U.S. mortgage brokerage companies and roughly 500,000 individual mortgage bankers and brokers.
A national registry would make it easier for the industry to track the performance of an industry that has thus far eluded federal regulation. Mortgage brokerage companies and their employees are considered to be the major source of origination-related fraud, which costs mortgage lenders, consumers and investors billions of dollars a year. The situation has been exacerbated by the success of mortgage brokerages, which have seen their share of mortgage originations skyrocket to about 70% currently from about 20% in 1987.
"Right now, an investor has limited or imperfect information about the specific loans that make up [a] portfolio," says D. James Croft, executive director of the Mortgage Asset Research Institute Inc., a Reston, Va.-based firm offering cooperative antifraud and other data bases to the mortgage industry. "He might know that he's dealing with a third-party-originated loan and the type of company a loan is coming from, but nothing more. The registration system would give him a more microscopic way to analyze what he's buying."
"I don't have any doubt that the investment community will applaud these fraud-related registration efforts," adds James Loving, senior vice president of correspondent business development at Norwest Mortgage Inc. in Minneapolis. "The lenders are the ones that stand behind [these products] through the appropriate warrants, saying that these are quality products. If the quality isn't there, the investment community will lose confidence, taking its money elsewhere."
The plan, being developed by the National Association of Mortgage Brokers (NAMB) and the Mortgage Bankers Association (MBA), is being closely observed by the nation's alphabet soup of mortgage- related agencies like Fannie Mae, Freddie Mac and the Federal Housing Authority. The proposed national registry system could be in place as early as 2001, though observers believe it will take several more years for it to be fully implemented. If successful, other mortgage professionals like appraisers may also have to follow suit.
Washington-based NAMB, a 6,000-member group, has been quietly developing the initiative for the past five years, and in recent months it has gained the enthusiastic backing of industry powerhouse MBA, while Fannie Mae and Freddie Mac have been official "observers" at development meetings. Indeed, just last week at the MBA's annual meeting, the working group on the initiative began to consider detailed questions on exactly how much personal information brokers and brokerages will have to furnish.
Many see the registration process as an ironclad way to rein in the questionable practices of an industry that has managed to escape federal regulation.
However, many brokerages and brokers wouldn't register or furnish reams of personal data without a significant stick hanging over their heads. The solution: Fannie Mae, Freddie Mac and others would refuse to do business with anyone who doesn't have a registration number.
Transparency For Investors
As the registration program comes closer to fruition, experts say the issuer community could benefit in a variety of ways. For example, the specific contents of individual securities would become much more transparent, making it easier for them to cherry-pick those portfolios least likely to contain loans likely to go under water later.
"You'd have a better idea of the quality of the portfolio you're examining, a better idea of how the securities will perform over time," says Stanislas Rouyer, vice president and analyst of real estate finance at Moody's Investors Service in New York.
Adds Croft of the Mortgage Asset Research Institute, "For instance, let's say one broker traditionally produces loans that traditionally perform well with low delinquencies, whereas another traditionally produces garbage. The investor will be able to tell that through this registration system; more than likely, he'll be willing to pay more for the former than the latter. So in the end the registration system could lead to a new level of risk-based pricing of portfolios that isn't possible now."
The secondary agencies, which have significant writeoffs of their own, could benefit as well. In 1997, Fannie Mae wrote off $375 million on net income of roughly $3 billion, about a 12% loss; and Freddie Mac wrote off credit losses in 1997 that totaled $418 million on net income of $1.39 billion, or roughly 30%.
Finally, there is the intangible benefit: the boost in investor confidence in the industry's securities, according to Norwest's Loving. Specifically, with fewer fraudulent and problem loans funded, investors might be more willing to invest in - or stay invested in - the industry's securities, rather than putting their money into similarly-related securities in other industries.