A vast chasm developed between the loan originator (the mortgage broker) and the final owner of a mortgage (hedge funds via CDOs). And it’s precisely this disconnect between the originator and the investor that created the current problems in the market. Why should a mortgage broker care if a borrower defaults? That’s the investor’s problem. He earns his commission either way. In fact, the more exotic the loan, the bigger his paycheck so his incentive is to find buyers that are likely to default.
Economic Recovery Reforms Senator Christopher Dodd Chairman of the Senate Banking Committee Congressman Barney Frank Chairman of the House Financial Services Committee Proposed Guidance for Legislation Submitted to the offices of : January 24, 2009 Prepared by: Sam Chughtai, Risk Management Microsoft Corporation, [email_address] Chris Dufault, Fraud, Credit & Risk Management Consultant, [email_address] Mark Gabel, Risk Management Microsoft Corporation, [email_address] Senator Tim Johnson Ranking Member Senate Banking Committee
Homebuyers mortgage loans based on inflated appraisals derived under pressure from lending and real estate agents
This artificially boosted rapid run-up in home prices between 2001 and 2006, and put the local housing market at a higher risk of falling.
A 2006 study by Richfield, Ohio-based mortgage and real estate research firm October Research Corp. found that 90 percent of 1,200 appraisers nationwide said they had been pressured to raise valuations, up from 55 percent in a smaller 2003 survey
The problem is underreported because of appraisers' fears that they will be blacklisted by real estate lending or sales agent
Inadequate Checks And Balances Control Mechanisms
Loan brokers separated from credit grantors and servicing
Brokers don’t care if borrower defaults
The more exotic the loan the higher the commission - providing incentives for brokers to seek out non-creditworthy buyers.
Falling home values reduce securitization of mortgage portfolios make them less attractive to secondary markets
Impedes ability for banks to lend in other in non-mortgage areas (i.e. consumer and commercial loans.)
Fannie Mae and Freddie Mac are taken over by fed.
Mortgage performance insurance programs are unable to meet potential payout demands
AIG is bailed out
Exposure to credit derivative contracts start to bring down investment banks.
“ Some theorize that money from real property speculation quickly moved into food and oil commodities speculation exacerbating domestic economic crisis by further eroding consumer ability to pay mortgages.”
As President Obama said on Inauguration Day, “this crisis has reminded us that without a Watchful Eye, the market can spin out of control”
We propose a Third Party Independent Risk Rating Value based Financial transaction Valuation and Audit model to ensure objective decision making for Individual (small) and Portfolio based (large) Financial / Mortgage transactions with built in criminal penalties.
Mandate Third Party Intrusive Oversight with criminal penalties to prevent the future catastrophe in financial and mortgage industry.
Develop and Mandate Risk Rating / Early Fraud Detection Framework compliance for all financial services organization, SEC Brokers and Audit Firms.
Introduce a Third Party Audit firm attestation requirement for Risk Management / Fraud Detection Valuation for all individual small / portfolio based large transactions.
An independent Risk Management Value ensure a common taxonomy across all transaction partners and prevent misleading High, Medium and Low subjective ratings based frauds by transaction beneficiaries and participant.
Mandate All individual Financial Transaction and secondary mortgage market Portfolio be assigned an independent Risk Rating value by a third party for quarterly disclosure reporting.
Mandate Criminal Penalties from Board of Directors to Senior Management for avoiding / tempering red flags reporting for High Risk Rating transaction execution.
Civil & criminal penalties for non-compliance to regulations
Authenticate and report all parties to a loan transaction including guarantors, borrowers, sellers, mortgage broker, real estate broker, appraiser etc.
Mandate banks to contribute all commercial and consumer trades to credit bureaus with Risk Rating Framework Value
National appraiser registry to track and report infractions
Mandate third party income validation to assure adequate debt to income
Mandate insurance companies to report property claims history to help prevent insurance fraud.
Proposed Changes & Impact Analysis Mortgage Finance Transaction Processes Current Lending Practice Proposed Model Impact Third party property valuation crosscheck ( AVM/BPO) No Yes Improve transparency / reduces fraud Independent income verification / enforce debt to income qualification No Yes Improve transparency / reduces fraud Mortgage broker / appraiser collusion potential (it was the trigger for the current crisis) Yes No Improve transparency / eliminates frauds Assign every transaction an independent formula driven CRV (calculated risk value) No Yes Improve objectivity / eliminates frauds Attestation requirement for all transactions risk values ( CRV) audit and validation No Yes Improve objectivity / eliminates frauds Mandate civil/criminal penalties for misrepresentation and fraud for all levels from appraiser to board of director No Yes Improve transparency / reduce frauds Mandate third party transaction validation and risk mitigation assessment with quarterly reporting for all transactions No Yes Improve objectivity / eliminates frauds Establish national registry for appraisers, mortgage brokers , and other financial services key players / authenticate all parties to a transaction No Yes Improve objectivity / reduce frauds Mandate commercial trade lines reporting No Yes Improve transparency Mandate banks to submit all transaction details to credit bureau with assigned risk value (CRV) No Yes Improve transparency / eliminates frauds All parties to a mortgage transaction remain responsible for loan performance (i.e. brokers who sell loans are not ‘off the hook’ for poorly qualified loans..) No Yes Improve accountability for loan qualification Mandate insurance companies to report claims histories and frauds to insurance claims reporting companies No Yes Improve transparency / eliminates frauds
We are an independent group of senior leaders in Risk Management / Fraud Detection domain with over 60 years combined experience with fortune 100 companies and public sector clients.
We offer our Subject Matter Expertise in Risk Management Framework Development, Fraud Detection, Credit Reporting and Real Estate Valuation to assist and strengthen the forthcoming financial risk management / compliance legislation.
While we’re versed in private sector risk aversion solutions, we have no current association with financial services, information services or other entities that would create conflicts of interest and can assure our complete independence during legislation guidance. We are available for more detail discussion and guidance development if requested.
An industry leader in risk management and fraud detection with over 20 years of professional consulting experience with Price Waterhouse Coopers, KPMG, Microsoft, Choicepoint and public sector clients.
An industry leader in consumer and commercial business credit fraud detection, risk management and electronic real estate valuation experience with over 22 years of experience consulting fortune 100 companies, Experian, Equifax, and Choicepoint.
A Senior Leader at Microsoft in risk management group managing global risk management practice with over 18 years of industry experience providing risk management and fraud detection guidance to Roche, Eli Lilly and many Fortune 100 companies.