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ABS East Panel: Developments in Loan Origination and Underwriting Standards

Last week, at the ABS East conference in Miami, I moderated a panel on originations and underwriting. My panel included:

Darius Bozorgi, President and CEO of Veros  Real Estate Solutions, a company that provides valuations and predictive analytics. Qunicy Tang, SVP of DBRS, and Kathy Kelbaugh, VP-Senior Analyst, Moody’s. Eric Kaplan, Managing Director with Shellpoint Partners and Bill Rayburn, Chairman and CEO of FNC, Inc., a data and analytics company.

If you’ve ever moderated a panel at one of these conferences, you know that the big challenge is to get things rolling, in a dialog format.  Nobody wants to listen to each panelist plug his or her business, or do a presentation of a particular viewpoint.  What people want is to hear a discussion, hopefully a lively discussion, among experts.

This panel was hot—they delivered!  Bill Rayburn stopped by the Allonhill booth a couple of hours before the panel and told me he intended to bring up controversial topics.  I had spoken with all the other panelists prior to that, and I knew they could take it.

We opened with what is new in originations and underwriting.  This group was unanimous in stating that the industry isn’t trusted anymore, and that everything about originations and underwriting now needs to demonstrate a reason why investors should put their trust into those loans.

Granularity, verification, validation of data and analytics are all being done now to an extreme that makes the work done previously seem negligible.  Information sharing is fundamental to originations now.  Panelists emphasized that no party to a loan, loan sale or securitization is going to accept not knowing everything about that loan.

One issue that surfaced is that technology is increasingly necessary.  Originators who can’t afford to invest in new technology that provides the data and ability to analyze what the investors, diligence firms, issuers and rating agencies require won’t  be able to compete. 

On the diligence front, it was noted that diligence has now moved up in the life of the origination, with pre-funding diligence now a standard.  This is a fundamental change from how it was done before, and it gives the investor greater reason to trust securitizations, because the issuer has the ability, now, to decide not to fund a loan if it doesn’t pass pre-funding diligence.  In the days of old, the issuer was committed to the loans and didn’t look at them until post-funding.

Income verifications are now far more extensive than before.  With the preponderance of jumbo loans right now, income verification is quite complicated because the borrowers for these loans tend to have tax returns to support their income, and not just a simple W2.

The industry is seeing far more limited product types, and can expect that to continue until the market is providing much greater volume.  Documentation levels are full, without exception. 

The controversy that came up was related to the rating agencies being paid by the issuer, and in fact, the diligence firm being paid by the issuer, in a securitization.  I was able to point out that Allonhill’s policy is to report to an audit or compliance committee on a securitization, and not to the individuals at an issuer who are responsible for the transaction.  Further, our people are all trained in the use of Ethics Point, a third party website for reporting ethical violations.  Allonhill’s employees all know that if anyone ever attempts to coerce them, influence their findings, or otherwise interfere with our ability to remain completely independent, and to report our complete and accurate findings, they must report the violation, anonymously if they prefer.  Those violations come directly to our General Counsel, or to outside counsel, if they indict our senior management.  We have always held sacred our vow to represent investors, completely independently.  These two features, in addition to contractual language regarding our absolute compliance with reporting requirements in accordance with the SEC’s rules, renders us independent.  Just as an independent auditing firm is retained by the company being audited, we have established standards and controls that prevent a conflict of interest.

The overall concluding point of the panel was that one thing, above all others, will be of greatest value to this industry: standardization.  This includes standardization of data, and of the process to review loans and report findings.  Variation in process, and in data and how it is presented, means that investors, the rating agencies, and others, will not be able to compare loans and securitizations in a meaningful way.  As a panel, we concluded that standardization is our goal, and that this industry is committed to getting it right, and will rally behind this effort.

I’d like to thank my panelists for participating.  We had some fun, and the format, which was a stage with chairs, just like a news talk show, was very conducive to making it feel like a conversation, and not like a series of presentations or like an interrogation.  Hats off to ABS East for putting together yet another productive, informative and important industry conference.


Lack of trust in the mortgage industry

I believe you were all right on the issue that there is a significant lack of trust in the mortgage industry. The answer is to go back to the basics of the buyer and seller relationship. Communication, education, and building relationships with the buyers is the first priority. Quantity of loans produced must be matched by the quality of service, of course. Long term stability and trust does not come without consistent, quality customer service.