This report reviews the current financial crisis by looking at the lack of quality management through the mortgage supply chain. The crisis represents a failure of proper regulation and visibility throughout the mortgage supply chain. Only careful management of these quality issues through all financial institutions and through all aspects of the financial supply chain will remedy the past issues. This is a difficult task but not impossible. This report will discuss each section of the mortgage supply chain and how the weaknesses in the integration caused the financial crisis. Proposed legislation will be explained in detail. Several recommendations will be proposed, both short-term and long-term, which I believe are necessary to resuscitate the mortgage industry through supply chain integration. The recent “Dodd-Frank Wall Street Reform and Consumer Protection Act” which was signed by President Obama will be discussed as it applies in the mortgage supply chain.
Mortgage Supply Chain Introduction
As this report is being written the economy is attempting a massive recovery. Economic recovery, as positive as it sounds, will not immediately resuscitate the mortgage industry. The lending institutes are still facing several years of increased foreclosure and delinquency issues. Needless to say, mortgage loan origination will not be going back to the “old way” of doing things anytime soon. (Focardi) One would hope that lessons have been learned that will never be forgotten. H.L. Menchen summed it up when he said, “Nobody ever went broke underestimating the intelligence of the American public.” (Zipkin) The entire mortgage industry has changed from, “Don’t ask, Don’t tell:” to a “Zero tolerance, Zero defects.” (Focardi) As more information becomes available regarding the mismanagement of the mortgage supply chain new changes are being implemented. These changes will take many years to effectively realign the inconsistencies upon which the mortgage industry relied. Needless to say, investors will not be easily fooled again. The only mortgages currently being purchased are the “plain-vanilla” loans which encompass high credit scores, low loan-to-values and full-documentation borrowers. From a profit margin stand point, these loans provide minimal yields which leave little profits for those involved. In order for those employed in the mortgage industry to remain profitable, the mortgage supply chain must be integrated effectively. Profitable originators are crucial for buyers because without them there would be no intermediary place for borrowers to go for mortgage loan information. (Focardi)
The mortgage industry has yet to conclude what the “new normal” will be; however, automation must be an integral step towards “normal”. (Focardi) It is not to say that companies were not automated before the financial crisis. However, the technology was merely scattered throughout different companies without a benchmark of quality to guide the flow of information. There are enormous opportunities for defects and bottlenecks of information. Without automation the actual process of documentation, errors in disclosure of information, offering the wrong product to the borrower, ineffective borrower screening, inefficient credit scoring models, missing information in the loan package and incorrect loan pricing and compliance issues could be easier to address should a regulated software be implemented. These inadequacies ultimately lead to repurchase requests by the investors and possible penalties by the government. History
Before the mortgage crisis approximately 80% of the United States mortgage loans were issued to subprime borrowers on adjustable rate mortgages. (Dodd) The decline of sales began shortly after the home values peaked because refinancing became more difficult. As borrowers with existing adjustable rates began to see them move from their preliminary fixed rate of 2-3 years,...
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