Archive for September, 2010
Analysts at the Federal Reserve Bank of Cleveland used the yield curve to estimate the probability of the economy will return to recession by next September is now 2.9%, down significantly from an 18.5% chance previously.
Last week, the National Bureau of Economic Research announced the recession of the past few years is over, reaching its trough in June 2009.
The Cleveland Fed analysts said although the numbers aren't strictly comparable, the decreased chance for another recession a year from now implies 12 months of "nonrecession data (as declared by the NBER), rather than any massive improvement in the economy."
Joseph Haubrich, vice president at the Cleveland Fed, and research assistant Timothy Bianco used past values of spread in the yield curve and GDP growth to project real GDP growth will be about 1% over the next year, which "comes in on the more pessimistic side of other forecasts, although, like them, it does show moderate growth for the year."
A flat curve normally indicates weak growth, while a steep curve shows strong growth. Analysts said one measure of slope — the spread between 10-year Treasury bonds and three-month Treasury bills – corroborates this inversion. And it's especially true "when GDP growth is lagged a year to line up growth with the spread that predicts it."
"While we can use the yield curve to predict whether future GDP growth will be above or below average, it does not do so well in predicting an actual number, especially in the case of recessions," the analysts said. "Alternatively, we can employ features of the yield curve to predict whether or not the economy will be in a recession at a given point in the future. Typically, we calculate and post the probability of recession one year forward."
Write to Jason Philyaw.
HSBC and Barclays have put forward the case against being broken up by the coalition's banking commission, which will set out tomorrow for the first time the issues that will be considered during its year-long review.
The commission has a mandate to consider whether the universal banking model – where retail and "casino" investment arms sit alongside each other – needs to be altered to avoid another taxpayer bailout. Banks such as HSBC, Barclays and Royal Bank of Scotland are most concerned by this aspect of the review.
Led by Sir John Vickers, the former head of the Office of Fair Trading, the commission will also scrutinize the broader issue of competition on the high street, which is dominated by Lloyds Banking Group as a result of the rescue of HBOS during the 2008 banking crisis.
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John Varley, the outgoing chief executive of Barclays, defended the role played by investment banks that are linked to high-street banks. In a comment piece in the Financial Times, Varley said: "It is not the work of the casino. Offering a fixed-rate mortgage to a first-time buyer (a derivative is needed to do that) is a real economy service. So is offering a farmer the ability to hedge his euro farm-support payments to protect his business from swings in currency value (which needs a derivative)."
Appraisers are a fundamental part of the loan origination process. Unfortunately, deceptive appraisal practices are part of what caused the current housing crisis. Now, said firms at the Mortgage Bankers Associations’ Quality Assurance and Residential Underwriting Conference in Grapevine, Texas, it’s time to hold them accountable.
During a panel Thursday, representatives from PCV Murcor and FNC Inc. spoke to lenders about enacting personal quality control when choosing an appraiser.
“Just because an appraiser is licensed does not mean they are qualified,” said Kathy Coon, chief appraiser and director at FNC.
The two firms — one an appraisal management company, the other a leader in mortgage technology – use the same set of guidelines to ensure qualified and honest appraisers serve their clients. They look, for instance, at where the appraiser is located and make sure they assign properties in that area. According to the panelists, if an appraiser tries to value a property outside where they are familiar with, they lack geographic competence and will provide an inaccurate appraisal.
Another key factor is to track an appraiser’s comparable sales. Coon showed a map that FNC uses as part of its QC Vigilance platform to track all properties that were used to in comparable sales to a specific property. The appraised home sat in the bottom right corner with one other compared property. The rest were about a half mile away in a subdivision next to a country club.
“Does that make you question the appraiser,” asked Coon. “Why did he do that? I’ll give you the answer: the properties next to the home were valued at $700,000. The homes in the country club were valued over $1 million.”
She pulled the map from an actual filing.
Jacqueline Doty, director of credit risk at Freddie Mac, stressed how important comparable sales are, reiterating that overstating and understating an appraisal is against the law.
“Freddie Mac is not looking for a low appraisal. We’re not looking for a high appraisal. We’re looking for an accurate appraisal,” she said.
Quality control vendors at the conference discussed how QC should begin at the start of origination and extend post-closing at a private Fannie Mae summit on Tuesday. They said it’s time to look to the sellers and servicers to abide by compliance.
“Traditionally, brokers and TPOs haven’t had QC post-close on conforming loans and that shifts the burden onto the lenders,” said Tommy Duncan, executive vice president of Quality Mortgage Services. “I think we all realized at the summit the importance of post-close QC at the broker level and they should report that to the seller/servicer to monitor.”
Quality control is a review file that corresponds to a loan origination. Vendors make sure the terms follow regulatory compliance, perform quality assurance credit and collateral analysis, and look for red flags to indicate fraud. Coon believes appraisers must be evaluated before a lender can determine if their appraisal is valid.
“Value is not an opinion,” she said. “In appraisal practice, value must always be qualified.”
Write to Christine Ricciardi.
John Madrid is the new chief executive of xplair Technology. He joined xplair from Vericrest Financial, which services residential and commercial mortgages. He was chief information officer there, overlooking the application development and IT infrastructure.
For this edition of In This Corner, Madrid describes the mortgage technology changes post-meltdown and why mortgage data is growing more difficult to track.
How would you compare the overall technology platforms in the mortgage space to how it was before the meltdown?
We’ve seen a pretty significant shift from two perspectives: One, product focus has moved from being origination channel oriented to servicing operation centric, and two, there’s less emphasis on running systems in-house or on-premise and more interest in the Software as a Service (SAAS) model.
Product focus moving from origination to servicing certainly makes sense given that managing a portfolio, especially one with distressed assets, benefits greatly from underwriting expertise and tools. We’re also experiencing a shift in how servicing data is viewed. The analytics and metrics are managed differently than a few years ago. Close attention, on an asset-by-asset basis, is critical to the success of managing an entire portfolio. Large scale and more traditional servicing systems continue to fill the need for transactional processing, but newer products are developing to help provide the tools necessary to manage a more dynamic mix of assets.
SAAS offerings have also gained significant momentum. This change in direction makes sense. Large in-house IT operations can easily consume a disproportionate amount of any corporate budget. Moving some of the requirements and functions for operating a line-of-business solution to a third party not only reduces cost, but reduces the complexity of an enterprise’s operation. Managing technology investments – infrastructure, software, people – should not have to be a mortgage business’s core competency.
Is the mortgage market overwhelmed with data?
It’s easy to say yes, that we’re overwhelmed with data, but I think the bigger issues are (a) do we have the right data to make intelligent decisions when we need it and (b) does the data we have today really provide us with the ability to gain better perspective on potential future outcomes and trends.
The answer to (a) is not always. The nature of the current climate is such that the characteristics required to make an informed decision requires more analysis than in the past. Data on the borrower, the property, the surrounding area, and the local economic outlook all play an important role.
The answer to (b) is yes, but it continuously evolves. The way in which assets are viewed and managed is different than a decade ago. Understanding a borrower’s propensity to pay during the first five years of their mortgage is no longer as material. A borrower’s ability to pay versus their intent to stay in their home is no longer bound by affordability alone. Trending the historic data over the past several years has become significantly more difficult. One has to pay close attention to the trends and look for statistical anomalies in a different manner. Advanced analytics, trending and modeling are all works in progress.
What's the next step/product in mortgage technology?
There are a couple of general technology trends that will ultimately have an impact on mortgage companies. Most financial services companies tend to be fairly conservative in their technology investments. They tend to lag slightly behind the technology curve in order to get comfortable that technologies are stable, reliable and deliver value, as opposed to simply investing in the “next big thing."
From a general technology trend perspective, I believe that cloud computing will be the next progressive development to bring huge gains to any institution, so long as it’s managed properly. Cloud computing — whether public or private — can provide the basis for managing technology growth far more effectively than in the past. I expect to see significant growth in this area by both mortgage companies and technology service providers. An initial migration has already begun as a result of the emphasis behind the SAAS model. Cloud computing will also facilitate, what I believe to be, the next big issue of managing the “New” workforce. Technology will need to support the changing habits of the incoming workforce with improved mobility options to support people working anytime from anywhere. Device independence, infrastructure/system delivery and application usability will be key issues to address with this trend.
Advanced analytics and predictive modeling have always been and will continue to be a necessity. The challenge is insuring the right information is delivered at the right time in order for any analysis or modeling to be effective. And of course, the data needs change as the market evolves. This creates a significant challenge for many companies.
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