Bursting the Bubble of Mortgage Compliance


For the past several years there has been periodic buzz about a possible second housing market bubble exploding. Remember a few years ago when the global economy crashed, because lenders dished out subprime mortgages like snake oil and preyed on the most vulnerable? Very simply, they issued mortgages to people who could not make the payments. Both mortgage originators and mortgage lenders were the culprits.

A component of the crisis not often addressed is the role of investors. Many took advantage of low mortgage finance rates, which played a huge role in fueling the housing bubble. “There’s a false narrative here, which is that most of these loans went to lower-income folks. That’s not true. The investor part of the story is underemphasized, but it’s real,” says Wharton’s Susan Wachter. “Borrowers who got loans for their second and third homes…were not home-owners. These were investors.”

Are we facing another bubble burst? Some say no. “More prudent lending norms, rising interest rates and high house prices have kept demand in check.  Regulatory oversight on lending practices is strong, and the non-traditional lenders that were active in the last boom are missing, but much depends on the future of regulation,” according to Wachter.

Regulatory compliance requirements

Dizzying regulations have emerged since the last bubble explosion at state and federal levels, including:

  • TRID Disclosure audits (TILA-RESPA Integrated Disclosure) which is part of the Dodd-Frank Wall Street Reform and Consumer Protection Act)
  • Home Ownership and Equity Protection Act (HOEPA)
  • State Consumer Protection regulations
  • Real Estate Protection Equity Act Good Faith Estimates (RESPA GFE)
  • HUD-1 Disclosures
  • …and nearly countless others

The periodic buzz about a possible bubble burst never seems to get much traction. Complacency is certainly a factor, as the list of regulations continues to grow. You know, that old false sense of security, tacit or explicit? But there are so many factors to consider. Forbes reports, for example, that wages have not kept pace with the rise of housing costs, which means that many renters are now unable to save enough for down payments or mortgage payments. Recent tariffs on Canadian lumber (recently up from 8.99% to 17.5%) have driven up builder costs, and hence inflated home prices and associated lender costs. 

Shouldn’t  we expect the most devious of compliance loopholes to be uncovered, which could fuel the next bubble burst? Time to wake up!

Consider some of the factors involved in mortgage originator and lender compliance:

  • Who are the potential borrowers, and what are their socioeconomics?
  • What is the housing inventory (recently down 23%)?
  • How has the pandemic affected housing prices?
  • How does incurred student loan debt affect the ability to obtain a mortgage?
  • Where are the most affordable and unaffordable housing regions?
  • How is the Fed manipulating interest rates?
  • …and the list goes on.

That is a big honkin’ cumulus cloud load of data, no? How do you acquire it, clean it, crunch it, and get your arms around all of it? Using spreadsheets, pie charts, bar graphs, report templates and all that is not only incredibly inefficient, but often leads us to false narratives. 

By analogy, ask anyone who has attempted to solve Lewis Carrol’s logic puzzles what they conclude. For example:

Babies are illogical; 
Nobody is despised who can manage a crocodile; 
Illogical persons are despised.

How different is that from trying to reconcile two or more of the apparent unrelated challenges listed above? Without tools that reliably support sound logic with real data, you might think that babies despise crocodiles. What’s the story?

What to do…

Choices for mortgage originators and lenders seem to be these: 

  • Don’t you worry ‘bout a thing; 
  • Cobble together as much related data as you can and set an army of spreadsheet geeks to work on predictions that impact compliance. Here are just a few:
    • Mortgage interest rates rising to 3.6% in 2022 will bring housing prices down
    • New listings will hit a new high without making a dent in supply shortages
    • Rents will continue to rise
    • Homebuyers will relocate to cities
    • Condo demand will rise

The validity of one or more of such “predictions” is intensely complicated. How many data elements are involved? Just look at that list of data sources. How clean and normalized is the data from so many sources? What are the most significant relationships (correlations and causation) between data elements, qua mortgage lending? Do you have the technical infrastructure to crunch the problem and put your house in order? Big questions!

Gemini has shown the way forward for numerous complex problems that involve compliance swimming in huge pools of data. Especially useful are the crystal clear visuals that you can derive using Gemini Explore

There’s nothing impressive about unscalable analysis techniques on dirty data with less than capable technology. All that does is place the burden of getting it right on a few ultra technical data scientists, with both hands tied behind their backs. 

On the other hand, teasing out good candidates for mortgage lending within a reliable, compliant framework—and assessing and reporting, timely and reliably—is what is required for the most significant challenges facing the housing market. Want to learn how to effectively address over 70% of the most nagging risks that mortgage originators and lenders face? Want to put your domain experts to work as analysts, cleaning data, revealing hidden relationships visually, and framing it all within a capable technology footprint? Reach out to our team to start using Gemini Explore today.

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