Jan. 7: Notes on False Claims Act, dollar rolls, & wire fraud; blockchain primer – it might be a good thing for every lender & counterparty

Rob Chrisman

Rob Chrisman began his career in mortgage banking – primarily capital markets – 31 years ago in 1985 with First California Mortgage, assisting in Secondary Marketing until 1988, when he joined Tuttle & Co., a leading mortgage pipeline risk management firm. He was an account manager and partner at Tuttle & Co. until 1996, when he moved to Scotland with his family for 9 months. Read more...

This is exciting news for some. The DC Cannabis Coalition is giving out 4,200 free joints at Dupont Circle in Washington on Inauguration Day, Jan. 20. (It’s legal to give away but not to sell marijuana in Washington, hence the great price.) Then 4 minutes and 20 seconds into the incoming president’s speech the 4,200 recipients are encouraged to spark up. Things are changing in America…

 

I received this note yesterday from the CEO of a somewhat well-known lender. “Rob, my capital markets guy has a lot of experience, and threw out the term ‘dollar roll’ in a management meeting today. Can you explain that in simple terms?” I’ll give it a shot. A dollar roll is a tool used by local sushi restaurants to pawn off 3-day old fish to unsuspecting out of town clients. That being said, a “mortgage dollar roll” is a transaction in which an investor sells a mortgage security for delivery in the current month and simultaneously contracts to repurchase the same security on a specified future date. Usually the buyer is a dealer who needs to cover a short position this month. Given that a dollar today is worth more than a dollar in the future, the future price of the security is lower. The price is usually quoted in 32nds, just like MBS prices.

 

During the period of time between this month and the date in the future, the investor gives up the principal and interest paid on the securities, but earns the interest on the cash proceeds from the initial sale and the lower repurchase price at the future date. Another way to look at this is it is the implied financing rate, and savvy investor compare it versus other short-term reinvestment rates or other short-term borrowing rates. It becomes very complicated, based on the number of days per month, the coupon, and so on. Lenders don’t typically make much use of them, but large investors in agency MBS securities do. One might say that the mortgage dollar roll is the most important trading strategy for investors to finance their positions in MBS.

 

Switching from the secondary markets to the primary markets, Mark W. had some thoughts on False Claims. “Let’s say these companies and individuals fined for the False Claim Act delivered loans in bulk pools. One must ask themselves if the mortgage industry has improved processes and procedures on the due diligence when buying loans sold in pools since the mid-2000s.

 

“There is too much ‘blind faith’ given to the mortgage bankers by the lenders buying these pools. Obviously the statistical analysis of loans on an excel spreadsheet for a pool of loans doesn’t include all the ‘applicable requirements.’ But why does it take ten years to fine abusers? With all the technology enhancements, you would think the mortgage industry and even the government could create a system that reviews every loan in a bulk pool quickly and thoroughly.

 

“I would write an addendum into my agreements for maximum time the lenders and/or the government can come back to me on loans. Even if the False Claims Act was above and beyond any written agreement with a lender, I would still ask for it as a safeguard. Does E and O cover False Claim Act fines from the government?  I would ask my insurer for an addendum.

 

“It could be a conference topic, with a panel discussion. ‘How to create a bullet proof mortgage banking firm in 2017’ would be a good title. Too many ‘What if’s.’ Not sure it is even possible. What does ‘applicable requirements’ mean to a regulator?

 

No wonder so many banks and credit unions stay away from mortgage banking. As you know, they have dozens of other regulators in their back pocket. There are so many things mortgage bankers are not thinking about. How does the owner of a mortgage banker doing a billion a year sleep at night? But ‘applicable requirements’ has to have many reading every word in every contract. Most think in terms of production and defense for the past year or two, but those that have been around for years have to be thinking ‘what’s next.’” Thanks Mark!

 

Of course, folks have different takes on alterations to the lending process. Change isn’t always such a great thing, and the continued modifications made by the Agencies, investors, and lenders are hard to track. Luke Slivkoff isn’t alone when he opined, “Just a quick comment regarding the ‘ever changing residential mortgage industry’… Why do Agencies, investors, and lenders continually relish change? We ALL know what fundamentals work so why continually tinker with it? The mortgage industry needs to take a page from the Realtor playbook…it hardly ever changes. Our industry constantly changes but the real estate side has only a fraction of changes and seems to fair better year after year and deals with less regulatory burden. With higher rates, the cycle will now swing toward layoffs, tighter margins, cost crimping, and more pressure on employees.  Guidelines will loosen to try to accommodate less volume and to keep stock prices up, etc.  Later, it will swing back the other way and the opposite will happen…It’s insanity!

 

“They just need to ‘set it and forget it.’  Borrowers, builders, Realtors, lenders, agencies, investors, and regulators will then all better understand what it takes to buy a home today, tomorrow, and in years to come. Consumers will then learn and retain proper ways to buy a home by managing their credit, saving money, showing verifiable income, etc…and the mortgage experience will be easier, simpler, and lead to higher customer satisfaction, fewer CFPB complaints, and more Realtor satisfaction.”

 

An attorney wrote in with a good observation about the CFPB’s focus. “Speaking of the CFPB doing its job on consumer complaints…., so, you say the biggest complaint area is “collecting debts not owed”.  What’s the CFPB doing about the problem of federal student loans? Of course, CFPB (which is supposed to be an independent agency) has been silent on this issue.  It sure would have been interesting to see them try to punish another federal agency, though.”

 

On the subject of scams and wire fraud, Tony Butler, President of Equitable Mortgage Corporation, writes, “Here in Ohio we are experiencing email scams where someone will hijack an email account (Realtor or lender) and change wire instructions with a spoofed email address that appears to be from their realtor and happens just prior to closing. The link above sheds some light on it and I am sure it is nationwide.

 

“What is Ohio’s answer legislatively? Well, Ohio will now require any money due at a real estate closing that is over $1,000 to be only in the form of a wire. A title company will no longer be able to accept a cashier’s check. This is supposedly to combat fraud but it puts the consumer directly in the path of this freight train and opens more consumers to loss and fraud that they cannot control. The Ohio Legislature appears to be protecting the banks and the title insurance companies from fraudulent cashier’s checks (criminal activity) by requiring all Ohio citizens to only use a wire for a real estate closing! Goodbye free cashier’s checks to the consumer and welcome to a costly wire. The consumer can no longer use a cashier’s check and must track down wire instructions and send money off to the title company instead of bringing a check. Maybe the CFPB will need to step in and protect Ohio citizens from the Ohio Legislature!”

 

Keeping on with the trends in transferring money, here’s a trivia question for you. What currency gained the most value in 2016? Bitcoin was the currency that gained the most value in 2016, ending the year worth more than twice its value when the year began. When trading in Europe ended recently, the digital currency was worth $1,024. It has since plummeted. I bring this up because a blockchain is a public ledger of all Bitcoin transactions that have ever been executed. It is constantly growing as ‘completed’ blocks are added to it with a new set of recordings. The blocks are added to the blockchain in a linear, chronological order. It is believed that in the mortgage process & buying a home the technology could remove cost and friction from the process, create transaction records that are infallible and incorruptible, and facilitate near instantaneous settlement. And wouldn’t that be darned cool?

 

I am no IT whiz, but a blockchain is essentially a recordkeeping system that can replace a periodically-updated central database – a design that underlies most financial systems used today – with a clever distributed database that updates in near real time. This database maintains a continuously-growing list of ordered records called blocks. Each block contains a timestamp and a link to a previous block. By design blockchains are inherently resistant to modification of the data — once recorded, the data in a block cannot be altered retroactively. So, I don’t think there’s a “white out key.” A lengthier definition can be found here.

 

A writer named Oliver Bussmann put out a good description saying it is a simple way to store information. “It’s almost a reference, a database reference that you can point to. And there is a mechanism in that if you do a transaction, it’s first of all locked, it’s recorded, you cannot manipulate that. Plus, there is a software at the end, making sure that this transaction only is unique, verifies it. So you don’t need a third party to verify your transaction, but the software is doing that.

 

“So that business logic is part of that ledger, and at the end, the whole messaging goes away, you have a direct impact, a third party is not necessary anymore, and so complexity goes away.

 

“The low speed of doing business is going away, plus the accessibility of blockchain and Bitcoin is public ledger at the end, it makes it easier to access that information from anywhere because it isn’t stored anymore behind firewalls, it’s accessible for the different marketplace, and there’s encryption in place to make sure only the relevant parties have access.”

 

What might blockchain mean for lenders & mortgages? Here is a nice piece, written in plain English.

 

Blockchain technology is particularly interesting for banks. As billed, this ledger technology could handle zillions of financial transactions, reduce costs, improve delivery time and lead to buckets of cost savings. Mortgages are typically local transactions, but it is estimated that the settlement costs of transferring money using blockchain overseas could save banks as much as 33% over current methods.

 

For banks blockchain could also overhaul the way loyalty rewards programs are managed. It would allow for both the real-time redemption and exchange of rewards points that individuals earn across multiple vendors, programs and industries – all without the need for third party administrators. Removing intermediaries from the equation would not only make it easier for organizations to securely run rewards programs, but also make it easier for small institutions, such as community banks, to provide customers with the same scale of similar programs currently run by major banks and credit card companies without major development costs.

 

A recent survey from Greenwich Capital Markets estimates that organizations with initiatives involving blockchain spent up to $1 billion in 2016 alone. Given banks and central counterparties are among the biggest beneficiaries of many blockchain efforts, the two groups have so far been among the most active investors in such initiatives.

 

The World Economic Forum projects 80% of banks worldwide will start blockchain projects in 2017. Pretty much anything that moves around in the financial world might be automated with blockchain so banks are looking closely to see how and where it might be used first and most effectively. As efficiencies are achieved within the financial services industry using blockchain technology, the outcomes may be felt not only with the largest institutions, but also down to the community bank level.

 

Of course the government wants to regulate it. But the big question is, “How?”

 

 

During the trade wars of the 18th century, bartering was quite common among seafaring merchants who needed laborers to load and unload their wares at each port. They were willing to trade just about anything to get strong, loyal workers.  

At one port, the captain of a merchant ship had his eye on a well-built, muscular potential addition to his crew, whose name was Anwar. He approached Anwar’s owner.

“I’ll trade you 50 pounds of course-grained igneous quartz rock for Anwar,” he proposed.

“What do you think about the offer, Anwar?” his owner asked him.           

“If you ask me,” Anwar replied,” I don’t like being taken for granite!”

 

 

 

Rob

 

(Copyright 2017 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)