July 20: CrowdStrike IT meltdown; STRATMOR CX, vendor tidbits, compliance latest, and Fannie deals

I had planned to start this Saturday commentary by talking about the Environmental Protection Agency (EPA) is considering consolidating its headquarters in Washington as more and more of its employees work from home. The agency’s space in Federal Triangle costs $90 million a year and accounts for 40 percent of the agency’s lease costs, money that goes to the General Services Administration. Last year the Government Accountability Office reported that 17 of 24 agencies used 25 percent or less of their office space. But then, in what may go down as the most spectacular IT meltdown the world has ever seen, a botched software update from cybersecurity firm CrowdStrike crashed countless Microsoft Windows computer systems all over the world, idling airlines, mortgage companies, banks, and even the London Stock Exchange. More on that below.

CrowdStrike IT meltdown

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A botched software update from cybersecurity firm CrowdStrike, not a cyberattack, crashed countless Microsoft Windows computer systems globally in what some are calling the largest IT outage in history. The outage illustrated how the world’s biggest and most critical industries have grown heavily dependent on a handful of tech vendors. In CrowdStrike’s case, over half of Fortune 500 companies and many government bodies use the company’s software.

As it pertains to the mortgage industry, I heard stories of HUD being down, Fannie and Freddie DU/LP being down, Encompass granting sporadic access, FHA connection experiencing login issues, and various levels of success for banks wires. For many companies, pricing and locking were unavailable. Originators found work arounds or did their best to avoid funding delays. Even for those not using CrowdStrike, it was still having an impact through the third-party vendor side (warehouse banks, HR solutions, etc.). Certainly, it’s terrible when employees find themselves locked out of programs critical to keeping their operations afloat. The outage is expected to be fully remedied by the opening of business hours on Monday.

STRATMOR customer experience

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How is this mortgage downturn different (and more dangerous) than those of the past? According to STRATMOR Customer Experience Director Mike Seminari, “The “higher for longer” rates we keep hearing about simply have not been high enough for long enough, which means that as refinances resurface, volume will likely creep up as opposed to bounce up. Meanwhile, loan officers will continue to battle it out to win each deal (often going up against savvy correspondent teams), which means getting the customer experience perfect the first time around has never been more important.” Check out STRATMOR’s recent CX Tip, “Shark Proof Your Business for The Next Refi Wave,” for practical tips on how to build meaningful relationships that increase loyalty to catch success when rates start to come down.

Capital markets classes

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I received this question regarding my earlier announcement of new mortgage capital markets coursework and accreditation offered by Rob Kessel, former CEO of Compass Analytics, through his new company, Panoramic Capital Academy and Consulting. (To remind readers, Compass Analytics was acquired by Black Knight in 2019 and then consolidated and spun off with Optimal Blue to Constellation Software in 2023.) “Rob, after reading your morning color announcement about the Capital Markets Academy coursework offered, I had a few questions. I am the founder and president of a medium sized IMB that currently closes about $100M monthly, lends in 20 states, has agency approvals and a modest servicing portfolio. Although I believe education is always a good investment, and I am considering multiple employees for the program, a 14-week program is a significant time commitment. What are your thoughts?”

 

My thoughts: After reviewing the Academy’s curriculum, I agree with Rob Kessel’s position that to truly understand the full view of how the pieces of capital markets fit together, you really do need the breadth and depth of relevant topics. Understanding how best execution guides your capitalization decisions which then determines your competitiveness, how best to hedge and what servicing to keep, all of these are decisions that can add multiple basis points to your bottom line. The more the broader organization understands the key distinctions and financial impacts, the more your organization operates as a coordinated team to better succeed. I believe that this Academy can address a common obstacle I frequently experience, which is the disconnect in communication and collaboration between C-Suite, CFOs and Secondary with respect to consistent financial performance.

 

That said, I am told that Panoramic’s fall semester class Is already full but is taking registrations for the spring class which starts in mid-January. Interested readers should register early before the next semester fills up! For more information visit www.panoramiccap.com or connect with Rob at rkessel@panoramiccap.com or through LinkedIn at https://www.linkedin.com/in/rob-kessel-66776a6/.

 

Vendor tidbits

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Vice Capital Markets, a leading mortgage hedge advisory firm for independent lenders, banks, and credit unions, announced it has integrated the Fannie Mae® Mission Score application programming interface (API) into its trading portal, allowing current clients to take advantage of pricing and best execution decisions to improve gain-on-sale.

VantageScore, a leading national credit-scoring company announced the release of a comprehensive, loan level, VantageScore 4.0 historical data set to mortgage industry participants. The FHFA,  alongside the Government-Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac, are releasing the data to support the FHFA mandated implementation of VantageScore 4.0 credit scores for mortgages. View Fannie Mae’s announcement on VantageScore® 4.0 historical credit scores.

More than 26 million U.S. adults have limited English proficiency (LEP); only 1 in 5 U.S. homebuyers understands all the documents they are required to sign at a mortgage closing. A first-of-its-kind partnership between digital language tech provider Talk’uments and cloud banking leader nCino (NASDAQ: NCNO) aims to address these challenges. This press release details how the tech integration brings unprecedented support for Spanish, Vietnamese, Korean, Mandarin, and other languages to the nCino Mortgage platform that touches 1 in 4 home loans originated in the United States.

 

CHLA is pleased with HUD’s announcement to expand the 230(k) Program as it will greatly strengthen housing affordability measures, especially among first-time and low to moderate income borrowers,” said Scott Olson, Executive Director of CHLA. “CHLA has been a strong advocate for expanding the FHA program’s scope to take into account cost advances. We are encouraged to see such enhancement initiatives, which make the program more attractive for homebuyers using FHA loans and contractors.

FFIEC published 2023 Data on Mortgage Lending. View the FFIEC Press Release for details.

Compliance latest

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How do you determine if a referral is illegal under RESPA? In certain circumstances, gifts or promotions directed to a referral source are not prohibited if they are a normal promotional or educational activity meeting the conditions in Regulation X, RESPA’s implementing regulation. Regulation X allows normal promotional and educational activities directed to a referral source if the activities meet two conditions: The activities are not conditioned on the referral of business, and the activities do not involve defraying expenses that otherwise would be incurred by the referral source. If the particular item or activity does not meet either of these conditions, it is not a normal promotional or educational activity meeting the conditions in Regulation X.

When is a company required to provide the risk-based pricing notice for closed-end credit? And does the company have to provide the risk-based notice if they don’t do the loan? FACTA  (Fair and Accurate Credit Transactions Act), which amended the FCRA (Fair Credit Reporting Act), added a requirement that mandates that if you use a consumer report in connection with an application for, or a grant, extension, of other provision of, credit on material terms that are materially less favorable than the most favorable terms available to a substantial proportion of consumers from or through your financial institution, based in whole or in part on a consumer report, then you must provide a notice to the consumer containing specific information. Timing is a central feature of the risk-based pricing notice (“Notice”). The timing of the Notice depends on the particular situation.

If no Notice of the increase in the APR is provided to the consumer before the effective date of the change in the APR, the Notice must be provided no later than five days after the effective date of the change in the APR. The requirement to provide a Notice applies only when, based in whole or in part on a consumer report, a financial institution grants, extends or otherwise provides credit to a consumer on material terms that are materially less favorable than the most favorable material terms available to a substantial proportion of consumers from or through that financial institution. That leads to a brief discussion of adverse action. There is an express exception to the Notice requirement when a consumer is provided with an adverse action notice. Potentially, a financial institution may need to provide a Notice if it grants, extends, or otherwise provides credit and the consumer does not accept the credit, because the deadline by which a Notice must be provided may be reached before the financial institution learns that the consumer will not accept the credit.

Red flag identification should be part of both post-closing and prefunding QC processes; indeed, prefunding QC is uniquely positioned to support production teams in identifying and remedying these defects. The prefunding Red Flags should be positioned in your prior-to-closing procedures. I have yet to hear a great definition of what should be considered Red Flags. Are Red Flags just itemized factors listed on an automated underwriting system, credit report, or even a mortgage fraud screening tool? Putting them in an LOS requires logic to go with it. A Red Flag is “something that indicates or draws attention to a problem, danger, or irregularity,” according to Merriam-Webster. Irregularities can take many forms, and you must ensure the logic needed to digitize those forms in a constantly changing business environment. You are not going to be able to rely solely on Red Flags in your loan origination system to catch mortgage fraud. At best, such embedded Red Flags will alert you to a potential threat. I would be very cautious in allowing Artificial Intelligence (AI) to trigger systemic loan flow decisions, such as issuing Adverse Action based entirely on its Red Flag utility.

Fannie deals

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Fannie Mae (FNMA/OTCQB) priced Connecticut Avenue Securities® (CAS) Series 2024-R05, an approximately $659 million note offering that represents Fannie Mae’s fifth CAS REMIC® transaction of the year. CAS is Fannie Mae’s benchmark issuance program designed to share credit risk on its single-family conventional guaranty book of business. Year to date, Fannie Mae has issued approximately $3.6 billion of notes under the CAS program.

 

The reference pool for CAS Series 2024-R05 consists of approximately 61,000 single-family mortgage loans with an outstanding unpaid principal balance of approximately $21.5 billion. The reference pool includes collateral with loan-to-value ratios of 80.01 percent to 97.00 percent, which were acquired between July 2023 and December 2023. The loans included in this transaction are fixed-rate, generally 30-year term, fully amortizing mortgages and were underwritten using rigorous credit standards and enhanced risk controls.

 

With the completion of this transaction, Fannie Mae will have brought 66 CAS deals to market, issued over $68 billion in notes, and transferred a portion of the credit risk to private investors on nearly $2.3 trillion in single-family mortgage loans, measured at the time of the transaction. To promote transparency and to help credit investors evaluate our securities and the CAS program, Fannie Mae provides ongoing, robust disclosure data, as well as access to news, resources, and analytics through its credit risk transfer webpages.

If you think manufacturing a loan is tough, try pushing out 45,000 Swiss Army Knives a day.

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Rob Chrisman