The Enemy of My Enemy

Competition is what makes free enterprise work. If our government has done anything right over the years, it probably has to do with making it possible for small companies to get big by preventing bigger companies from gaining monopolies in the market. It hasn’t always done a good job, to be sure. After all, we do still have the GSEs, but there are plenty of laws on the books intended to keep any group of companies from forming a cartel that would inhibit trade. Companies competing in the financial services industry are careful not to discuss information at industry functions that would give the government the impression that they are working to fix prices or limit consumer choice in any way. That’s all fine and good. Unfortunately, an environment where competitors are not comfortable sharing important information with each other has its disadvantages. It also has its dangers. Back in the glory days of loan origination when it wasn’t about whether a deal could be sold into the secondary market but rather about how quickly it could be delivered, mortgage fraud was mostly the other guy’s problem. Lenders had access to good tools for flagging files, but not much time to use them and even less time to investigate potential problems. With no skin in the game and a buyer standing at the door (and his buyer standing behind him), it just made sense to treat fraud for housing as less of a crime and more of a misdemeanor. In fact, if you look back, you’ll find some very large service providers telling the industry that fraud for housing wasn’t a serious issue because these players wouldn’t default. Talk about waking up on the wrong side of the bed. Today, lenders are living in a different environment. Instead of trying to get any live body on the other side of the closing table, they’re dodging buy back requests like they were bullets (and they are) and giving a whole new level of respect to loan quality. Fannie Mae recently sent a letter out to lenders about its new Loan Quality Initiative, which puts a bunch of new requirements on originators, but really, it’s just crystallizing what everyone already knows. The GSEs won’t take a loan that has a bad smell to it and if they find they’ve already taken it, they’ll make the lender take it back. And they make the rules, for now. I fully expected to attend another MBA National Fraud Issues Conference that featured a bunch of alarmists (and rightfully so) screaming at an audience of risk managers about dangers in their portfolios and in their production pipeline that could spell the end of them. I did see that. But I also saw something I did not expect: lenders opening up to each other about fraud problems and comparing notes on real solutions. Lenders compete with each other; they are not enemies. But fraudsters are professional criminals who have spent their careers learning how to circumvent lender quality control processes and to get deals funded that never should have been. They are surely the enemies of the industry and it appears that lenders—at least the risk managers that were in attendance at the show—realize this and have embraced the idea that the enemy of my enemy is my friend. It’s a welcome development that could change the way the industry deals with mortgage fraud.