Clifford Rossi: National Mortgage Database faces challenges

In his American Banker column, Clifford Rossi looks at the challenges faced by the National Mortgage Database.

At the top of the list of challenges is distinguishing between this database and the FHFA's platform to support mortgage financing.  While the two databases could be combined, so far, based on public announcements, they have not been.

Mr. Rossi's column does not distinguish between the two databases in discussing the challenges.  Most of the challenges he mentions are actually attributable to the platform to support mortgage financing and have already been addressed in my firm's patented information system.

The CFPB and FHFA's effort to build a comprehensive data repository and identify emerging mortgage lending risks is laudable. However, success will depend on how regulators handle four areas: collaboration, scope, privacy and the regulatory burden. 

The mortgage industry includes numerous participants performing critical functions that touch borrowers at various stages in the home-buying process—and which should be represented in the design of the new mortgage database....

The CFPB and FHFA's decision to join forces is a positive sign, but collaboration must extend beyond these agencies and Experian, the credit bureau they have contracted with to build a database.... 

If a database is going to help regulators understand emerging risks, it needs to be comprehensive. That means including loans from Fannie Mae and Freddie Mac, the Federal Housing Administration and Department of Veterans Affairs, as well as loans that are part of private-label securities in held-for-investment portfolios.

By definition, the National Mortgage Database should include every mortgage. The question is what is the source of data for every mortgage.

Information on credit enhancement and other features of mortgages would provide an even more complete picture of their riskiness. 

Regulators who were armed with an understanding of differences in the risk profiles of loans held for investment and placed into securities, for example, would gain insights into potentially abnormal behavior, such as cherry-picking of loans....

This is also a concern of investors and in theory should be addressed by the database underlying the platform for supporting financing of mortgages.

For the database to be useful in monitoring risk, it must include information at the individual loan level. That means placing into regulators' hands borrowers' credit, employment and income histories, marital status, net worth, and other highly sensitive information. This, unsurprisingly, will give rise to concerns involving regulatory burdens and personal privacy. 

My firm's patented information system was designed to protect personal privacy consistent with the patient privacy standards established under HIPAA.  The protection of personal privacy also meets the standards established in Europe for protecting personal data.

The advantage of collecting such data is that it holds the prospect of improving on analysis of mortgage default behavior, which has traditionally relied on proxies for so-called "trigger events" that prompt defaults.  Ideally, the new database would include information about the events themselves—including divorce, job loss, the death of a spouse and other personal catastrophes. 

Collecting such information and other behavioral characteristics of borrowers is critical in developing more robust risk assessment capabilities, but protecting individuals' privacy is of paramount importance.... 

I know and that is why the information system was designed to protect individual privacy.

From a business perspective it is likewise important to protect portfolio lenders from the release of their proprietary information. 

Again, this was included in the original design of the information system.

The FHFA and CFPB must also be mindful of any additional reporting burdens they place on market participants. Regulators are often criticized for creating excessive regulatory burdens, and the costs of additional regulation could inhibit the industry from overcoming the malaise that has plagued the mortgage market since the crisis. 

Actually, it doesn't cost much to provide the data today and this figure will decline over time.  The reason it will decline is that the cost will be passed through and built into the cost of each mortgage.

The many legitimate concerns aside, the effort to create a National Mortgage Database must go forward. Regulators and the industry have for too long relied on mortgage risk information that has failed to keep pace with the complexity and speed of product development and structured finance. 

If the initiative is to fulfill its potential and become the definitive repository for mortgage risk assessment and monitoring, those in charge must expand collaboration as well as the scope of mortgage activities and the number of participants included in the project. 

Additionally, they must manage the regulatory burden and closely guard private information.