Rebuilding the Non-Agency Market: Why Modernizing Data and Reporting Is Critical

Abstract

Twelve years have passed since the US mortgage and housing bubble served as a primary catalyst that plunged world economies into a global financial crisis. The bubble was fueled by the usual culprits: fraud, excessive risk, and lax standards, particularly in the non-agency mortgage universe. Underlying all of these factors was a systemic lack of transparency and quality reporting that prevented these issues from being reconciled and resolved. Since then, legislation has been imposed to regulate the mortgage industry, protect consumers from predatory lending practice, and rebuild the economy. Similarly, issuers have made substantial underwriting changes to prevent prior lending excesses. The improvements made, however, have not addressed the core issue, and legacy systems for accessing, managing, and analyzing loan data have remained largely untouched. Data are the basis of safe and critical decision making, but it continues to be inaccessible, costly, and unvalidated. To restore investor confidence, especially as COVID-19 proves to be a destructive force, the industry requires modernization; otherwise, it may never truly recover.

TOPICS: Asset-backed securities (ABS), CLOs, CDOs, and other structured credit, MBS and residential mortgage loans

Key Findings

• ▪ While substantial improvements have been made to underwriting and borrower verification, antiquated legacy systems and inefficient data-reporting processes remain fully intact, which stifles innovation, hinders transparency, and jeopardizes accountability.

• ▪ The legacy systems’ lack of innovation proved incapable of quickly adapting to COVID-19-related performance reporting or increasing the availability of new mortgage data, which contributes to the sector’s slow recovery in volume and investor participation.

• ▪ A broader investor base is critical in propelling the non-agency mortgage market back into prominence. To attract new entrants and welcome previously scarred participants, investor confidence must be restored through data integrity and modernizing sector infrastructure.