Magazine article Mortgage Banking

Underperformance and Oversight

Magazine article Mortgage Banking

Underperformance and Oversight

Article excerpt

BY 2010, TOTAL INFORMATION TECHnology (IT) spending by financial institutions will total $450 billion a year, with about 60 percent of that going toward maintenance of existing systems, said Kathleen Khirallah, research director, retail banking, for the TowerGroup, Needham, Massachusetts, speaking at her company's annual Financial Services Business & Technology Conference & Exhibition in Boston in May. Some of those systems have been around a while, said Khirallah, joking that they are on "the drip" (life support), and "costing a tremendous amount of money not only in absolute dollars but also in relative dollars, because as banks are compelled to continue that maintenance work they don't have the opportunity to invest in new systems and continue to innovate. That's why it's important to start thinking about the applications and solutions that are being used," she said.

Khirallah also said banks are not good product innovators because there exists a "parochial point of view among the various lines of business, each of whom thinks they are autonomous. They don't think outside the box," she told the conference attendees. She went on to describe the "paradox of retail banks' product innovation, [which is] 'If it's easy to do, it's worthless,' because it's easy to copy and it doesn't differentiate." She said linking products and services together is "hard to do, takes time and has so much operational risk associated with it that very few banks do it--which is why we don't see more innovation."

In its review of new lending data, required under the Home Mortgage Disclosure Act (HMDA), the Federal Reserve Board will be hunting for predatory lending practices as well as racial discrimination, according to an official who will co-author the board's long-awaited review this fall. Robert Cook, special counsel, told attendees at the Mortgage Bankers Association (MBA) Non-Prime Lending and Alternative Products Conference in Washington, D.C., in June, that the Fed would "experiment with non-racial aspects" in analyzing the data, producing what he called "an index of propensity to make unaffordable loans," defined as "unsafe and unsound."

The emphasis on "unaffordable loans" stems from the Fed's belief that such transactions are the "epitome of predatory lending," he stated. Cook, a recognized fair-lending expert, said the Fed "has to work out the kinks this year, and even for the next few," in its analysis of new elements of HMDA lending data. He will be one of three authors of the board's report on HMDA data due out this fall, along with economists Glenn Canner and Robert Avery.

As Fannie Mae and Freddie Mac loan-buying has wilted under the white-hot spotlight of congressional investigation, who's been buying all that product?

According to Brien Hampton, senior vice president of The Winter Group, New York, the capital markets have been "filling that void aggressively with all different types of products." Speaking at the MBA Non-Prime Lending and Alternative Products Conference, Hampton said the government-sponsored enterprises' (GSEs') market share of originations is 27 percent--less than half of the total in its heyday.

"Capital-markets executions have been getting cleaner, and that will continue in terms of pricing and execution," said Hampton, who questioned what will happen when "the big boys" return. …

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