This article has been adapted from a speech at a recent conference of the Mortgage Bankers Association.
I believe there are many opportunities to drive down cost, expand service, improve regulations, make better loans, and strengthen our business. I believe there are four main opportunities for us to work together in order to help ensure a bright future for this industry.
First, effectively managing risk. The key to our success has been the discipline to build a sound housing finance system and to resist the temptation to compromise on risk. Managing credit quality and interest rates are essential to the flow of mortgage funding from the capital markets to your market. Investors must have confidence that the payment stream from borrower to investor suffers as little interruption as possible.
Because it involves credit decisions about borrowers and property value, we have learned that underwriting is the core to our industry's ability to manage credit risk. The road will not be smooth for mortgage bankers who want only to originate loans and leave Freddie Mac to monitor credit quality. To originate quality loans, we must work together and avoid the temptations to bend on quality or absolve yourself of that responsibility.
Eugene Ludwig, who is comptroller of the currency, recently reminded all bankers of this danger. Mr. Ludwig sees signs of slippage in credit quality as the economy slows and the business cycle matures. He urged bankers to maintain their vigilance and avoid stretching credit standards to strengthen profits. That's a message we certainly can agree with.
A second opportunity we have is to strengthen the position of mortgage lenders. Many lenders I speak with are concerned that new business systems and new technologies being developed by Freddie Mac and Fannie Mae are designed to go around you to the borrower. Let me be clear about where we stand: To help more people realize the American dream of homeownership, Freddie Mac will work with mortgage lenders because no one can replace the value you add to the housing finance system.
The mortgage lender will remain at the table. You are uniquely qualified to know what your customers need and how best to serve them. And you serve a critical role in the effort to control loan quality - and there will continue to be a need for mortgage bankers as long as they perform this role successfully. We have seen a decline in loan quality in the market this year, reflecting pressure on the industry and changes in the economy. The proportion of poor quality loans being originated has quadrupled since l993 and these loans are expected to have an unacceptably high default rate. This must be curtailed.
This summer we expect to introduce more specific guidelines and tools to help you assess loan quality and help reduce loans of lesser quality. the importance of your role in controlling loan quality is a)so why we support a Respa (Real Estate Settlement Procedures Act) rule that values consumer protection and maintains the independence of the mortgage lender from other parts of the real estate transaction. We support the rule covering the lending process that maintains an independent interest in the ability of the mortgage lender to ensure that the consumer can afford the loan.
A third opportunity we face is to make the homebuying experience more u- ser friendly and less expensive.
At Freddie Mac, we are targeting key areas where we bring unique value and expertise, and then working with customers to redesign key steps in the origination process. The goal is to eliminate any information and steps that are not necessary to originate or service a quality loan and to make it easy to collect and to process as possible. This approach will demystify much of the homebuying experience and create a far less expensive process for mortgage lenders seeking business and for Americans looking to buy a home.
Perhaps the best example is our work in simplifying mortgage underwriting. Despite dramatic changes in our society, we have essentially the same process for underwriting a mortgage we did two decades ago. In response to many suggestions by our customers, we have set out to dramatically change that - to cut down on the information that must be collected, to slash or even eliminate time spent needlessly verifying facts, and to make underwriting less subjective, to make it less of an art and more of a science based on facts and objectivity, and to provide consumers a better explanation about the underwriting decision.
We also have used the opportunity to reengineer underwriting to add further value by joining it with credit verification, collateral assessment, and mortgage insurance to assemble a powerful, unified process. The result is a vastly superior approach to underwriting. This service, which is called Loan Prospector, has been commercially available since January, and it is being implemented by large national mortgage firms as well as midsize and smaller lenders.
Customers using our service have received purchase decision approvals within minutes and closed loans within days. They have realized other benefits such as reduced repurchase risks, fallout rates, and origination costs, and no longer having to obtain appraisals themselves. I expect a few hundred customers to be up and running with Loan Prospector by the end of the year.
The fourth opportunity we have in the current environment is to further simplify and hasten transactions through technology. Most notably, we are developing a value-added network that makes it dramatically easier and faster for you to access a wide variety of mortgage services. Our network - which we call Goldworks - will give you one-stop shopping to virtually every step in the mortgage lending and funding process.
Through Goldworks, we will put you on-line with the real estate community, third parties such as credit bureaus, mortgage insurers, appraisers, software vendors and, of course, with investors like Freddie Mac. This network will eliminate the cost and administrative burden of using a cumbersome series of ways to access and process information. Because we designed it along with our customers, Goldworks will be easily adaptable to virtually every origination system on the market today.
And I am certain that in just a few years this industry will have undergone a fundamental change and the home financing experience will be simpler, less costly, more fair and more profitable. These products promise to be powerful tools in achieving our vision. Over this past quarter century, one lesson we have learned is to be successful you must have a vision of how you can bring value to the market and then pursue it aggressively.