LenderNews by Rob Chrisman
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June 25: From secretaries to CEOs, ignoring cyber-crime is a mistake; future goals for the capital markets to keep in mind

June 25, 2016

As if CEOs and owners of financial companies don’t have enough to worry about, cyber-crime continues to be an issue. In fact, in my discussions with insurance brokers who work with bank and non-bank lenders, hacking is their largest concern. Any banks or lenders looking to subscribe to a source about cybercrime and hacking may want to check out Financial Services Sharing and Analysis Center newsletters. “What’s in your wallet” will be the question du jour if someone steals the social security numbers and private information of your clients.
 
A CSID survey of small business owners regarding security finds that 58% are concerned about cyber-attacks but 51% are not allocating any budget to risk mitigation (because they do not feel they store valuable data). Of note, however, 68% said they store email addresses, 64% store phone numbers and 54% store billing addresses.
 
And a AFP Payment Survey finds 61% of organizations reported experiencing attempted or actual payments fraud. Meanwhile, fraud by payment type breaks down as follows: checks (77%), corporate or commercial cards (34%), wire transfers (27%), ACH debits (25%), and ACH credits (10%).
 
Think you’re too big to worry about it? Wrong. The Federal Reserve Office of Inspector General will audit the Federal Reserve’s cybersecurity oversight of financial institutions in the fourth quarter. "The growing sophistication and volume of cybersecurity threats presents a serious risk to all financial institutions," the OIG said in a report.
 
Every day I receive an e-mail from someone saying they’re stuck in the Philippines and asking for money. Nothing wrong with the Philippines – I’ve been there – but they aren’t believable. The FBI, the original “Bureau,” is warning global losses caused by Business Email Compromise (BEC) have grown 1,300% since Jan 2015 to about $3.1 billion worldwide. In these scams, hackers send fake internal emails posing as executives asking for money to be wired out by an unsuspecting employee. Cyber experts say this approach works because it is cheap so it can happen thousands of times (email is free) and because the emails are sophisticated (include company name, correct contact info, digital signatures, etc.).
 
In fact, a while back a McAfee study finds 97% of people worldwide cannot correctly identify a fake phishing email.
 
What are those people “at the top” supposed to do? Well, Bank Director Magazine has “Four Best Practices to Help Bank Boards Manage New Cybersecurity Guidance. The joint regulators’ IT Examination Handbook was recently revised. Here’s what you need to know as a member of a bank board.
 
What are firms doing about it? As an example, Brent Buckmaster with Flatirons Capital sends, “Rob, Flatirons is happy to announce we have recently signed an agreement with a leading identity protection firm. Through Flatirons, you can get identity protection to give as a gift to your customer, or as a benefit to your employees. The gift can be given to your borrower as a thank you for their business, for everyone in their household, with your customized company branding. The protection also comes with a monthly update from the provider with tips on how to protect your identity and password security, as well as alerts of security/identity breaches, when they occur.” (Brent finished with, “It is a great product that should be used by everyone, and comes at a very nominal cost. Give Flatirons Capital a call if you are interested: 320-230-6500.”)
 
Without a secondary market for loans by investors to help create rates and demand, the primary markets would be aimlessly adrift. Of course Congress and the President know little about the markets for securities backed by mortgages, so the industry has taken it upon itself to make necessary changes. Capital markets staffs are aware of the moves afoot regarding the “single security” – combining Freddie and Fannie loans, for example, into a single security. Everyone is waiting for word from FHFA to update industry, but we can expect it to take a few years.
 
A separate issue is the “common securitization platform.” This is an actual company, created to provide a platform for various loans to be put into and securitized. Most expect Freddie to roll this out this year, with Fannie probably in 2017.
 
Both of these are “easier said than done.” Investors and traders must adjust their modeling. And SIFMA (Securities Industry and Financial Markets Association) is focused on TBA (to be announced) guidelines, good delivery, and the like.
 
There are some fundamental changes in the capital markets, and housing finance, and a task force that the MBA put together put forth its thoughts on its direction. A portion of this, focusing on capital markets, is reproduced below. Of course the devil’s in the details…
 
Affordable rental housing and access to credit for all qualified homebuyers are the cornerstones of housing in America, and these two commitments must be present in any dialogue about housing finance reform. The policy questions are complex and the politics equally so. Yet, unless these fundamental challenges are resolved in a balanced and effective way, housing finance reform will be incomplete…it is time that lenders join in the dialogue with an appropriate level of commitment to these noble aspirations.
 
A centerpiece of most housing finance reform plans, and consistent with MBA’s reform principles, is the attachment of an explicit federal government guarantee to mortgage-backed securities backed by a limited, defined class of well-underwritten loans. In exchange for this guarantee, secondary market entities should have a corresponding duty to provide access to credit for prospective homebuyers and financing for affordable rental housing. The challenge is how to define and fulfill this obligation in ways that balance the public purposes of the government guarantee with the need to protect taxpayers.
 
Demand for housing will come from households that are increasingly diverse across dimensions such as age, race and ethnicity, and geography. The government-backed secondary mortgage market must be able to provide liquidity to facilitate the development, preservation, or purchase of all types of housing for both owner-occupants and renters. Moreover, government policy should reflect a unified, holistic approach toward addressing the full scope of housing needs along the continuum.
 
The government-guaranteed secondary mortgage market cannot serve the entire continuum by itself. On the affordable rental housing end, the government-guaranteed market can help facilitate financing for the development and preservation of good-quality, affordable rental housing. At the same time, the role of equity investment is also critical, and in some cases, the secondary mortgage market will require partnership with other programs, such as Low Income Housing Tax Credits, Section 8, or the National Housing Trust Fund to serve America’s affordable housing needs.
 
On the other end of the continuum, the highest-income and highest-credit-quality borrowers are adequately served by the private mortgage sector and do not require the support of a government guarantee.
 
A core objective underlying our support for a government guarantee in the housing finance market is to ensure broad liquidity in all markets and through all economic cycles (for both) the single-family and multifamily mortgage markets. Affordable rental and homeownership policies could be viewed as a means to direct this liquidity toward particular market segments along the continuum. However, to do so, government policy must be crafted as a single, holistic strategy to ensure that programs operate effectively in service to the overall policy. With a unified approach, policymakers can best develop and utilize programs and products to address discrete segments in a unified housing policy.
 
Preserve and enhance what works. Policymakers’ approach to affordable housing should take into account the differences between, and respective advantages of, the multifamily and single-family markets. The current government-sponsored enterprise (GSE) multifamily businesses should be considered a policy and economic success. Both GSEs’ multifamily businesses have experienced very low default rates, even during the financial crisis, and their predominant business executions have incorporated significant private capital (Mortgage Bankers Association 2015). In addition, because the GSEs do not play the same dominant role in multifamily finance as in single-family finance, there is strong competition among capital sources in apartment finance between banks, life insurance companies, commercial mortgage-backed securities, and other market participants.
 
Multifamily rental housing tends to be affordable, with rents predominantly affordable to households at or below area median income. The vast majority of the two GSEs’ multifamily business is within this range. We believe that the future housing finance system should be focused on ensuring liquidity to the multifamily housing market broadly, with a particular focus on moderate-income and affordable rental housing. Most of the annual cohort of government-backed multifamily activities should finance properties with units affordable to households at or below area median income or some similar standard. We believe that any affordability standards imposed in the context of GSE reform should advance policy objectives to support moderate-income and affordable rental housing and provide flexibility during periods of market disruption and illiquidity.
 
In the single-family market, the GSEs are, and have been, the dominant liquidity providers, particularly for longer-term (terms of 20 years or more) fixed-rate mortgages. Borrowers currently benefit from this role in two primary ways: first, the GSEs are perceived as being backstopped by the federal government, allowing them to broadly serve the nation’s home purchase needs even through economic downturns; and second, the availability of the TBA (to-be-announced) market for the core of the GSE single-family businesses allows a broad segment of borrowers who obtain financing through conforming loans to receive modestly lower interest rates, saving them money over time. An explicit government guarantee would enhance these benefits and eliminate the risk of market disruption during a regional or national downturn.
 
As noted above, however, secondary market activities that support the affordable rental housing end of the continuum will need to be complemented by other market mechanisms and clear housing policy. In particular, policies aimed at facilitating development, rehabilitation, and preservation of affordability in the existing housing stock are increasingly important. Such alternative support should work in partnership with flexible debt financing, as in the case of Low Income Housing Tax Credits or the use of Section 8 vouchers to occupants. Such programs should be fully appropriated and funded to meet the needs of households.
 
Align federal housing regulations and policy missions. To fully serve the needs of the housing market across the entire continuum, federal housing policy should be harmonized into a single, holistic strategy. The at-times competing missions of the Federal Housing Administration, US Department of Veterans Affairs, US Department of Agriculture, Rural Housing Service, Ginnie Mae, and the GSEs should be complementary and coordinated. One approach would be to create or empower a single body to coordinate and manage the various roles and targeted missions. Combining our fragmented housing policy into a single, unified strategy would allow for greater coordination, more dynamic program development, and clear communication with market participants and stakeholders. Moreover, it would help prevent discrete segments of consumers from falling through the cracks as specific policies are developed and executed.
 
Utilize transparent, pooled pricing and underwriting, where possible. Pricing single-family loan risk at the pool level provides a cross-subsidy that can result in some savings for qualified borrowers while maximizing access to credit. The application of this cross-subsidy and consideration of compensating factors utilized in the underwriting process across various programs and markets should be as transparent as possible to ensure eligibility, qualification, and pricing information can be clearly communicated to the market to improve service.
 
To protect taxpayers, MBA and its members support additional transparency in the transfer of credit risk to private capital sources. Transparency in the forms and cost at which this risk is transferred to the private sector will help the government manage risk and identify where additional support or research may be necessary. Importantly, risk-based pricing of credit risk by private investors through risk-sharing structures does not preclude the use of pooled pricing of government guarantee fees for borrowers. 
 
Subsidy contributions. The government guarantee of a well-defined class of single-family and multifamily mortgage-backed securities should be explicitly priced and paid for. This price should include a fee dedicated to funding certain affordable housing–targeted funds, such as the Affordable Housing Trust Fund or Capital Magnet Fund. Entities empowered to grant the government guarantee could also use this fee to work through mortgage originators and other primary market participants (e.g., mortgage insurers or nonprofits) to expand the role of consumer education and mortgage counseling in the housing finance system. These activities are particularly important to assist minority and immigrant households, those burdened by high rents and student debt, and first-time homebuyers so that they may gain from the wealth-building opportunity provided by sustainable homeownership. Additionally, support for affordable housing programs, such as those referenced above, could be supplemented by the fee.
 
 
Little Johnny was in a relative’s wedding. As he was coming down the aisle, he would take two steps, stop, and then turn to the crowd, put his hands up like claws and roar.
That’s the way it went all down the aisle: step, step, ROAR…step, step, ROAR…step, step, ROAR.
As you can imagine, the crowd was near tears from laughing by the time he reached the pulpit. When the priest who was celebrating the wedding asked what he was doing, Little Johnny sniffed and said, “I was being the Ring Bear.”
 
 
If you’re interested, visit my twice-a-month blog at the STRATMOR Group web site. The current blog is, “The Fed’s QE: Help or Hindrance to Lending?” If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.
Rob
 
(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. Currently there are over 300 mortgage professionals looking for operations, secondary and management roles. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2016 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)