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» VISIT US ONLINE @ DSNEWS.COM 25 finance disruptions during the transition. Since these proposals are like one another in many respects, I believe that it will not take too great a leap of faith to reach a general consensus for a plan of action. Meanwhile, foundations for GSE reform are moving ahead. e GSEs are taking strides to become guarantor companies, the Common Securitization Platform that integrates the GSEs' various and antiquated securitization systems is now scheduled to arrive in 2019, and the GSEs now have meaningful credit-risk transfer programs. ese three pieces, together with a federal insurance fund to cover catastrophic risk, will likely constitute the basis for the new market structure. In recent testimony, Treasury Secretary Mnuchin said GSE reform remains a priority, and that he would share ideas in the second half of 2017. It thus appears that as soon as there is a political will to move ahead with reform, it can happen. Only time will tell. In July, Fannie Mae will raise its DTI requirements. What impact will this have for borrowers? By raising the DTI ceiling to 50 percent and loosening the credit box, Fannie Mae is likely making a play to attract more student loan-laden millennials to homeownership. I am not worried by this move—Fannie's research team, where I used to work, claims that the additional default risk is minor. With that said, will this move have a widespread impact? e consensus is that lender credit overlays—driven by the existing housing finance system's structure—are the main reasons for tight credit. e good news is that structural changes are happening. e GSEs have made major progress in tackling reps and warrants risk and steady progress in coming to grips with litigation (False Claims Act) risk. However, the industry is still in need of a structural upheaval in servicing where costs are high and uncertain, and progress has been slow. Per the MBA, the cost of servicing a nonperforming loan quintupled to almost $2,400 between 2008 and 2015. I therefore believe that without addressing servicing compensation and costs, lenders and servicers will continue to restrict the credit box beyond investor guidelines, and loosening DTI ceilings will only have limited effect. What are the biggest challenges currently facing mortgage servicers? In addition to the compliance and fee structure challenges I touched on above, two challenging areas include the rising interest-rate environment and the increasing role of nonbank servicers who serviced a quarter of all mortgages in 2015. Rising interest rates are a mixed blessing for mortgage servicers. After a long period of low-interest rates and a slow and uneven recovery, uncertainty about the value of servicing remains as rates rise. Slower prepay speeds should lead to rising MSR valuations, but rising rates could cause additional delinquencies in fragile markets leading to additional servicing costs and reduced valuations. I believe the rapidly increasing share of nonbank servicing—a trend that continues as Citigroup plans to exit servicing—is a challenge to the industry because of what could happen in the next economic downturn. While nonbanks appear to be more proficient at managing the rising costs of servicing, a 2016 GAO report noted that they do not have, as a group, the same regulatory scrutiny as banking institutions. I worry that if CFPB's budget is severely cut in FY 2018, we may remain far from achieving a prudent level of compliance. I am also worried about nonbanks' lower capital requirements. ese risk factors could lead to major problems in the next economic downturn. What aspects of servicer scorecards drive their success? One of the projects I am most proud of being part of in the last decade was the analytical design of Fannie's STAR servicer scorecard. While all scorecards have controversial and imperfect aspects, I believe that the enhanced use of data to provide servicer oversight has led to major improvements in loan performance. STAR was an example of smart regulation— using objective data science to drive desired outcomes. Data-driven scorecards often fail, however, because they are overly complex and opaque black boxes. e STAR scorecard's success was due to leveraging readily available servicing data and adopting a straightforward and transparent analytical methodology, which I believe Fannie was shrewd to disseminate through the internet. STAR shows that transparency and simplicity are critical for scorecard success. "One of the projects I am most proud of being part of in the last decade was the analytical design of Fannie's STAR servicer scorecard. While all scorecards have controversial and imperfect aspects, I believe that the enhanced use of data to provide servicer oversight has led to major improvements in loan performance." —Eddie Seiler, Chief Housing Economist, Summit Consulting

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