This week, MortgageOrb connects with William M. LeRoy, CEO of the American Legal and Financial Network (AFN), and Richard Rydstrom, chairman of the Coalition for Mortgage Industry Solutions (CMIS) – two organizations that have been on the forefront of propelling meaningful industry dialogue during these trying times.
Q: Both of you have gone on the record lately with statements touting best practices, specifically in the bankruptcy arena. Can you elaborate?
LeRoy: We can. As we have both said, our industry is experiencing a historical breakdown in the mortgage banking, credit and capital markets. It is our joint view and the view of our respective organizations that the system is broken. We believe that there is a terrible void in government, policy and industry leadership. The industry is, in effect, without an effective voice. I would place emphasis on the word ‘effective.’
Rydstrom: Exactly. When something is broken, it must be fixed. Let's face it: Our old-form best practices and management controls need a facelift. Part of our old best-practices mentality was: If it works, don't fix it. Well, this time it's broken, and we have to fix it.
To fix it this time, we need input and reconciliation from all conflicting and diverse interests. Then we need comprehensive and reconciled consensus for real change. Not change for the sake of change – we need motivated and collaborative change.
A bid for change must come with incentives. All parties must be motivated to act for their benefit by receiving something of value – something that resolves a problem and something that guides them to better times going forward. To date, the solutions offered by industry and government have failed to be comprehensively incentivized.
Industry leaders, state and federal regulators and enforcement agencies, politicians and interest groups are struggling to develop solutions to this crisis. Change is now necessary to achieve effective solutions. Effective and sensible solutions cannot reveal themselves until leadership appears and embraces comprehensive reconciliation that prompts change for all diverse, conflicting self-interests. Change starts from within, but must reconcile with many.
Q: But how do best practices fit into this picture?
LeRoy: In the absence of effective political leadership, changes will necessarily have to start from within the industry itself. It starts with leadership from individuals who step up and have the audacity to offer the first round of solutions and accept the challenge of debate.
Rydstrom: Best practices are tools of offense and defense. Best practices should be embraced in every aspect of business; not only as management efficiency controls, but also as litigation defensive measures and risk mitigation devices.
The biggest defensive move that the industry can take is to reach deep down into the functional knowledge base of its members – have each develop its respective best practices and then have the industry comprehensively reconcile those controls and best practices.
Although best practices are not mandatory or law, they can set a reasonable standard and act as an operational risk mitigator, efficiency tool and litigation-defense device. We need to embrace new best practices as operational-certainty controls. Credit agencies – the ultimate operational arbiters – will separate the weak from the strong by the expanded review of best-practices controls, including oversight and quality controls and enterprise risk analysis controls.
LeRoy: It was wonderful to see Standard & Poor's recent announcement regarding new best-practices guidelines. These guidelines ultimately will reshape the thinking and business philosophies of corporate and risk-governance models, going forward.
We should note right here that one of the first to step up and set out best practices in the related mortgage banking and bankruptcy field was the National Association of Chapter 13 Trustees (NACTT). NACTT's bankruptcy best practices should be reviewed and implemented as procedural controls. These best practices will be the DNA for standardization in the mortgage servicing industry.
Rydstrom: A ‘standard’ is a document that establishes uniform engineering or technical specifications, criteria, methods, processes or practices. Some standards are mandatory, while others are voluntary. Some standards are de facto, meaning a norm or requirement has an informal but dominant status. Some standards are de jure, referencing formal legal requirements.
The AFN and CMIS have agreed to supply the framework to comprehensively reconcile such controls and best practices in its working groups, as the experts step up and produce outlines of their respective best-practice suggestions.
Q: What needs to happen next?
Rydstrom: To effectively reconcile all diverse, conflicting self-interests, for the betterment of housing and the economy at large, we must first consider all such interests in a comprehensive forum. The results of such discussions will yield principles-based standards with objectively obtainable safe harbors.
New solutions allowable in such a framework would lessen risks and enhance certainty for all industry participants, including borrowers. We must spark a renaissance of innovative best practices and loan, credit-enhancement and analytical products – products that are in tune with the industry as a whole. We must have a system of regulation and/or regulators that inspire new product innovation without unreasonable hindrance.
The industry cannot be responsible for innovation if it is not allowed to innovate. However, we must do so responsibly. We must refine our thinking to yield responsible innovation in a free but responsible open market.
By definition, our innovations must be more comprehensive in nature. We need to update and refine our regulatory system, as well as our product and origination systems. We must go back to the basics, starting with the identification of the need or use for such products, including the exposures that need to be hedged or mitigated – and do so not only in terms of the use for the company, but in terms of the industry as a whole, including the borrower, and the stability of the markets and the assets or instruments intended to support such markets.