November 28, 2012
The 2008 housing collapse provided a key lesson in averting a crisis: it’s necessary to first understand the problem before it spirals out of control. In the lead-up to the crash, no one had an accurate count of the number of risky subprime loans in the system or the financial condition of borrowers as a whole. Four years later, though mortgages make up the biggest share of the consumer lending market, there are still no comprehensive national data on these loans.
More Americans Walk Away from Their Mortgages
That’s about to change. A new national mortgage database being launched next year by the Federal Housing Finance Agency (FHFA) and Consumer Financial Protection Bureau (CFPB) will house detailed information about the country’s mortgages—at a minimum, this will include each borrower’s financial and credit profile, the terms of the loan, information about the property, and the loan’s payment history. “I see it as a long-term monitoring and early-warning system,” says Rick Sharga, executive vice president at Carrington Mortgage Services in Santa Ana, California.
Others, however, see it as a potential invasion of privacy that could lead to personal financial information going from a bank’s lockbox to a database that can be accessed by anyone working at the CFPB. With so much borrower information in one place, many experts are concerned about the privacy of borrowers’ financial details.
In announcing the project on November 1, the agencies said they would use the database to monitor the overall health of the mortgage market—whether borrowers are making payments on time, how many loans are being modified or foreclosed, and how many borrowers are declaring bankruptcy, for example. It will also help them get a picture of borrower finances since it will capture information on other debts, like car or student loans.
The two agencies say that they’ll be “exploring ways to share database information with other federal agencies, academics, and the public,” but assert that database would not contain personally identifiable information and that “appropriate precautions” would be taken by the agencies to ensure that individual consumers couldn’t be singled out.
But that’s not enough, says Richard Andreano, a partner at law firm Ballard Spahr who counsels clients on privacy and data security issues. He’s worried about how the data will be safeguarded inside the agency—the CFPB’s own Inspector General issued a report on November 15 concluding that the bureau lacks a comprehensive information security strategy and policy. And if the database is made public in a format that includes individual borrower records with key identifying fields (like property address and loan number) removed, that won’t be enough to stop a determined data miner, says Andreano. “Simple assurances that ‘we’ll take precautions’ frankly are not enough… they owe it to the public to be specific here,” he adds.
In response to a question about specific plans, a CFPB spokesperson said in an e-mail that only a “finished product that has been merged might conceivably be released to the public…. Any decisions on what specific data might ultimately be released to public are still to be determined.”
Despite the outstanding questions, proponents argue that it could be worth the risk. With the database, regulators will be able to monitor whether new loan products are emerging that could pose a risk—the downfall in the run-up to the last crisis. If a major bank is suddenly selling a lot of loans that have a unique structure “maybe we should look into that and make sure it’s not something that’s going to blow up,” says Gus Altuzarra, CEO of Vertical Capital Markets Group, which invests in residential loans originated elsewhere. He thinks it could give companies like his better information about the quality of loans made by originating banks from whom he buys.
The database could have another function: offering real-time information about how new regulations are working, says Sharga. One much-criticized proposal under the Dodd-Frank financial reform law, for example, could set a minimum 25-percent downpayment for borrowers, which critics say will make it impossible for thousands of responsible homeowners to get a loan. If that rule were implemented, national mortgage data would permit an almost immediate assessment of its effects—whether it made it harder for lower income borrowers to get a mortgage, for instance.
Of course, more and better information will only be as good as regulators’ willingness to use it. “Data is data,” says Sharga, and if they don’t react to warning signs, it won’t prevent the next catastrophe. But overall, he thinks it will give regulators the information they’ll need to allow for a reasonable level of growth while preventing behavior that brought down the economy the last time.
This piece was updated on November 30, 2012 with a response from CFPB.