TheMReport — News and strategies for the evolving mortgage marketplace.
Issue link: http://digital.themreport.com/i/1481918
54 | M R EP O RT SERVICING THE LATEST O R I G I NAT I O N S E R V I C I N G DATA G O V E R N M E N T S E C O N DA R Y M A R K E T Lack of Transparency Hinders the Unbanked "Financial institutions have clear responsibilities to verify customer identities and ensure compliance with national and international regulation," said Leslie Bailey, VP of Financial Crime Compliance at LexisNexis Risk Solutions. A new report from Lex- isNexis Risk Solutions focusing on financial transparency and inclusion has found that among Americans, those most financially at risk are the "unbanked"—or those without a traditional bank account—and that increasing financial inclusion responsibly and sustainably can help these people grow financially. LexisNexis worked with Celnet to complete an extensive survey of banks, insurers, and nonbank fi- nancial institutions in 13 countries to gather data for their report. They also relied on information from The World Bank which found that there are approximate- ly 1.4 billion unbanked individuals globally. There are many reasons that the unbanked are not part of the system, they include: lack of appropriate citizenship/docu- mentation necessary to obtain an account, poverty, a new/thin credit file, having a cash-based lifestyle, a history of debt, or lack of financial education are all com- mon responses. According to LexisNexis, one way to convert the unbanked to a banked customer is to improve financial transparency; financial institutions need to have the drive and ability to identify consumers and understand their unique risk profiles to maintain regulatory compliance and support extending financial services to consumers. However, the survey revealed that 69% of respondents said that the unbanked (or underbanked) are harder to connect with and therefore are harder to onboard as a customer than other types of consumers. In addition, a growing number of institutions also say they are willing to share internal data for such purposes, further showing that institutions are aware of the challenges the unbanked face. "Comparing this year's results with previous editions of the survey suggest that it has become harder, not easier for financial institutions to source KYC data, making it more difficult to extend services to new client segments including the financially ex- cluded," said Neil Katov, Director at Celnet. "As a result, there is in- creasing interest in exploring new sourcing models, such as data sharing and utilities, and more financial institutions say they are willing to share their data for this purpose." Key Findings: • Financial institutions remain strongly interested in financial transparency and inclusion, with two-thirds of institutions expressing commitment to sup- porting financial inclusion. • Many financial institutions turn away significant numbers of po- tential customers due to current Know Your Customer (KYC) processes. The most challenging customer onboarding hurdles faced by institutions lay within difficulties in collecting and verifying customer information. • Interest in data sharing to sup- port KYC processes is growing. Nearly 80% of financial institu- tions express interest in a global Customer Due Diligence (CDD) utility, compared to just over 70% in 2019. • The pandemic posed a chal- lenge to financial crime and compliance operations at financial institutions, with large numbers of applicants seeking government assistance loans and financial institutions unable to verify identities in person due to lockdowns. However, it also led to financial institutions embracing more digital prac- tices, with 90% of institutions reporting that the pandemic has accelerated adoption of Artificial Intelligence (AI) and other next-generation technolo- gies. "Financial institutions have clear responsibilities to verify customer identities and ensure compliance with national and international regulation," said Leslie Bailey, VP, Financial Crime Compliance, LexisNexis Risk Solutions. "Rejecting potential customers due to inefficient or manual processes rather than reg- ulatory reasons can be detrimental to genuine individuals trying to access financial services. With ro- bust data and the right technology and processes in place, institutions can help improve global rates of financial inclusion without com- promising on compliance." Cash-Out Refis Dominate Market, Increasing Risk Level "Cash-out refinance loans historically have higher default rates compared to rate-and- term refinancing," Jonathan Glowacki, a Principal at Milliman and author of the Milliman Mortgage Default Index said. T he latest Mortgage Default Index (MMDI) published by Milliman, Inc., showed that the mortgage risk rate continues to increase in the second quarter of 2022 with heavy cash-out refinance volumes weighing on the market. According to Milliman, the default risk for loans from Fannie Mae and Freddie Mac (the GSEs) acquisitions increased at a rate of 2.28% for mortgage loans originat- ing in the first quarter to 2.78% for loans originating in the second quarter of 2022. This means that for mortgage loans originating in the second quarter, the expectation is that 2.78% will become delinquents by at least 180 days over their lifetimes. "The volume of refinance mortgages continued to decline in Q2 2022 compared to Q1, likely the result of increasing interest rates," Milliman wrote. "Mortgage refi- nance volume has dropped steadily since its all-time high in 2021, when interest rates were at historic lows. Along with the decline in volume, the makeup of refinance loans has changed compared to the year prior. Cash-out refinance loan volume increased from 34% of all refinance originations in 2021, to 74% in Q2 2022." "Cash-out refinance loans his- torically have higher default rates compared to rate-and-term refi- nancing," says Jonathan Glowacki, a Principal at Milliman and author of the MMDI. "In 2022, there's been an increase in cash-out refinance originations compared to the prior year, which is a contributing factor in the increased mortgage default risk we're seeing."