MISMO: data standardization in the age of housing finance reform
The burst of the housing bubble in 2007 brought a wave of change in the US residential mortgage market. From tighter underwriting standards and stricter disclosures per regulatory guidelines in the primary market to a secondary market placed under conservatorship, organizations across the entire industry have had to adapt to this changing paradigm. Regulators, borrowers and investors are seeking more transparency in hopes of preventing a second mortgage crisis. In this article, Jocelyn St. James discusses the industry’s increased adoption of the Mortgage Industry Standards Maintenance Organization (MISMO) data standard, and how, by enabling market players to build upon a common foundation, the standard can ensure organizations are better prepared to evolve in this rapidly transforming environment.
What is MISMO?
The mortgage industry is comprised of a series of interconnected players that have unique roles throughout the life cycle of a loan. MISMO is a non-profit, vendor-neutral subsidiary of the Mortgage Bankers Association whose goal is to provide a standard set of guidelines that delineate the way in which data is utilized across industry participants.
From a data perspective, mortgages are a complex instrument, with a single loan containing thousands of data points. Despite the sheer volume and complexity of data, institutions typically lacked a robust structure in which to store this data, often housing information in PDF documents and Microsoft Excel® files. When a loan progressed from originations to servicing and was subsequently picked up for securitization in the secondary market, there was no transparent, cost-effective way to move its data along with it.
MISMO attempts to address these issues by creating a mortgage industry XML Schema Definition (XSD) which contains loan-level data fields. In addition, it ensures a common understanding among participants who use their XSD by maintaining a corresponding data dictionary. MISMO periodically updates both items to ensure they encompass changes within the market and the industry. By adopting and maintaining the MISMO standard, organizations are able to increase data transparency and communicate with each other more efficiently.
Data Standards and the GSE
Chartered by Congress to help promote homeownership in the United States through the creation of a secondary mortgage market, Fannie Mae and Freddie Mac were placed under the conservatorship of the Federal Housing Finance Agency (FHFA) in the fall of 2008. Subsequently, at the direction of the FHFA, both Government Sponsored Enterprises (GSEs) have undergone significant business, operational and technological changes that include the Uniform Mortgage Data Program (UMDP) (see Figure 1).
UMDP represents an ongoing series of initiatives that aim to streamline the way data is consumed by the GSEs. Utilizing MISMO as the framework, Fannie Mae and Freddie Mac have implemented a common approach to the data collected from various vendors, including expanded datasets and the electronic transmission of data.
The first set of initiatives under UMDP went live in late 2011. The Uniform Appraisal Dataset and the Uniform Collateral Data Portal (UCDP) defined the appraisal data needed to be submitted to the GSEs and created a platform that enabled lenders to transmit the data to the GSEs. This was followed in 2012 by the Uniform Loan Delivery Dataset (ULDD), which contained the common data elements needed by Fannie Mae and Freddie Mac for the delivery of single family loans. Other initiatives are underway, and the FHFA has directed the GSEs to begin analysis on a separate but related initiative known as the Servicing Data and Technology Initiative (SDTI), which will be used to streamline the data collected by servicers.
Effect on the Industry
While Fannie Mae and Freddie Mac have traditionally played a large role in the secondary mortgage market, the two organizations have essentially been responsible for sustaining liquidity in the housing market since the crash. Between 2004 and 2006, private label securitization was as high as 30 percent of the market share.1 However, since 2008, Fannie Mae and Freddie Mac have been responsible for guaranteeing 60 percent of all mortgages, with Ginnie Mae guaranteeing 20 percent and the remaining balance being held as whole loans by commercial banks.2
In light of the private sector’s diminished role, lenders have had to adapt and conform to the UMDP data initiatives if they wish to remove the loans they originate on their books. While the upfront process of adapting to these standards can be costly and time consuming, lenders who proactively convert to the MISMO standard can help reduce the impact of future initiatives on their organizations. Additionally, servicers should begin analyzing what it would take to upgrade their systems and processes to the MISMO standard to be better prepared for when the GSEs announce dates and timelines for the SDTI.
How Data is Utilized
Last year marked a major year for the GSEs in their ability to deliver tangible benefits to the industry based on the groundwork laid by UMDP. In January, Fannie Mae delivered the Collateral Underwriter tool, which helps lenders more easily assess risk on a given appraisal. Subsequently, Freddie Mac rolled out a pilot version of its Loan Advisor Suite, a group of products that leverage technological gains made by the adoption of UMDP. These tools aim to help lenders avoid mortgage repurchases through loan and property data validation, as well as automatically monitor when lenders are released from their rep and warrant obligations. While UMDP laid the foundation needed to successfully develop these products, the adoption of a standard method of communication has also allowed for easier vendor integration with these tools.
Furthermore, work on two long-term FHFA directed standardization initiatives is underway between the GSEs. The first is the Common Securitization Platform (CSP), a platform both GSEs would leverage to issue and maintain their securities. Secondly, the FHFA has directed the GSEs to begin analysis on a single security, which would involve issuing a security backed by a mix of loans from both portfolios.
The groundwork laid by adopting ULDD ensures that the two organizations are working from a common set and structure of loan-level data, creating the infrastructure needed for both GSEs to plug into a shared technology platform. Additionally, as the goal for standardization across the enterprises expands the ability to issue a single security, uniform loan-level data is the only way to ensure that investors know what is behind the bonds they are buying. Ultimately, maintaining a common set of loan-level data across the enterprises is key to the success of both initiatives.
Data Standards and Regulations
In November 2013, the Consumer Finance Protection Bureau unveiled the TILA-RESPA Integrated Disclosures (TRID), which sought to transform the way lenders delivered consumer disclosures throughout the residential mortgage loan origination process. Aiming to provide borrowers with more timely and straightforward information on their loans through the use of a comprehensive initial Loan Estimate and a final Closing Disclosure, the implementation of TRID required lenders throughout the United States to conduct a major overhaul of their processes and procedures. In addition to this standard set of documentation, TRID also created strict rules around the timing of document delivery to the consumer as well as fee naming conventions and tolerance levels for fee changes.
TRID and MISMO
In effect since October 3, 2015, TRID resulted in major changes to mortgage loan originators and their corresponding vendors. To help industry participants align with the new regulation, MISMO produced an upgraded TRID-compliant schema. While not the only measure of vendor readiness, the ability to upgrade to the latest version of MISMO was seen by many as a way to determine if a given loan origination system (LOS) was truly prepared for the changes brought on by TRID.
While LOS vendors looking to assure clients of their TRID readiness were ensuring compliance with the latest MISMO standards, vendors that wanted to capitalize on the changes in the loan origination process were able to utilize the MISMO standard in the creation of marketplace utilities. Perhaps the best example of this is Black Knight’s Closing Insight (CI). Due to the stricter rules TRID created around fee names, variance tolerances and timing of various disclosures, there was a need for the once largely manual coordination process between the lender and settlement agent to become more automated and streamlined. Seizing on this need, CI was developed to help coordinate fees between the various parties.
CI was built utilizing the MISMO framework, enabling easy integration with existing systems and processes. Within 30 days of opening registration, over 30 percent of all settlement agents in the United States had registered with CI. Leveraging an existing infrastructure enabled CI to take advantage of efficiencies already in place, while utilizing an industry data standard allowed for ease of adoption among partner organizations.
MISMO and the Future of Regulations
While TRID represents the largest post-housing crisis regulatory change to the loan origination process, there will undoubtedly be more in the coming years. It is impossible to predict what all these changes will entail, however, it is clear that vendors who maintain compliance with current MISMO standards can elicit stronger client confidence while simultaneously remaining more flexible to address oncoming changes. Additionally, as new products are rolled out in support of these changes, developing products in alignment with MISMO enables easier integration between vendors.
The near decade-long housing market recovery has brought change and reform to players across the industry. Looking forward, participants should expect additional change as regulators seek to prevent a repeat of the events of 2007 and the actions that caused them.
Organizations and vendors can more quickly and cost-effectively react to future changes by maintaining compliance with the latest version of the MISMO standard. Not only will this allow for flexibility and ease of integration, it will also enable the industry to make informed decisions based on robust and clean data. Additionally, a standard means of communication will allow for the development of more straight-through processing in an industry long afflicted with inefficiencies and the operational risk associated with manual processing as well as lack of transparency. While there is no way to know what the future holds for the industry, one thing is certain: organizations that invest the time now to align with this data standard will find themselves better prepared to adapt to future changes.
Jocelyn St. James
is a Business Consultant with Sapient Global Markets based out of New York. Jocelyn has spent her career working in a variety of capacities within mortgage banking technology. She has worked on multiple initiatives within the primary and secondary markets, covering the mortgage loan lifecycle from loan originations through to MBS disclosures. Additionally, her work has covered major regulatory changes as well as FHFA scorecard deliverables.
1. Federal Reserve Bank of New York, “The Rescue of Fannie Mae and Freddie Mac,” March 2015, https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr719.pdf