The Mortgage CTO

Bringing down Bear Stearns

2008-06-30T23:18:00.003-04:00

Interesting article on the demise of Bear Stearns in "Vanity Fair." "Vanity Fair" you ask? Yes, that magazine...I don't get it either. Maybe they saw Jimmy Cayne's pouty lips and confused him for Angelina Jolie.

The article is intriguing in that it raises the "conspiracy theory" that Bear was brought down by a handful of conspirators. I doubt this theory will ever be substantiated as it seems a tad far-fetched. More likely Bear over-extended its risk position and when word spread the panic caused a run on the bank. Since Bear wasn't a true bank nothing could be done.

But the real story is that something was done. And that is where our wonderful Fed stepped in and brokered a deal. The article pains a very bad picture of Treasury Secretary Henry Paulson. He comes off as a politico who wants to keep up appearances by not looking as if he is bailing out Bear (by mitigating Chase's risk with our tax dollars) when he in fact was actually doing that very thing. This hypocrisy led to a $2 initial offer that more than quintupled after some griping by Bear shareholders. It also led to a Federal bailout of a firm that had no business being bailed out.

Bear was judged too big to fail. Which makes me wonder what other firms are too big to fail? The US government has done this before. Remember Lee Iacocca and Chrysler? Could we see a repeat of history in the next year or so? Similarly no one in the mortgage industry really believes that Fannie Mae and Freddie Mac are independent financial institutions. Their cost of funds is lower due to the commonly held believe that the Fed would never let them fail.

So who is not too big to fail. Countrywide? Obviously not since they were gobbled up without any intervention. But what if Bank of America starts teetering? My bet is that Bernanke and Paulson will be on their horse to the rescue again. How about Wachovia? Naaah...they're "too small to survive." I guess scale does have its advantages.

Are Machines to Blame for the Sub-Prime Crisis?

2008-04-17T22:35:00.004-04:00

My alma mater recently asked me a question that I have been asked by many other folks - did technology cause the subprime meltdown? After some discussion they decided to interview me on the topic and publish an article.

For those of you who are considering going back to school for a graduate degree that combines technology and business disciplines, I highly recommend the Penn EMTM program. EMTM stands for Executive Masters in Technology Management and the program is run by the University of Pennsylvania School of Engineering and Applied Science (SEAS) and is co-sponsored by Wharton. You get the best of both worlds - technology courses taught by engineering professors from SEAS and business courses taught by Wharton professors. In addition you work in a team environment with a lot of extremely bright and motivated individuals. I can't say enough about how great this program is.

As for the article, many people have questioned whether technology was the root cause of the subprime bubble bursting and the resulting credit crunch. My opinion is that technology did not cause the problem but it may have accelerated it. Technology is very good at adding speed to business processes. If those business processes are flawed in any way then technology will accentuate those flaws.

As an example underwriting standards were loosened over the years and the technology which enables automated underwriting made it easier and quicker to approve someone who maybe shouldn't have qualified for a loan product. Does this make technology the culprit? In my opinion no. The business decisions that allow underwriting guidelines to be compromised were translated into business rules that are used by the technology to render decisions.

People who point to technology as the culprit are looking to redirect the blame. The real mistakes were made by people who got carried away yet again in a fit of irrational exuberance.

Trenton Computer Festival

2008-04-01T23:46:00.004-04:00

For those of you who live in the Trenton, NJ area an annual landmark event is just around the corner. Yes, the Trenton Computer Festival is set to occur Friday, April 25th through Sunday, April 27th.

The Trenton Computer Festival (TCF) was created, in 1976, by Sol Libes, of the Amateur Computer Group of New Jersey and Allen Katz, of The College of New Jersey (then Trenton State College) as an annual educational event with speakers, forums, and user group meetings, an exhibitor area and an outdoor flea market. It still remains one of the longest-running computer hobbyist events anywhere.

Past speakers have included John Mauchly who invented the ENIAC, Adam Osborne who invented the first portable computer, Bill Gates (not sure what he does), Bjarne Stroustrup the inventor of C++, Phil Zimmerman creator of PGP encryption, Brian Kernigan (co-author with Dennis Ritchie of the famous "white book" on C).

This year David Perry of Trend Micro will speak about Identity Theft. They must be desperate for speakers, since I will be speaking about Data Governance on Friday. I guess Bill Gates had a conflict so they settled for me.

Ehring On blog

2008-04-01T23:35:00.004-04:00

I added a link to Dain Ehring's blog in my "Interesting Websites" area to the right. Dain is the CEO and co-founder of Dorado, an Enterprise Lending Automation company.

I've met Dain a couple times in passing and recently met his CTO Rob Carpenter at the MBA Technology conference. Rob is a very smart individual who has a great grasp of both the mortgage industry and technology. Based on my discussions with Rob I decided to check out Dorado's website. That's where I stumbled upon Dain's blog.

Some of his early posts read like glorified PR for the firm, but his recent post comparing the Dutch Tulip panic of the 1630's to our current subprime meltdown was spot on. Check it out.

DLNA and why it's a big deal.

2008-03-10T23:39:00.004-04:00

DLNA stands for Digital Living Network Alliance. The DLNA is a cross industry organization that seeks to create a network of compatible devices that allow consumers to share digital content between PC's, consumer electronics products, and mobile devices. Sounds a bit esoteric, right?

Well this weird acronym hit me right between the eyes when I installed my Playstation PS3. After spending some time on games and Blueray movies (yes, this game system is very underrated...it is quite good) I decided to figure out what the heck a media server is.

That's when I stumbled upon the fact that I could hook up my PS3 to my PC simply by installing Windows Media Player 11 and configuring it to share the media on my PC. The PS3 has wireless connectivity to my home network. This now allows me to serve up pictures, videos, and music from PC to my family room television. Thanks to DLNA the effort involved in getting this to work was on the scale of starting my car in the morning. I browsed through all the various pictures that are stored on my PC on my large screen TV.

One minor issue was that Apple in its abhorrence of all things open does not support DLNA for its iPod or iTunes products. Alas I couldn't unlock all the music stored on my iPod and play it on my TV. But actually there was a solution - I simply converted all my iTunes .m4a files to .mp3 and reconfigured iTunes to store music in the future as .mp3 so I could future mass conversions. Voila! All my music now played on my TV.

However that really got me to thinking on my drive home. As usual I decided to plug in my iPod so I could enjoy my own songs when it struck me. Wouldn't it be great if I could have my car stereo simply link to my home PC for my music as easily as my PS3 did? Well of course it was easy for my PS3 because it's on a wireless home network. But how soon before we have wireless everywhere? It will be game-changing.

Imaging streaming music from your home PC to your car. Or even better, what if Apple gets a clue before Google owns the world and decides to host your music for you. All your favorite iTunes and CD tracks hosted as a service that you can access from anywhere (PC, PS3, car) anywhere in the world.

And to think it all started with serving up some pics to my TV that were hosted on my PC.

Stephen Knight book - "Creator and Trader"

2008-03-02T15:23:00.006-05:00

I recently read Stephen Knight's "Creator and Trader", which is the story behind his UK mortgage company Private Label, which eventually became part of GMAC-RFC's International Business Group.

In the book Stephen describes how the UK mortgage has matured through the years mainly due to the role of intermediaries, which are called "Packagers", and via technology. Stephen is a huge proponent of utilizing technology to improve the mortgage lending process. GMAC-RFC UK was one of the first lenders to utilize an automated decisioning engine, based on the AssetWise service built by GMAC-RFC in the US. However he took it to another level by combining the power of AVM's (automated valuation models) to give customers a binding offer at the point of sale.

This still is a revolutionary concept for many firms and there is still much debate in the US regarding the use of AVM's as part of mortgage products. AVM's are basically means of automating the home appraisal process. They are similar in concept to the consumer site Zillow. By not requiring a human appraiser to do a "drive-by" of the home to determine it's value the mortgage process can be accelerated.

Some argue that AVM's are not as effective or accurate as manual appraisals. This can be true if there are not a lot of comparable homes in the vicinity which have recent sales data. However manual apparaisals, much like manual underwriting, is also fraught with issues. Many home valuations in the Pocono resort communities near Philadelphia were wildly out of wack due to shady appraisal practices and outright fraud.

Stephen is also quite a character. He is kind of a British Angelo Mozilo, with a better sense of humor and a worse tan. In his book he relates the story of walking through Countrywide's offices which had a lot of rubber floors and commenting that the last time he saw that much rubber was at one of Godfrey Blight's parties. Apparently Angelo wasn't amused but I found the remark brilliant (hopefully the folks at BofA improve the sense of humor out there in Calabasas).

I only met Stephen once when I was visiting the UK and only for one meeting. However, I spent some time with Barry Searle one of his three key team members. Barry is quite a guy in his own right - although he has some strange notion that Fulham has a great soccer (football) team.

Stephen and Barry are now starting up a new firm called Checkmate Mortgages. I wish them all the best.

GrandCentral

2008-02-25T22:23:00.001-05:00

Google's GrandCentral comes to Blogger! This is a great service that allows you to manage the plethora of phone numbers you own. It is a personal switching station for all your phone #'s, voicemails, and contact info. Best of all you can allow people to call you without ever giving out a personal phone #.

Look at the link towards the bottom of my link list on the right side of this page. Feel free to leave me a voicemail, but please keep it clean.

This is the first step towards a future where we'll all have ONE phone # and callers will find us whether we're sitting at a desk, traveling with our personal cell phone, surfing the web, or watching TV. The old concept of phones is going to be changing.

What should I do with my good old trusty rotary phone? Perhaps I can stack it next to my Toshiba HD-DVD player.

Welcome to The Mortgage CTO

2008-01-29T13:34:00.001-05:00

This is the first post for my blog. 2007 was the most challenging year of my career but in many ways it also turned out to be a most rewarding year also.

I am the CTO for GMAC ResCap which is a top-ten mortgage lender. ResCap was a top subprime lender until the market crashed. That's the bad news.

The good news is that ResCap has also traditionally had a strong conforming lending engine. This is probably what has kept ResCap from being on the "bad side" of the Mortgage Lender Implode-o-meter: http://ml-implode.com/.

I intend to use this blog to reflect on some of the more extraordinary events of the past turbulent year, give you some insight into what it's like to be a technology leader in the midst of a tectonic shift in an industry, and also have some fun along the way.

Stay tuned...the best is yet to come.

Rob