Nov. 15: The uneven cost of compliance; delinquency figures; thoughts on GSE MBS purchases; Third party provider news

The U.S. Federal Reserve doesn’t set mortgage rates, the market does. People in our biz know that mortgage rates and pricing are a function of supply and demand, not from some Administration decree for a 50-year mortgage, assumability, or portability. The same can be said of food, hence President Trump changing his tariff policy again given higher prices due to those tariffs, and precious metals, with some twists. Gold is a traditional gift in Vietnam (connoting luck), so at a record $4,380 per ounce globally, wedding season has become very expensive. Vietnam’s gold demand is roughly 55 tons per year, but it only imported 13.5 tons last year. Demand remains high, though, and people aren’t selling their cache, which means that the price of gold in Vietnam is now 10 to 15 percent higher than the global price. It has become a significant enough issue that the government is overhauling the import monopoly held by the State Bank of Vietnam in a quest to get that price down to a two to three percent premium.

CHLA’s take on GSE portfolios, correcting prior piece

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Rob Zimmer, Head of External Affairs for the Community Home Lenders of America (CHLA), responded to an opinion piece focused on the advisability of the Government Sponsored Enterprises (GSEs) buying their own mortgage-backed securities (MBS). Of course, any entity stepping in and buying a lot of whatever tends to raise prices, in this case lowering rates.

“You recently ran comments from Chris Whalen and Alex Pollock opposing the views of community lenders (Community Home Lenders of America and the Independent Community Bankers of America) for asking the GSEs to increase their portfolio of Mortgage Backed Securities (MBS) to help bring down mortgage rates for young families. CHLA would like to correct the record on a few key factual points.

“First is the spread between 30-year mortgages and 10-year Treasuries. The article claimed the spread has fallen to 130 basis points. Not so, and It's not hard to compute the real numbers. With an average 30-year fixed rate mortgage at 6.29 percent and the 10-year Treasury note rate at 4.06 percent on November 12th, the 30/10 spread was 223 basis points, well above the historical norm of 140-170 basis points going back to the 1980s.

“Second, in making the case against the GSEs buying MBS, Mr. Pollock claims that ‘The Fed has lost hundreds of billions of dollars on its investment in in MBS.’ This is irrelevant to the CHLA/ICBA proposal.

“The basic investment principal is to buy low, sell high. The Fed has done precisely the opposite, so it's not surprising it lost money buying large blocks of 3 percent mortgages during COVID. But the CHLA/ICBA letter is clear. We're not proposing the GSEs buying MBS indiscriminately but instead favor a targeted policy where they intervene only when the 30/10 spread is historically high, specifically ‘above 170 basis points’ and therefore spreads should be narrowed.

“Moreover, the Fed never hedges its purchase of MBS, while Fannie and Freddie have always hedged against such purchases. Indeed, for years leading up the 2008 housing crisis, we were warned that the main Fannie/Freddie risk was interest rate risk. Yet the housing crisis had nothing to do with interest rate risk… It was caused by credit risk.

“Finally, CHLA and ICBA are not calling on a massive expansion of the GSEs’ MBS portfolios, as existed prior to the 2008 conservatorship. We are calling for a prudent increase in the existing portfolio caps from $225 billion to $300 billion.

“We'll note that Mr. Whalen was lambasted by the credit score resellers in a recent mortgage trade publication where, among other errors, he was called out for mistakenly saying FHA borrowers don't need credit scores. We believe he has made some basic mistakes in this MBS policy area also.

“Our two organizations represent community mortgage lenders, whose sole objective in this situation relates to this MBS issue (the ICBA is involved with other lending as well) and is to provide affordable mortgage loans for American families, particularly younger Americans priced out by spiraling home prices. That is why we made our proposal, and that is who will benefit.”

Community banks and the cost of compliance

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“For years, community bankers have warned that the growing thicket of federal regulations is suffocating smaller institutions. The compounding effect of these rules lands hardest on the banks least able to absorb them. The refrain has become familiar: small community banks don’t have armies of compliance officers or sprawling technology budgets; yet they face regulatory mandates often meant for larger institutions. Most of that argument rested on anecdotes and intuition rather than solid, quantitative evidence. But now, drawing on an unusually rich dataset (a decade’s worth of information from the CSBS Annual Survey of Community Banks, covering 2015 through 2024) we have statistically significant evidence behind the claim that regulation weighs more heavily on the smallest banks. And the empirical findings are hard to ignore.

“How the CSBS Community Bank Survey Measures Compliance Burden: In each annual survey, hundreds of community bankers estimate how much of their operating costs go toward compliance, broken down into categories such as personnel, data processing, legal, accounting and auditing, and consulting. Responses to the banks’ financial statements were then matched to the surveyed banks and then grouped into asset-size quartiles to see how the burden scales. The research question being asked is deceptively simple: are smaller banks devoting a greater share of their resources to compliance than their larger peers? And if so, how large, and how consistent, is that gap?

“Smaller Banks Consistently Spend a Higher Share on Compliance. The short answer to the first question is an emphatic yes. Across 10 years of data, four of the five expense categories show that smaller community banks shoulder a markedly higher proportion of compliance costs. The answer to the second question is that the differences are significantly large and consistent across all years for four of the five expense categories.

“Which Cost Categories Show the Biggest Gaps? For personnel costs, the largest overall expense category at most institutions, the smallest banks reported spending roughly 11 percent to 15.5 percent of their payroll on compliance tasks, compared with 6 percent to 10 percent at the largest institutions, a statistically significant gap every single year. The pattern repeats across other categories. Data processing costs consumed 16.5 percent to 22 percent of small banks’ budgets versus 10 percent to 14 percent for the largest quartile. Accounting and auditing expenses devoted to compliance ran 5 to 17 percentage points higher. Consulting costs diverged the most: roughly 50 to 64 percent for the smallest banks compared with 19 percent to 30 percent for the biggest. Only in the legal category did the differences wobble, with smaller banks still spending more (around 17 to 31 percent versus 14 to 21 percent) but without consistent statistical significance.

“Why Compliance Costs Hit Small Banks Harder: The evidence puts forth a clear conclusion, and that is regulatory costs behave more like a fixed overhead cost than a variable one, meaning they do not scale down gracefully. The smaller the bank, the bigger the bite.

“Why does that matter? Because regulation, though essential to protect markets and consumers, carries real economic trade-offs. Every dollar that goes toward more personnel staff time, paperwork, data systems, and external consultants is a dollar not spent on lending, innovation, or community outreach.

“The Post-Crisis Regulatory Environment and Its Impact on Community Banks: These findings fit within a longer-running story, which is that regulatory volume and complexity have increased over decades and accelerated sharply in the aftermath of the 2008 financial crisis. Post-crisis changes, whether from the Dodd-Frank Act, Basel III capital rules, or expanded consumer protection oversight, had the cumulative effect of raising regulatory compliance costs.

“While large banks could absorb those fixed costs, community banks had to spread them across far fewer employees and smaller balance sheets. Many responded by merging or exiting certain lines of business altogether. The number of community banks in the United States has been falling steadily for decades, but the pace of decline accelerated after 2010, and new bank formation has nearly vanished. Regulation is not the only culprit, but these data suggest it is a significant contributor.

“What This Study Adds to Existing Research: The detailed working paper reviews the literature on compliance costs and economies of scale in banking. Some earlier studies found hints of the same pattern: fixed reporting and internal-control costs erode small-bank profitability. And others linked rising regulatory complexity to consolidation, arguing that big banks can spread those costs while small ones cannot. What distinguishes this study from earlier research is the use of direct, longitudinal data rather than proxies or simulations. The result is an empirical foundation based on 10 years of survey data as opposed to what had been mostly qualitative arguments.

“How Small and Large Community Banks Differ: The working paper also shows how the smallest and largest community banks differ in structure and performance. The smallest quartile of banks tends to carry higher capital ratios (around 12 percent compared with 10 to 11 percent for larger peers) signaling conservatism and limited leverage. Yet they also report slightly higher non-performing loan ratios, often 1 percent versus under 1.5 percent. Smaller bank portfolios tend to lean heavily toward farm and residential real-estate credit, while larger community banks emphasize commercial real estate and commercial-and-industrial loans.

“In earnings, the smallest banks generally post lower returns on assets, even though their net interest margins may be marginally higher; compliance costs and limited economies of scale eat into those gains. Funding profiles differ as well: the smallest banks use fewer brokered deposits and less non-core funding, which reduces liquidity risk but constrains growth. None of these characteristics are inherently negative (they reflect mission and market) but together they make smaller banks more sensitive to fixed cost pressures.”

Delinquencies: moving incrementally higher from very low numbers

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The MBA reported that, “The delinquency rate for mortgage loans on one-to-four-unit residential properties increased to a seasonally adjusted rate of 3.99 percent of all loans outstanding at the end of the third quarter of 2025, according to the Mortgage Bankers Association’s (MBA) National Delinquency Survey.

“The delinquency rate was up 6 basis points from the second quarter of 2025 and up 7 basis points from one year ago. The percentage of loans on which foreclosure actions were started in the third quarter rose by 3 basis points to 0.20 percent.

“’Mortgage delinquencies increased in third quarter of 2025, led by worsening FHA loan performance,’ said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. ‘Since this time last year, the FHA seriously delinquent rate, which includes 90+ day delinquencies and loans in foreclosure, increased by almost 50 basis points. In contrast, the conventional and VA seriously delinquent rates remained relatively flat.’

“’The stressors on FHA homeowners include a softer labor market, other personal debt obligations, and increases in taxes, homeowners’ insurance and other fees that exacerbate already stretched affordability. Additionally, home price declines in some parts of the country may lessen the ability to sell or refinance.’

“Walsh also noted that while the third quarter results were not impacted by the ending of COVID-era FHA loss mitigation options and the recent government shutdown, those events may affect future quarters.”

Service provider/vendor products

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There are some cool programs and software for lenders in both the primary (dealing with borrowers) and secondary (dealing with investors) markets. Let’s take a random look at who’s doing what out there, in no particular order.

(By the way, the Chrisman Marketplace has become the centralized hub for vendors and service providers across the mortgage industry to be viewed by lenders in a very cost-effective manner. To reserve your place or learn more, contact Jake at info@chrismancommentary.com.)

Secure Insight has announced its 7^th Annual Prestige Partner Award initiative. Each year SI polls the 90K plus attorneys and title agents in their database to identify the top fifteen lenders based upon mortgage industry-focused criteria. This year the criteria include Closing Efficiency, Communication & Responsiveness, Ethical Practices, Innovation & Adaptability, and Client-Centric Support. The survey begins November 15^th with results tabulated through November 30th. Results will be announced starting on December 1^st starting in reverse order, with five winners being revealed each week, leading up to the overall winning lender the last week in December. Winners receive social media recognition, an award graphic, and a frameable certificate. For more information contact Amanda Padd, CRO.

MortgageFlex announced the launch of its groundbreaking cloud-native Loan Origination System (LOS), LoanQuest. This innovative platform marks a new era for lenders, delivering unparalleled flexibility, scalability, and automation all powered by a modern cloud infrastructure. With LoanQuest, institutions can tailor workflows, AI Tools, boost staff performance, and streamline compliance with evolving regulations.

Ocrolus, the AI-powered data and analytics platform for credit decisioning, announced it is adding automated conditioning to its suite of products. This new solution helps mortgage lenders move faster, increase loan quality, and reduce compliance risk. The capability, announced at the MBA Annual Convention and Expo, dynamically surfaces underwriting conditions within a structured, auditable system and powers their full lifecycle from identification through resolution. Conditioning has traditionally been a manual and inconsistent process, requiring underwriters and processors to dig through documents, interpret guidelines and enter conditions manually into loan origination systems like Encompass. Automated conditioning builds on existing capabilities in Ocrolus Inspect, accelerating clear-to-close, minimizing human error and helping lenders deliver a faster, more predictable borrower experience. 

Friday Harbor has expanded its AI Originator Assistant to include appraisal underwriting, bringing the same real-time intelligence it already applies to credit, income, and assets to the collateral review process. The new capability allows lenders to automatically identify appraisal inconsistencies, analyze market soundness and assess property condition through both data and visuals. It flags issues like misaligned comparables or property damage early, providing guided resolution steps so files stay complete before they reach underwriting. Friday Harbor built the feature entirely in-house, aligning checks with Fannie Mae and Freddie Mac standards. Results flow directly into the lender’s LOS through a direct integration with ICE Encompass or via open APIs for other systems.

The human and animal lover in me is cheered on by this video of pet actions. The cynic in me asks, “Is there a camera everywhere these days, or are they staged? And who is going to be filming if there’s a dangerous animal nearby?”

Visit www.ChrismanCommentary.com for more information on our industry partners, access archived commentaries, or subscribe to the Daily Mortgage News and Commentary. You can also explore the Chrisman Marketplace, a centralized hub connecting mortgage professionals with trusted vendors and solutions. If you’re interested, check out my periodic blog on the STRATMOR Group website. This month’s piece is titled, “Rates Drop, Pipelines Pop: Don’t Let Fulfillment Flop.” The Commentary’s podcast is available on all major platforms, including Apple and Spotify.

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(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes, visit the Chrisman Job Board. This newsletter is intended for sophisticated mortgage professionals only. There are no paid endorsements by me. For the latest mortgage news, visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.ChrismanCommentary.com. Copyright 2025 Chrisman LLC. All rights reserved. Paid job & product listings do appear. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Rob Chrisman. The views and opinions in this newsletter are mine alone unless otherwise specifically stated herein.)