11.6.26 Bipartisan Opportunities; Crittora’s Doug Long on AI Governance; Credit Modernization

Robbie ChrismanWelcome to the Chrisman Commentary, Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include bipartisan politics, why capital markets is setting the record straight on credit modernization, and my interview with Kratora's Doug Long on enabling secure controlled AI adoption that helps organizations manage regulatory requirements, mitigate risks from unauthorized AI use, and operationalize AI strategies. Here, take a listen to a little preview. When we think about AI governance, what does that mean? How do you define it? Doug LongWe provided at our on our website a uh AI governance uh document that gets everybody prepared for Fannie Mae is uh January 18th. The 10 steps at a glance. Number one, you got to confirm your scope, dates, and accountability. Two, you got to inventory every AI use case, which is yeah, everybody calls it A, but now government is calling AI. Number three, you got to stand up your SI governance and name the owner. Number four, you got to assess the risk and set monitoring and retirement rules. Five, you got to control changes to models, systems, and use cases. Six, you got to test and safeguard against AI-specific attacks. Seven, you got to lock down access to people for non-human accounts. Eight, log, protect, and independently assess. Nine, flow requirements uh down to third parties, and ten, prepare incident, continuity, and disclosure requirements, in fact. You now have to uh if you have an incident, you've got to within 36 hours, you've got to identify that in this incident. You've got to be able to say what happened, where did it, where did it occur. And so these are the things that uh Fannie Mae is requiring. We've we've got that whole free list. If anybody wants to get a uh Fannie Mae uh readiness guide, we have it on our website at kratora.com. Robbie ChrismanThanks to this week's podcast sponsor, First Close, which helps financial institutions grow a successful home equity business with innovative solutions that minimize application drop-off, automate time-consuming processes, and reduce time to close from weeks to days. To learn more, visit firstclose.com. You ever wonder why the vote counts in Mississippi are slow? Well, because they have to say one Mississippi, two Mississippi after each vote counted. But um. I received a note from a senior mortgage manager in Tennessee saying, quote, the Democrats now have an opportunity to do something constructive, like to address issues with our relationship with our allies andor Russia, the tariffs, social programs, and research that has been cut, and the deficit, perhaps even bipartisan housing issues. It would be a strategic mistake for them to interpret the midterm outcome as a mandate to return to far-left progressive initiatives. Those who prevailed in former Republican strongholds like Texas, Iowa, and Kansas were elected by voters rejecting Trump, not a socialist agenda. For answers to the affordability problem, should we all follow Florida's lead, Florida, one of a handful of states known for no state income tax, voted in property tax cuts. So which services will counties and states cut that were funded by those property taxes? In other parts of the nation, the tariffs impact on Canadian lumber prices or appliances, immigration changes, and high mortgage rates still plague affordability. In addition to people complaining about affordability, people are also complaining about credit modernization. There's been a lot of noise for lack of a better term, and obviously the rates and prices borrowers see are a direct reflection of what investors are seeing. And yesterday, a seasoned respected capital markets vet sent me thoughts on what their company is seeing in the primary and secondary markets. Quote, lenders need to be aware of their choices. If a lender signs the FICO preferred agreement, they are not locked in to be exclusive with FICO. They can still pull a VantageScore and use that score with any investor who will accept them. Nearly every investor today is saying they also want the classic FICO if you're using the vantage. I'm not aware of a single investor who will accept only a VantageScore, although it will be a matter of time until this happens. If a lender only orders a VantageScore, then they are harming the 20% or more borrowers who would have had a higher classic FICO. The GSEs are being forced by current FHFA Director Pulte to price VantageScores, the exact same as classic FICO, even though it's widely known by the entire industry that a 720 VantageScore has a higher probability of default than a 720 classic FICO. For the next many months, the GSEs, that's Fannie and Freddie, may be the only investors taking only a VantageScore. I expect most, if not all, private investors will have a different price for vantage loans to account for the estimated 10 to 20 plus point score inflation of vantage versus FICO. But your readers should be aware of a potential industry dilemma. First, lenders will want to run all three scores when 10T comes out in January for HUD loans, and then cherry pick the best score to give the most benefit to borrowers. Second, investors will have huge pressure to pick the lowest of the three scores presented. They cannot unsee that there's a lower score in file, and the data will show a loan with a high vantage and a low FICO will perform worse than a loan with the same vantage, but a medium or high FICO. If lenders game the system but then rerun credit with only the higher scores, private investors will quickly build in a gaming adjustment for those lenders. I think that the future state is most lenders pick only Vantage or 10T. Vantage will be able to keep their price low since they don't need to generate any profit, and FICO will have to charge a score fee since this is their only income. The market will then decide if 10T is more predictive, and if by enough to justify paying a higher price. U.S. Treasuries, and to a lesser extent, Agency MBS rallied on Thursday as escalating volatility in AI-related equities triggered a broad flight to safety, despite stronger than expected economic data, including low initial jobless claims, robust productivity growth, and declining unit labor costs. The resulting demand for safe-haven assets pushed treasury yields to their lowest levels since mid-September, with the 10-year yield extending its decline by more than 50 basis points from its October 7th peak, as equity market weakness continues to weigh on investor sentiment. For today's interview, we wanted to welcome to the show Kratora's Doug Long to talk about enabling secure, controlled AI adoption that helps organizations manage regulatory requirements, mitigate risks from unauthorized AI use, and operationalize AI strategies. He's CEO at Kratora, which secures AI agents by enforcing execution time authorization before agents can use tools, call APIs, or change systems of record. Kratora is the execution time authorization layer for AI agents, a cryptographic enforcement layer that sits between agents and the tools, APIs, and systems they're trying to use. Kratora is mortgage AI governance. It adds action-level control and reviewable evidence to help mortgage organizations move consequential AI workflows toward governed production. You've been in the industry a long time. How did you get to this point of deciding that mortgage AI governance was the opportunity you wanted to pursue? Doug LongOne of the things that uh, you know, like I said, I've been in the mortgage banking business for four decades and have been through a lot of different cycles. And it kind of reminds me back in the late 1990s where we had this thing called the internet that was going. You know, it was all all things about dot com and people getting websites. And I know that kind of sounds juvenile today, but back then that was a reflection point that was going on in the industry that it was like, wow, okay, there's there is uh there's different ways of looking at the business today. And I remember a lot of mortgage companies back then were not, you know, they were like anti even putting a website up. And as as the people understanding the power of uh digital advertising, the power of search, the power of being able to put intranets up for communication protocols in your company. The people who adopted that early on seemed to have a substantial advantage over those who didn't. In fact, if you kind of look at what where Rocket Mortgage is today, they were the first guys to really kind of become the first internet lender and they sold into it, and the rest is history. You get, you know, what happened there. But you kind of look at today, you fast forward today, and I see what's happening in the mindset of what's going on similar. It's a very similar scenario. Because this is a time where I think a lot of mortgage companies and banks and credit unions, et cetera, could be sitting down saying, I can redefine, I can rethink, I can reimagine what my company can be with utilizing this technology. You know, at the end of the day, the mortgage business always comes down back to relationships and doing the right thing to the for the consumer. But uh the question is, you know, what could AI do to actually maybe drive down the cost of the consumer? What could it do to create more efficiencies within my company? What can it do? And I think a lot of the the mortgage folks out there and people I know, a lot of them are kind of having that same thing that happened 20-something years ago where they're thinking, wow, is this really something I've got to do? I'm I know it's coming, but should I embrace it? You know, I know I've got you know a lot of people using AI outside my company. I don't even know what's really going on. And it's it's to the point where people know that AI is going to change our industry. The question is, how is it going to change it? And how's it going to change your mortgage strategy? How's it going to change the way I do business? How, you know, how, how, how, how. So it's all about how right now. And one of the things that that came into play is uh being in this industry for so long. I was one of the companies, uh I was uh president of sales for Prospect Mortgage back when uh it had its first CFPB audit. And, you know, understanding the need for being audit ready was something that companies really didn't have in play. So I I kind of looked at, you know, everything from the beginning of like 1990, the birthing of the internet when internet started getting strong to the regulatory environments that we went through back after uh Dodd-Frank and after the Great Recession. I was like, man, we know that there's going to be a change. And so the question where is where we started at playing is like, where would we fit? And how could we actually get to a position to where we could play in the game of uh making AI operational, being able to be agnostic to what AI you use. We're not gonna pick an AI, you pick your own AI, you reimagine what you want to do. At the same time, we said you've got to be able to do this efficiently, you got to be able to do it securely, and you've got to be able to make sure that whatever you do on your AI, you've got to have an audit-ready trail. Because I knew eventually regulators were would get involved. So that's when we started building it. We started building it with those things in mind. We didn't want to be you had to be this kind of vendor or that kind of, you know, we are vendor agnostic and we're also AI agnostic. But what we do is we kind of create a command and control center for you to reimagine your company and be able to implement AI in a safe, secure method and allowing humans to stay in control. And at the same time, make sure that there's an audit trail of every every one of the AI actions that occurred within your company so that when the board members or your executive committee or your internal audit team, or if any maybe auditor or somebody from the state shows up and says, Can you prove what that AI did? We have an audit log that says this is what happened. So that's how we kind of started thinking about Kratora is we know that there's going to be a game-changing wave that of how AI is going to play in the mortgage industry. We just thought, how do we make sure that we sit down and create a secure methodology for the mortgage company, crediting or bank that wants to implement AI in a way to be able to do it very efficiently, very securely, and make sure they're proof prove what happened. So that's how we started, Robbie. Robbie ChrismanWhy governance, considering all the possibilities that AI presents in terms of the type of company you could create? Why do you choose governance? Doug LongWell, if you look at uh the governance side of things, that kind of if you if you look at what's really driving all mortgage companies, we have a boss that's called Fannie Mae or Freddie Mac, that's where our liquidity is, right? And those guys provide most of the liquidity to the mortgage industry. And if you kind of look at what Fannie Mae has done, they've said and Freddie Mac, they both have said, we need to make sure that if you're doing something in AI, you need to have a governance policy around it. And so we're not the guys that are going to create your government's governance policy. There are great people out there like James Brody and others that can help you do that. What we decided to do was we need to be able to actually help you execute on that policy. Whatever policy you decide to put in place, and you've got to document that policy, you got to make sure that everybody in your company, you've got to have designate who's involved in that policy, and you got to make sure that you're you're the person that is responsible for it. So if you got designated, somebody's gonna be responsible in your company for that. So we know that we're not if you look at the kind of the top 10 things that Fannie Mae's requiring of at this January 18th uh requirement that's coming out soon. We fit in like six, seven, and eight. Okay, we're we're the you know, we're we operationalize your AI, we secure your AI, we can we prove what your AI did, but you need to be able to put the whole team together when you're putting together your AI governance strategy or AI strategy. You need a whole team that's gonna do that. And what we're finding is that's kind of why we're partnering with other people that do other things. We're we're not gonna set your AI governance policy. What we can do is we can document it, help you document it, we can help you operationalize it, and we can uh and we can audit it for you. Robbie ChrismanLet's talk best practices for mortgage, AI, governance. Why do people need something like Kratora? Why should people trust Kratora? Doug LongLet's start with the why. All right, so you you've got a lot of a lot of lenders I've talked to are just waiting for their vendors to kind of create their own AI strategy for me. I'm waiting for Encompass or I'm waiting for my LOS to create an AI for me. I'm waiting around. In the meantime, they've got their loan officers or processors and other people who are using Cloud or they're using OpenAI or they're using other other things, and we call that shadow AI. So things are going on that you probably don't even work you're not even aware about, and it's maybe outside your network, but that doesn't mean that you're not responsible for it. And that so at the end of the day, you're kind of responsible for any of your employees' use of AI, you're responsible for your third-party vendors' AI, what they're doing. And so, you know, when you start realizing that, you know, what the governance requirements are, most people I don't believe actually realize that they need that they're responsible for all this. And so that's kind of when you were asking originally why governance. Well, it's a requirement, number one. And number two, the question is, do I get do I need governance? Yes. Do I have an AI strategy? Maybe. I don't know if you do or not. And the same time, the question is, do I want to implement an AI strategy? And so what Kratora does is we actually help in terms of implementing your AI strategy. We utilize our encryption technology to actually make sure that uh the whole technology is locked down in terms of your security for your AI agents that you're using. In fact, we we're able to be able to make sure that every AI agent you decide to put in place, we actually just don't allow for them to go wandering around because you don't even give them the tools to do that. So you've heard AI agents and horror stories of where they and maybe they started in a uh CRM, and next thing you know, they're in the HR database and they're just trying to be helpful. Well, by the way, what we use at Kratora, we don't even allow that to happen because you you can sit down and give access to the agent, the AI agent what it can see and what it can't see. It's almost like having blinders on an AI, so it's very focused AI. And that doesn't allow for them to go wandering around in rooms they're not supposed to be in. And so that's one of the reasons we created it. And the second thing is that we have probably on staff with you know over 100 years of expertise in the mortgage industry. So we know mortgage, we understand mortgage, and that's another reason I think when you said white trust Kratora, uh, we kind of know the business. Robbie ChrismanPeople in the Chrisman LLC ecosystem have certainly seen Kratora everywhere. You burst onto the scene. Can you talk about your plans for the next couple of months, six months, year? Doug LongI can tell you one of the things that I've found is that we want to, number one, we want to be able to partner with any company who wants to have an AI strategy that has a desire to make sure that that's uh how can I operationalize it fast and secure and provide auditable trail. That's that's where we play. But we also know that we need to be able to put together partners, and when I say partners, like strategic alliances with other like-minded people who have the same desire that play in different spots within the AI strategy. And so we're putting together, you know, groups of people that are involved in MISMO or involved in uh the frame project with MISMO, which we're one of the proof consultants of MISMO, in order to be able to have a place where people can go, where do I find? I want to start an AI, I want to get into AI, but how do I do it? There's so much noise around it, there's so many people around it. And so what we're trying to find is the experts in maybe every position that you need in order to actually decide, I want to get into AI, or I decide I want kind of AI strategy I want to get into. So everything from consultants to start out from strategic planning perspective of like how do I get into AI to the position of how do I make sure that as different rules change or different municipality or state changes the rules on AI, or there's some legal documentation, how do I get in, how do I make sure I have access to that? To the point of being able to say, how do I operationalize it? That would be us. You know, how do we help you operationalize the AI and how do we document it uh for with governance packs to be able to provide any auditor? And then we're also looking at a couple of AI agent builders that as people like need help maybe in terms of building out their AI. So so we're in the middle trying to put together uh over the next next 60 days, we're putting together a team of different people that fill that different spots within a strategy session that you would you would want to implement. And so that's what we're doing now. And over the next 12 months, we want to be able to uh be known as the people to help secure down AI agents and provide uh provide auditable track for any uh anybody that needs to make sure that what those AI agents did for the mortgage industry, any any anybody doing mortgage lending, whether it's mortgage lenders, banks, or credit unions. Robbie ChrismanVery good. Anything else you want to touch on before we finish? Do you feel like that was comprehensive enough? Doug LongI will tell you uh one of the biggest things we're also doing, just uh FYI, we've come up with a quantum ready encryption product so that when quantum computers hit, we're in the middle talking to uh a lot of the federal agencies about it. When quantum computers come, the the current security loads are gonna not be close to being able to keep out the bad actors. We will eventually add that quantum security into the product we're just talking about as well. Robbie ChrismanDoug, ton of good stuff, man. Wish you the best of luck, and I'm sure we'll talk soon. Thank you. Doug LongOkay, buddy, appreciate it. Robbie ChrismanMortgage prepayments slowed in October, with Fannie Mae and Ginnie Mae speeds declining 9.2% and 14.8% month over month, respectively, as elevated mortgage rates continued to suppress purchase and refinance activity. Although 30-year mortgage rates have declined for three consecutive weeks to 7.18%, they remained significantly above year-ago levels, suggesting prepayments will remain subdued into the seasonally slower year-end, though refinancing declines may begin to moderate. With approximately 0.5% of mortgages currently offering sufficient refinancing incentives, there's potentially attractive risk reward in servicing heavy originators such as Rocket and Rhythm. Today's economic calendar kicked off with October nonfarm payrolls, which were up 165,000 versus 65,000 expectations and a prior reading of 29,000. The unemployment rate declined to 4.1% from 4.2%, and average hourly wages were up 2.0%. Despite a relatively tight labor market, wage growth has slowed to 3.1% year over year as surging employer health care costs increasingly crowd out salary increases. Later today brings preliminary November University of Michigan consumer sentiment and September consumer credit. With the U.S. equity sell-off appearing to be easing, we begin the day with agency MBS prices, little change from Thursday's close, the two-year yielding 4.49, and the 10-year yielding 4.86% after closing yesterday at 4.84%. Let's wrap up with a joke and some housekeeping. Three brewery presidents walk into a bar on a Friday afternoon in November. One from Corona, one from Corus, one from Guinness. The president from Corona says to the bartender, give me a Corona. The best Mexico has to offer. The bartender hands one. Next, the Corus president orders a coors saying, Hand me the only beer in the world made with water fresh from the Colorado Rockies. Then the Guinness president walks up to the bar and orders a Coca-Cola. The bartender, a bit taken aback, hands him what he orders. The other brewery presidents turn to him and ask, Why didn't you order a Guinness? He replies, Well, I figured if you guys weren't ordering beers, why should I? Thanks again to First Close for sponsoring this week's podcasts. First Close helps financial institutions grow a successful home equity business with innovative solutions that minimize application drop-off, automate time-consuming processes, and reduce time to close from weeks to days. To learn more, visit firstclose.com.