Tech Deal Shows Stronger Quality, Secondary Ties

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A recent acquisition shows how technology is evolving in line with investors’ interest in ensuring they have a thorough understanding of mortgage assets’ values and integrity throughout those assets’ lives, as well the shift in the market as larger entities sell their mortgage servicing rights to smaller players.

The mindset used to be that investors should have confidence in lenders’ reps and warrants/ability to underwrite loans if they retained servicing and collected on the mortgages, but the crisis “exposed a major fault-line” in that thinking in terms of data integrity, said Parker & Co. president Les Parker.

Parker, who recently sold some technology assets that have been used to value and hedge mortgage assets to LoanLogics—a loan quality, analytics and pricing platform tackling the data integrity issue, thinks the use of such a platform to maintain and track values can help restore investor confidence.

There has been some “bristling” against this change as ensuring quality can slow the closing process, but “the major players get it,” he said, noting that some have been ramping up their emphasis on quality to various degrees, some seeking confidence in their loans’ quality in the 90th percentile or higher.

In line with this broader goal as well as the aforementioned shift in the MSR market, Parker recently sold three technology assets to LoanLogics in a transaction with undisclosed terms.

These assets are Parker & Co.’s former flagship product Hedge-It, an interest rate risk management tool used in pipeline hedging; Value-It, a servicing valuation model; and Book-It, an MSR accounting tool.

Among other things, the acquisition helps LoanLogics move deeper into the secondary market risk management side of the business, said Brian Fitzpatrick, LoanLogics’ president and CEO. It also will help the company serve needs that have arisen involving divestitures of servicing on the part of large banks related to risk-based capital requirements related to the assets, he said.

“This is creating opportunities for midsized players, both depositories and nondepositories to acquire servicing,” said Fitzpatrick, noting that these entities are a large part of LoanLogics’ user base.

These players have lacked the more complex analytical and accounting tools and expertise their larger counterparts have had to assess servicing portfolio concerns such as prepayment risk.

Some of the newly acquired technologies are being added to LoanLogics’ LoanHD analytics platform for portfolio evaluation, while others are being added to LoanDecisions, LoanLogics’ pricing and eligibility technology.

Fitzpatrick said LoanHD is currently evaluating about 1.5 million loans actively for a number of banks and credit unions, monitoring the performance of risk indicators over time.

“A lot the regulatory requirements of having to monitor their loan loss reserve capabilities” can be met using the automation, Fitzpatrick said. “The only way they can tell if they are under-withheld or over-withheld is by understanding the underlying risk.”

LoanLogics’ technology can be used by the depositories that may hold both the servicing and the underlying loans and also by entities selling their loans to Fannie Mae and Freddie Mac and retaining the servicing.

“They have to account appropriately for the MSR values on their financial statements,” he said of the latter.

The analytics also can be used to help make buying or selling decisions when it comes to MSR assets, Parker said.

Parker said his original company will continue its commodity brokerage activities handling futures and option trades and related advisory services, and he will continue to serve as a consultant to that business while his partner Buzz Bartholomew of California Managed Accounts takes the lead.

At LoanLogics, Parker will be a senior vice president reporting to Fitzpatrick.

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Originations Mortgage technology Secondary markets
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