At the Forefront: Loan Level Data, Risk Analytics

Continuous lender demand for risk assessment technology keeps renewing the industry focus on predictive analytics, data mining and risk scoring tools.

Right now and in the immediate future, banks are focusing on loan-level data transparency, since the complexity of the mortgage business has made it quite impossible to analyze risk, says Lee Howlett, who during his over 30 years in the mortgage marketplace has covered all aspects of origination and servicing before his current focus on both servicing and outsourcing for ISGN. "Both the customer and the lender need transparency."

Lenders do not feel comfortable with many of the old tools that have proven to be deficient in the current marketplace, so demand for better tools is gaining tract. According to president of Interthinx, Kevin Coop, mortgage technology users are looking for state-of-the-art loss forecasting, stress testing, and economic capital requirement tools to better understand and forecast the risk in their credit portfolios.

"It's a tenfold increase" in volume of distressed loans being processed so a natural progression is to try to maximize the use of internal resources, since it all translates into higher servicing costs, says Howlett.

"One of the struggles servicers face today is the effort to automate the decision-making process."

Verisk Analytics Inc. of Jersey City, N.J., which specializes in risk assessment solutions for the insurance, health care, mortgage lending, government, risk management, and human resources industries in the United States and around the world is catering to that need through acquisitions.

The company recently acquired another unit specialized in enhancing risk mitigation solutions through interdisciplinary tools, credit risk and capital management provider, Strategic Analytics, that focuses on retail credit modeling that enhance regulatory compliance. It will integrate with Interthinx, another business unit of Verisk Analytics, to provide U.S. residential mortgage market customers advanced loss mitigation solutions.

These tools are currently deployed in all verticals of consumer lending, including automotive, credit card, student loans and mortgages, says Coop. The added Mortgage Risk Model offers mortgage risk analytics products for retail lenders looking to access loan-level mortgage databases including "the vast majority" of nonagency loans for the residential mortgage-backed securities market, the company said.

According to Coop some of the benefits of using forecasting technology, consist in incorporating into analytics tests measures that help control loan origination quality, the effect of maturation and a variety of environmental factors. In addition, lender users can access the mortgage-backed securities and asset-backed securities Securities Forecasting Service, as well as accurate cash flow, conditional payment rates, conditional default rates and loss severity projections that help lenders and investors to price and trade mortgage assets with high efficiency.

Interthinx also provides risk mitigation and regulatory compliance tools for the financial services industry with a focus on risk assessment and mortgage fraud prevention-currently in use by 1,100 customers including 15 of the top 20 mortgage lenders.

Joe Breeden, president of Strategic Analytics, says the merger with Verisk Analytics and Interthinx was a perfect match because it will "significantly boost" the partners' objective to provide "mission-critical credit risk management solutions to our customers worldwide." It offers users the option to transform data from one of the largest repositories of loan-level mortgage data into usable business intelligence, he said.