Servicers Are Under Pressure to Find Problems Early
Mortgage servicers are under pressure to help the mortgage securities market detect potential fraud earlier and update investors about progress in addressing loan problems, according to executives at Digital Risk here.
Peter Kassabov, co-founder and managing director of the privately held firm, said the mortgage industry is coming to understand in the wake of the subprime crisis that a credit score, tax return and pay stub are not sufficient to protect against loan fraud.
"The industry is about to go to an inflection point where either the industry will have to reinvent itself in terms of the way business is conducted or there will be a major shakeout," he said.
Digital Risk not only uses data from the loan application, but also data from the public domain and private data sources to quickly provide a predictive model review of loan portfolios. Those additional data include information from the telecom industry, the insurance industry, employment sources and the public domain.
He said much of the data used by the industry in the past to verify information about borrowers and collateral are obsolete. Digital Risk, which has offices in Dallas, and Jacksonville and Orlando, Fla., has developed technology that features new data and algorithms for assessing loan fraud and default risk.
Mr. Kassabov said Digital Risk's Portfolio Review Predictive Model helps servicers and investors who acquire loans. Increasingly, they are looking very carefully at loan performance over the first three to six months of seasoning to make sure that prime credit quality loans really are prime loans, he said.
Jeff Taylor, also a co-founder and managing director of the firm, said that FICO scores are too easily manipulated to prevent fraud, especially for innovative new loan products that gained a foothold in the market.
"The mortgage industry in the last five or six years - the subprime industry - took off on steroids basically. The infrastructure didn't keep up with that," Mr. Taylor said.
And with some $3 trillion of ARMs ready to reset next year, the industry may once again face an origination boom as borrowers refinance into more attractive loan products.
The technology can be used to verify origination data and provide a predictive modeling of default risk.
One positive trend arising from the subprime mortgage crisis, Mr. Taylor said, is that the industry is taking a more proactive approach to fraud prevention. That has led to a "healthy cleansing" of companies that couldn't perform up to the new standards.
Digital Risk's technology has processed some $35 billion of nonperforming loans for Wall Street firms and servicers to date. Since the servicer is the party that needs to act first in the case of a trigger such as an early payment default, the company sees a growing need for its analytics in that sector.
Mr. Taylor said servicers also face growing communication demands from investors. Whereas in the past investors relied on periodic reports of past loan performance, increasingly they want real time or daily data. That is expected to generate increasing demand for predictive modeling technology going forward.
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