Mortgage Lender Takes Proactive Approach to Buyback Risk
Given the issues around loan quality and the spate of buybacks lenders are facing, Impac Mortgage Holdings has decided to be proactive about the situation by rolling out risk mitigation technology to its correspondents.
"While we buy business through our correspondents with reps and warrants attached, their network is impacted," said Andy Chawla, senior vice president of enterprise risk management for Impac. "Investors ask us to buy back loans so we go back to our correspondents as well. This technology initiative is a pre-emptive way to get rid of that problem.
"If the correspondent has a net worth of $5 million and they have to repurchase only two or three loans, they're going to be hurt. So, this method allows them and us to catch this early. If they find discrepancies we can require a full-doc loan for example. So, it's good for the long-time viability of the seller."
Specifically, Impac has integrated First American CoreLogic's LoanSafe Risk Decision System collateral risk assessment tool and IncomePro income authentication tool into iDASL (Impac Direct Access System for Lending), Impac's proprietary Web-based automated underwriting engine.
Since late 2006, Impac's wholesale subsidiary has been using these tools to assess property, borrower, third-party broker/correspondent and stated-income risk. The LoanSafe and IncomePro tools were tested on a three-year wholesale platform history before their implementation. The success of these tools has allowed Impac to better manage the layered risk in alt-A residential mortgage lending, especially when high loan-to-value ratios, identity risk, fraud and property flipping are present in stated-income-type loans. The addition of these new tools may also enable Impac to provide more information about the loans in its securitizations for investors.
Through LoanSafe RDS, brokers and correspondent lenders can analyze the loan through full property assessment along with borrower, agent and credit characteristic assessment to help classify loans for decisioning based on low, medium and high risk. The combination of collateral and character risk for integrated loan level risk assessment has been achieved by combining LoanSafe RDS with IncomePro.
"First American CoreLogic is a major provider of collateral risk solutions," said Mr. Chawla. "We just began using HistoryPro for evaluating properties and getting comparables. We were using their AVMs and cascades. At the end of 2005, early 2006, we completed a test with LoanSafe, which was predictive in early payment defaults. The product ran a test on three years of products on our wholesale channel and it was very predictive. We could also see our risk as compared to other lenders. We found a reduction in delinquencies and early payment defaults as a result. From there, we introduced IncomePro to look at the profile of the borrower. This tool rates the risk of the borrower on a scale of one to four."
Impac currently runs LoanSafe on 100% of its loans. Further, the company runs IncomePro on all of its stated-income loans.
"Acceptance has been overwhelmingly positive," pointed out Mr. Chawla. "We started with two or three correspondents at first and they said, 'Bring it on.' They were having repurchase problems with other lenders, so knowing that this type of tool was available helped them all around. The fact that we're putting it on an AU engine that they are already using lets them get the whole package and see first hand that problems are being solved.
"In total, character and collateral are responsible for 70% of loses. We want to see if we can use a number of tools to triangulate this problem. So, right now we're testing another tool to rollout as well. In fact, the MIs give us credit for the application of these tools, which indicates how well receive and valuable this is.
"In order to make better decisions you need connectivity to all these tools," said Mr. Chawla. "The integration of these tools along with a macro assessment, so you get the big picture, is where the value comes. You need to combine people, technology and statistics." (c) 2007 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com