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Technology Firm Employs Behavioral Modeling

Scottsdale, AZ-Multifunctional tools that help determine the net present value of a distressed mortgage portfolio are highly attractive in a market where liquidity is scarce.

The recent wave of redefaults has shown the "one-size-fits-all" approach to loan modifications often fails to both maximize cash flow and remain manageable for the borrower.

The challenge for technology providers is to minimize default and maximize returns from buy/sell transactions and portfolio servicing.

New methods, such as a solution introduced by optimization technology provider Response Analytics here, "use behavioral, servicing and other data to customize a loan modification, and aggregates that with similar data from thousands of other loans in the portfolio, providing a more accurate valuation based on expected cash flow over a hold-to-maturity period." It allows users to value and improve the performance of distressed mortgage portfolios and has the potential to expand its usage into the mortgage-backed securities market, according to Response Analytics CEO Brent Lippman.

The company said the solution will help end two of the key uncertainties standing between investors and distressed mortgage portfolios, "forecasting value based on expected cash flow, and reworking the loans so that they can once again perform, rather than allowing them to go into default." Furthermore, mortgage portfolio defaults involve additional ramifications in the mortgage-backed securities marketplace.

Response Analytics maintains distressed mortgage portfolios currently remain largely untouched as an asset class because unless there are tools capable to accurately determine their net present value and forecast cash flow, "investors will continue to shy away from them." The financial services optimization company has developed a new solution based on behavior modeling and optimization technology that determines the value of these underpriced assets, directs their treatment to maximize their value and even extends the solution to mortgage-backed securities if the requisite data are available.

"Until now, investors would have been taking a shot in the dark with distressed mortgage portfolios and mortgage-backed securities. That's the key reason that the market for them froze," said Mr. Lippman. "But now optimization technology will allow them to confidently assess one of the most discounted assets currently available, and to go on to create more value than the current market expects."

Response Analytics finds borrower behavior is not just a factor of income and FICO score, it is dependent on a range of variables. "By applying advanced behavioral modeling and optimization technology, our distressed portfolio management solution can establish the optimized individualized workout for each distressed loan in the portfolio, based on terms that have a much higher probability of being met," Mr. Lippman said.

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