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   ARTICLE   |   From Scotsman Guide Residential Edition   |   March 2010

How Analytics Can Lead to Better Loans

Upfront testing may help brokers focus on transactions most likely to succeed

Many direct lenders and warehouse lenders left the mortgage business in the past two years because of unacceptable credit losses caused by improperly represented collateral. Today, some of those financiers are willing to re-enter the business if they can partner with mortgage brokers who can ensure delivery of quality, fraud-free loans.

To do that, brokers can partner with third-party analytics vendors that employ loan-quality solutions before transactions are completed. This helps comfort lenders by letting them know they're getting their loans from brokers who have implemented best-in-class quality controls. In turn, it also gives loan-portfolio and mortgage-backed-securities investors the confidence to get back in the game.

As investors and others dig deeper into the root causes of why pricing hasn't been as transparent as it needs to be, one of the factors coming into focus is inaccurate collateral valuation or, more specifically, inaccurate property valuation. Centralized appraisal practices mandated by Fannie Mae and others are believed to address this. At the same time, lenders are tightening guidelines and demanding more document disclosures. All of this should help keep money flowing to borrowers who want to buy or refinance homes.

Third-party analytics vendors can help brokers enhance the quality of their loans and enable them to originate quality loans in a cost-effective manner. An independent provider may offer greater flexibility than lenders' in-house review systems, which tend to be oversized and laden with multiple protocols.

The advent of improved technology that better monitors crucial data, on the other hand, helps specialists in risk management. It allows them to search deeply into various third-party information databases to authenticate and validate borrowers' income, identity, occupancy, assets and liabilities, and collateral valuation on real-time bases.

Building upon this data, authentication experts conduct monthly reviews of thousands of substandard residential mortgages, creating an enormous knowledge base from which to construct origination models. Analytic tools expose and teach researchers new relationships between input data and risk, and analyst feedback is incorporated into the tools simultaneously.

When integrated, these items accelerate and enhance analytics companies' ability to solve many of the complex problems of the residential mortgage industry. The combination of analytics technology and risk experience helps uncover fraudulent activity and determines borrowers' repayment capacity.

In building predictive scoring models, many analytics-providers focus on almost 100 performance-drivers. By feeding their findings into their models, they get an indication of the authenticity of borrower representations and warranties.

For example, inquiries can ascertain whether borrowers' stated income is reasonable for their occupation. For property appraisals, systems can check multiple-listing services to verify the most-current values.

By being well-equipped to verify repayment capacity and home values, mortgage brokers can increase their ability to avoid originating nonperforming loans, thus protecting all parties to the transaction.


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