Magazine article Mortgage Banking

Integrating Credit and Collateral Portfolio Risk Management

Magazine article Mortgage Banking

Integrating Credit and Collateral Portfolio Risk Management

Article excerpt

In last quarter's Tower on Tech column, I presented results from the FICO/TowerGroup Mortgage Credit Risk Management 2009 Survey, (end) commissioned by Minneapolis-based FICO and completed in September 2009 by Needham, Massachusetts-based TowerGroup. This survey revealed the strategies, attitudes, accomplishments and 2010 information technology (IT) spending plans of leading credit-risk managers. In this column, I look at integrated credit and collateral risk-management systems (CCRMs) that credit-risk managers are investing in to manage credit risks.

CCRMs are comprehensive platforms that integrate borrower credit and property collateral risk assessment with multiple data sources and multiple analytic systems. These solutions also may incorporate data for the economic and demographic factors that drive mortgage defaults.

This is an established but still maturing and rapidly growing IT product category. Financial institution (Fl) demand is, of course, driven by the persistently high mortgage defaults, home-price weakness and weak economy that have led stockholders, rating agencies and government regulators to demand more data for greater information transparency and oversight.

The major benefits of using CCRM systems are derived from the combination of many different types of data that together enable more complete analysis of an Fl's mortgage portfolio credit risk. For example, mortgage borrower default is most typically caused by job loss, divorce or major medical expenses, which impact the ability to pay. However, home prices matter greatly because the amount of equity a borrower has also drives the borrower's desire to pay. Further, the type of loan product may influence the borrower's ability to pay if it calls for future mortgage payment increases. And finally, local and regional economic and demographic factors will impact both the borrower's ability to find work and home values.

Collecting and combining these data enables FIs to more finely forecast the probability of default, the loss severity if the borrower does default, and individual treatments of delinquent borrowers.

The major components of a CCRM--platform, integration, data, analytics, reporting and presentment--can be acquired and integrated separately or bought in bundles of components to create a comprehensive system. Data access, collection and management are the core sources of value upon which CCRM relies. However, it is not easy or cheap for lenders to save, scrub, normalize and share all required data internally. For this reason, vendors such as First American CoreLogic, Santa Ana, California, and Lender Processing Services Inc. (LPS), Jacksonville, Florida, collect raw loan servicing data from individual servicers on a monthly basis and sell back related data, analysis and reporting.

A financial institution's CCRM platform and integration requirements may be relatively simple or very complex. For example, mortgage investors such as pension funds can license third-party systems that provide detailed monthly updates of mortgage-backed securities (MBS) and whole-loan performance. On the other hand, FIs with mortgage portfolios having tens of thousands or more loan records with hundreds of data fields have more complex data-management requirements, and use tools from vendors that include Harte-Hanks Trillium Software, Billerica, Massachusetts; IBM Corporation, Armonk, New York; Informatica Corporation, Redwood City, California; Pitney Bowes Inc., Stamford, Connecticut; SAP America Inc., Newtown Square, Pennsylvania; SAS Institute Inc. …

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