Client Successes

The following business cases illustrate some of the risk management solutions designed and implemented by Digital Risk:

Business Case: Hedge Fund 1

CHALLENGE: A Hedge Fund and Private Equity Group is looking to acquire assets then sell them profitably to Fannie Mae and Freddie Mac. There are two challenges: find the “right” price to pay for the loan portfolio and then to repackage the portfolio, by kicking out bad loans, so a quality package can sold and fetch top dollar.

SOLUTION: Using PortfolioReview’s comprehensive analytic tools, Digital Risk more accurately assesses the value of the underlying loans and provides a bidding price range. Once the portfolio is won, a thorough pre-refinancing review takes place, with rank-ordered by their ability to perform. The clients’ business decision system is then applied, and those with the greatest problems are kicked back.

RESULTS: The firm now has higher quality portfolios which it can sell.

Business Case: Hedge Fund 2

CHALLENGE: The Hedge Fund acts as a financial investor, acquiring portfolios, assessing their “correct” value, re-underwriting them and placing them with new servicing agency, while also monitor long-term performance of the loans.

SOLUTION: Digital Risk analyzes the loan portfolio to identify the key parameters that need to be analyzed analyze them. Using PortfolioReview’s unique predictive modeling analytics, the Fund can determine loan-to-value and key economic indicators enabling them to price the loans properly. Digital Risk also introduces the Fund to an asset acquisition service for underwriting the loans. In doing so, Digital Risk serves as a Trusted Advisor, making sure that the loans meet the agency’s investment criteria by obtaining the necessary documentary requirements to show that the new loans now conform to government agency standards.

RESULTS: The Fund now has a high comfort level that the loans will performed as predicted, because of the precision of the analytics and the ongoing monitoring of performance.

Business Case: Investment Bank Asset Recovery

CHALLENGE: Investment Bank has a large portfolio of non-performing loans and needs to understand the root causes. Are there misrepresentations by the original underwriters? Have warrants been breached? To what extend is fraud an issue?

SOLUTION: Digital Risk’s role here is much more than just using PortfolioReview’s analytic tools to discover the sources of underperformance; our job is to use our forensic expertise to answer these questions for our client, and, as necessary serve as an expert witness to defend the position that the Bank will take as it seeks to recovery assets. Knowing that we’re a “one-stop” solution, Digital Risk does more than just analyze sources of non-performance and produce a spreadsheet listing them. Instead, a far more thorough analysis is taken, using full understanding of the legal implications of representations and warranties, and State Law Compliance, so the client knows how to defend itself effectively.

RESULT: By partnering with Digital Risk as an expert forensic re-underwriter, the client feels comfortable pursuing asset recovery and knowing it can defend itself with an expert witness.

Case Study: Servicing Organization.

CHALLENGE: Since the beginning of 2008, over 50,000 modifications have taken place in the US, and this Servicing Agency needs to handle a large volume of them. Simply put, they have more work on their table than they have skilled people to handle.

SOLUTION: Digital Risk serves as an outsourced service provider, using our 360° risk mitigation tools to verify income, determine if the property meets the standards set for it, etc. Digital Risk has an army of qualified people to assist our clients in meeting their needs.

RESULT: The servicing agency is able to handle the avalanche of work, cost-effectively.

Case Study: Leading Mortgage Originator II.

CHALLENGE: When you run a large, centralized mortgage origination firm with a large number of branch offices, how do you ensure that all are complying with the Firm’s policies, rather than trying to circumvent them to make more money per loan?

SOLUTION: Using its experiences analyzing over 20,000 loans for non-performing portfolios, Digital Risk was able to set up a Quality Control model for analyzing loans with clear benchmarks. Then, samples loans from each office are compared, so the company could focus on loans deviating from the “standard”. In addition, Digital Risk developed a set of solutions the firm could use when it spotted systematic problems from specific branches to help staff comply with the firm’s business rules.

RESULTS: Early results show that the pull-through rates to investors have increased. Further, early difficulties within the branches have decreased 11.8% and EPD has decreased 13.6%.

Business Case: Mortgage Originator within an Investment Banking Firm

CHALLENGE: When a company has to reduce staffing, it also means losing highly qualified people. It becomes a big challenge when the business demands increase, as they did as the sub-prime situation grew. In this case, the repurchase demands from entities to which loans were sold were increasing at the same time as the need to return bad loans which the Bank had purchase. Further, the Group needed to be on solid legal ground as it sold and kicked back the loans.

SOLUTION: Digital Risk served as an outsource forensic provider, not just analyzing the loans but also providing the legal expertise to back the decisions. Digital Risk determined whether the facts presented by Claimants were correct, and drilled down to determine the standing of the problems: were misrepresentations by claimants frivolous arguments or serious breaches which needed to be defended? What legal steps were advisable based on the facts? Digital Risk provided the expertise to answer both sets of questions.

RESULTS: By providing these services, the Originator was able to handle to legal related questions without the need to add additional staff.

Business Case: Mortgage Originator Needing Better Fraud Detection.

CHALLENGE: Loan originator had been using a fraud detection system for over 5 years old, which increasingly was producing poorer results. Originator used Identity and AVM fraud solutions, which were implemented as stand-alone tools and not integrated into the loan originating process. Despite extra time and energy invested to make them effective, poor quality control continued and an increasing number of EPDs resulted in repurchase requests or “scratch and dent” sales.

SOLUTION: A comprehensive RiskIQ solution was implemented and integrated with the Originator’s LOS. Digital Risk’s RiskIQ product delivered a one-stop solution for identity, income, collateral and compliance risk management, integrating origination, underwriting and post-closing processes in a streamlined workflow. Building on the client’s business rules, a comprehensive system of alerts, cautions and corrective actions was implemented. Finally, the RiskAnalystics module was implemented to enable risk mitigation monitoring, management oversight, “best practices” identification and to ensure quality control.

RESULTS: Within six months, the client reported a 35% decrease in fraud related EPDs. Loan origination time was reduced 10% as a result of higher automation and reduced duplicate data entry; most important, staff time spent addressing false positive alerts resulted in an additional 25% cost savings.

Business Case: Vertically Integrated Investment Bank

CHALLENGE: A vertically integrated Investment Bank conducted a thorough review of it MBS program and noted many problems. First, it found deficiencies in the loan acquisition process; the bidding systems weren’t pricing loans competitively because sellers weren’t providing enough data leading to inaccurate assessments of default risk. No automation tools were being used, making the process of analysis time-consuming and costly. Second, it discovered that many of the bank-issued MBS’s were being downgraded as a result of the high proportion of loans going into default, and the rating agencies’ discomfort with the lack of the securitization process quality controls. Third, it discovered that it had a very large number of non-performing loans requiring analysis and proper disposition, but the mostly manual system was not capable of handling the volume; exacerbating the problem, the due diligence vendors they usually relied on were overwhelmed with similar work from other banks and were charging a premium for any work they could handle. Finally, it realized that no information was being shared between the loan acquisition, securitization and servicing departments of the bank.

SOLUTION: A two step program was developed. First, a comprehensive PortfolioReview solution consisting of Triage PortfolioReview and Due Diligence Services was implemented to provide rapid identification, justification and execution of repurchases on backlog of non-performing Prime and Alt-A loans. Trading Desk PortfolioReview was installed to enable loan level default risk quantification upon acquisition and enhanced due diligence sample selection. It uses improved pricing algorithms enhancing current negative convexity calculations, with actual default rate projections and analysis of an expanded data set, to give more precise new loan acquisition decisions. In addition, PortfolioMonitor was adopted to proactively, on the entire portfolio of serviced loans, identify and review high risk loans for monitoring and loss mitigation. Second, an integrated RiskIQ solution was implemented for the loan origination operations enhancing quality assurance and management oversight.

RESULTS: The power of PortfolioReview’s automated tools is providing the punch that the client needed. In the process of analyzing the backlog of non-performing loans, it is doing so 50% faster than the prior manual process, at 30% less cost than before and has increased the number of successful repurchase requests. In response to using PortoflioReview’s proactive loan analysis and disposition solution, the credit agencies have raised the client’s rating on new and existing securities. Initial results of the new system for analyzing new loan acquisitions is generating more competitive pricing for higher quality loans. And, due diligence costs have been reduced by 10%. Finally, the credit agencies are acknowledging the improvements by giving the company higher ratings.