Digital Risk In The News

Compliance Technology Seeks to Allay Wall Street Concerns

Volume 3, Issue 32
August 7, 2007
Michael Murray

Compliance Technology Seeks to Allay Wall Street Concerns Murray, Michael Mortgage originators, correspondents and investors are working together to determine data accuracy as the subprime market continues to correct itself.

Mortgage originators and loan purchasers—investment banks or correspondents—and their investors are working together "more than they ever have been" to make sure that the industry players are all on the same page, according to Jeffrey Taylor, managing director at Digital Risk LLC.

“For several years, it wasn’t that way.” Taylor said.

Digital Risk, a compliance firm whose mission is to provide clients with accurate risk mitigation decisions, is finding its business growing and expanding services to different Wall Street firms. The issue on Wall Street now involves loan value, as the subprime market correction passes beyond mortgages and into other market segments.

Different cycles in the past year have required Taylor's firm to take on various new tasks. “It has been a very reactive environment,” he said. “U.S. housing has spilled over into many other sectors, including investment-grade corporate bonds and other areas of financial segments.”

In addition to providing data analysis, Digital Risk expanded its reach to due diligence, with manual underwriters and staff examining acquisitions and non-performing assets, allowing mortgage industry players—including investors—the ability to make decisions on the loans and move forward.

“Depending upon the decisions to make, we can even act on those for them, if need be” Taylor said. For example, he said, Digital Risk can upload its findings into a database and share information across an organization.

“It would be the end results versus just a component [of data],” Taylor said, noting that clients could be purchasing whole loans and securitizing them, or performing due diligence without owning any part of the trade. Digital Risk clients also include hedge funds in private equity firms purchasing large portions of either performing or non-performing assets.

“They are trying to better understand what they are getting so they can price it and, once they get, how it is going to perform,” Taylor said. “If they can outsource to an entity and get the results they need without having to build the infrastructure, the data points and build the manual teams, it give them the ability to move quickly and make decisions on a variable cost basis versus having to build out a huge infrastructure to try and get the business up.”

Taylor forecasts that some of the hedge funds in private equity firms are tightening up guidelines for their investments, and it may take time for them to return to the market.

“At least investments that they made in the first half of this year will start to bear some return—or fruit—before they are aggressively back in the marketplace,” Taylor said.

Industry participants report pricing on Alt-A products moving below par, and even AAA bonds are having difficulty pricing. Taylor said ratings agencies are trying to gain the confidence of investors and Wall Street firms prior to securitization.

“It is overcorrected right now, and I think leveling the playing field will get down to when people have more standards in place and some more guidance as to what they need to do to be in business,” Taylor said. “We definitely do see guidelines setting up quite a bit.”