Digital Risk In The News

NATIONAL MORTGAGE NEWS May 30, 2007

It Begins With The Data...
Jeffrey Taylor, Digital Risk LLC

At a pre-conference workshop earlier this month, sponsored by SourceMedia and preceding its Nonprime Lending Symposium in Las Vegas, attorney Richard Rydstrom summarized an extensive group discussion about solving mortgage fraud.

The solution, said Mr. Rydstrom, “requires us to be more refined in our thinking.”

In other words, he said turning to his fellow industry professionals, “We have to take [all these] good ideas and nationalize them” and put them all into practice. The industry, he said, “is going through a growth and refinement phase and will come out much better for it.”

He’s right and it begins with the data. We in the mortgage industry collect, sift and store as much information about our customers as just about anyone else in their lifetimes. What we do with this intelligence reflects our own. If we handle the data right, we’ll not only solve most fraud, but also produce a better industry in the end.

Consider technology we have at our disposal now like our Portfolio Review Predictive Model, which better protects investors against the vagaries of the marketplace.

The model allows analysis of loan portfolios they plan to purchase, or those already in-house that have run into troubles like property values not matching appraisals, borrower IDs that are inaccurate and faulty employer information.

Wall Street must improve its pricing models in this turbulent period, as they bid for new pools in the future. About 53% of U.S. non-financial debt is now "securitized." In 1980, that was 28%. More than $1 trillion now resides in an array of financial quarters including hedge funds, mutual funds and private equity funds.

It is an important consideration in today’s environment to have a two-way perspective meaning that it is no longer enough to have technology that can identify where you went wrong in the past. It also has to provide “predictive ability.” The human mind does this all the time, comparing untested decisions against similar ones from the past (think liverwurst) to come up with the right actions.

Once you have that predictive ability, the technology can go even further, adding data elements to allow for future expectations and related pricing.

This provides valuable direction on where any exposure might exist and, more important, what to do about it. It is all based on a lender’s business rules making it even more possible to set up next recommendation steps and advantages.

The biggest industry challenge today swirls around whether we have the right kind of underwriting, which is nothing more than the right kind of insight into whom we lend to and for what.

That requires validating information in a timely manner. This is how lenders and their partners make intelligent decisions and prevent fraud. The use of multiple measures and collection of data from a variety of reputable sources must complement one another.

Originators, servicers and investors in the secondary market are being reminded -- sometimes the hard way -- just how tightly risk tolerance (a k a financial investment) and risk mitigation are connected.

Jeffrey Taylor is the managing partner for Digital Risk LLC.