Digital Risk In The News

Quality and Consistency More Important to Investors and Ratings Agencies

September 27, 2007
National Mortgage News
Jeffrey Taylor

Media covering the mortgage market this summer are hustling like never before to stay ahead of the latest news coming from the world’s many money markets, as volatility becomes a fact of life.

Headlines seem to fall out-of-date almost as quickly as they can be posted electronically and certainly faster than they can be printed on paper. That’s the nature of what has become not only a fast-developing cycle of occurrences but also a domino effect, as each jolt in one market affects another.

And, as tough as it is to keep up with the news, it is even harder to keep current with demands of lawmakers, regulators and investors, who seem to be setting the compliance bar somewhere new everyday for the mortgage industry.

More often now at our firm instead of being hired by secondary market companies to assess and help mitigate risk on a six- or 12-month basis, that cycle has shrunk to 60 days or less as a result of recurring turbulence. Proof of that unsettled situation is the plunge in the sale of bonds backed by mortgages, equity lines of credit and other home loans — down nearly 50%, to $41.92 billion in July from almost $80 billion in June.

We are working with Street firms that are buying and securitizing whole loans themselves or just performing due diligence for the underwriting fees. We also serve hedge funds and private equity firms buying performing (and nonperforming) assets. They are trying to understand better what they’re getting and how to price associated risk. The key challenge often is determining what the loans are worth (both prime and subprime).

To answer that call, we have broadened our data analyses and now regularly upload those findings directly into the client’s database so they can efficiently share results with the entire organization.

Spearheading that work for us is a new addition, Rachel Jones, who is vice president of due diligence services. Rachel joins Digital Risk from Goldman Sachs. She previously was the Director of Corporate Credit for NovaStar Mortgage, Inc. where she built their quality control department and oversaw secondary market transactions. Her tremendous wealth of knowledge and expertise will ensure the quality and consistency of due diligence services we provide.

The Big Picture

This service goes beyond assessments of an individual component, providing the all-important big picture.

Even the ratings agencies, once the bedrock bellwethers of the investment communities, are hunkered down, trying to regain the confidence of bond investors and others. The agencies had come under fire for their failure to adequately gauge the extent of the subprime market's woes.

Quality and consistency have become more important than ever to investors and ratings agencies. They know that a return to more normal markets will require them to review and perhaps reset strong criteria where investors can feel confident with performance in the structured finance market.

In early August, many investors — residential, commercial and corporate — remained on the sidelines as funds to underwrite securities froze as a result of substantial losses among banks, hedge funds and pension funds. These losses surfaced after some time tucked away in complex investment vehicles that were hard to evaluate. In turn, that sharply limited the money available for mortgage lending.

All of that came as quite a shock to the housing finance system after consecutive years of unlimited liquidity driving growth among hedge funds, private equity funds and all sorts of investment-grade debt — and the subprime mortgage bonds.

With some form of recovery inevitable, this is the right time to get one’s house in order, accumulating and disseminating the most accurate and timely data possible.

Jeffrey Taylor is co-founder of Digital Risk, Orlando, a risk mitigation firm that provides special data authentication tools, which limit financial services firms’ exposure to fraud. Prior to founding Digital Risk, he spent several years in financial services risk mitigation, where he created a successful identity theft authentication initiative for mortgage loan originators.