(Orawin Velz is director of economic forecasting in the Mortgage Bankers Association’s economics and research department. She provides commentary and analysis on key monthly economic indicators. She can be reached at ovelz@mortgagebankers.org.)
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At the Second Annual Mortgage Lending Industry Diversity and Emerging Trends Conference, experts said individuals who are left out of traditional credit programs include immigrants, college students and other young adults, the recently divorced or widowed and segments that culturally do not use credit such as those over the age of 70.

According to Stacy Millhouse, product manager for Fair Isaac Corp., Minneapolis, the growing Hispanic populations want to tap into the American Dream. “Nearly nine in 10 Hispanic renters (84 percent) strongly desire to buy a home,” he said. “In addition, nearly 55 percent—an estimated 1.5 million Hispanic households—plan to buy homes in the next 5 years.”

Fair Isaac Corp. created a product called the FICO Expansion Score, which can tap non-traditional sources of consumer data to assess the credit risk of adults who have minimal or no credit history on file. Use of FICO risk scores for these consumers—such as recent immigrants, people with low incomes, recent widows and divorcees and young adults—will help businesses expand their markets, reduce losses,and make more financial services available to more people.

Using alternative data sources, the program designs and calculates predictive credit risk scores. Predictive information considered in the formulation of this score include payment performance data on financial activities such as deposit accounts, payday loans and product purchase payment plans. Until recently, such information has not been consistently maintained or accessible for commercial risk scoring. Like the Classic FICO credit risk score, the FICO Expansion score rank-orders consumers by the likelihood that they will become severely delinquent (90 days or more past-due on a credit account) in the 24 months following scoring.

Fair Isaac conducted a FICO Expansion Score retro validation project to demonstrate the FICO Expansion score’s ability to score the majority of the targeted population, demonstrate FICO expansion Score’s ability to distribute the targeted population across the risk spectrum and provide clear evidence of FICO expansion Score’s ability to rank order risk within the targeted populations.

The results found that the thin file/no file population distributes across the risk spectrum, Millhouse said. “There is low credit risk within the underserved market,” he said.

Initiatives such as Fair Isaac’s are paying off. Minority buyers were the fastest growing segment of all new home purchase mortgages in 2005, according to analysis released at the conference.

"The 2005 Minority Home Buying Surge" report finds that the percentage increase for all minority loans in "high volume areas" combined was three times greater in the top 20 mortgage growth metropolitan areas than for White households, and the increase for Hispanic, African American, and Asian loans was up to five times greater. Genworth Mortgage Insurance, Raleigh, N.C. and Compliance Technologies, Woodstock, Ga., issued the report.

"We are now witnessing the positive effects of the growth in immigrant households who want to own a piece of the American Dream," said Michael Taliefero, managing director of ComplianceTech. "While immigration is part of the story, the lower homeownership rates among African Americans and Hispanics represent pent up mortgage demand that is starting to be filled."

Using newly released 2005 Home Mortgage Disclosure Act (HMDA) data, the report, prepared by ComplianceTech, analyzed the change in minority home purchase loans between 2004 and 2005 in 388 metro areas. Minority borrowers had a greater percent change than Whites in 320 of those markets.

"Despite the nationwide cooling in home buying, minorities represented a significantly larger percentage of new purchases in 2005 than they did in 2004," said Kevin Schneider, president of Genworth Financial's U.S. mortgage insurance business. "We're determined to help close the homeownership gap, and it's good to see that progress is being made."
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Phil Huff, president and CEO of eLynx, told MBA NewsLink that the acquisition provides both companies with “highly complementary” capabilities and would expand the ability to enable the paperless mortgage process.

"The eLynx and SwiftView organizations are highly complementary to one another. These synergies will enable us to rapidly advance e-business innovation and set the standard across financial services and a broad range of industries,” Huff said. “We share a unified vision to help enterprises deliver a higher quality of service to their customers while gaining dramatic cost and cycle time advantages.”

eLynx is a portfolio company of American Capital Strategies Ltd., which includes more than 180 companies in a variety of industry. ACS provided equity and debt financing for the transaction; financial figures were not disclosed.

Together eLynx and SwiftView provide services to more than 500 customers in the financial services and insurance industries, including 17 of the top 20 lenders. More than 10 million financial transactions involving consumers, lenders and settlement agents will be serviced by eLynx in 2006, Huff said.

"We are extremely pleased to join forces with eLynx at a time when financial services enterprises are looking to paperless processes to improve the efficiency of their businesses,” said SwiftView President Steve Bachelder. "We have great respect for the accomplishments of eLynx and are very excited about the impact our combined capabilities will have on the rapid shift towards paperless transactions.”

The company will have corporate offices, operations, support, and R&D staff in Cincinnati and Portland.
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Under the terms of the agreement, LSSI will interface its mortgage disclosure and closing-document preparation software, DocWin, and its ASP-based data and document capture solution, XCapture.

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Portellus Inc., Irvine, Calif., said its correspondent origination and investor transaction management products available. The product allows correspondents or conduits to offer a seller-facing portal that enables secondary market participants to electronically submit data on flow, bulk and mini-bulk delivery. Additionally, the platform also provides additional modules for managing forward and master commitments.

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RealEC Technologies Inc., Santa Ana, Calif.,  entered into an agreement with Countrywide Home Loans Inc., a Calabasas, Calif.–based division of Countrywide Financial Corp., to provide its settlement services management product. Under the terms of the agreement, Countrywide Home Loans is licensing RealEC's enterprise technology products to maximize efficiency, accountability and information tracking throughout the entire settlement services process.

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Mortgage Guaranty Insurance Corp. (MGIC), Milwaukee, is available to lenders nationwide through the easyLENDER Mortgage LOS system from Fiserv Lending Solutions, Brookfield, Wis.

easyLENDER Mortgage is fully MISMO-compliant in the area of mortgage insurance (MI), so MI vendors that offer MISMO-compliant products can readily link their offerings to easyLENDER Mortgage. Because MGIC's MI product is also MISMO-compliant, data flows between the Fiserv and MGIC systems in a two-way data exchange that does not even require easyLENDER users to open a separate browser window.
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The PWG report, mandated by Congress, analyzes the availability and affordability of insurance for terrorism risk, including group life coverage and coverage for chemical, nuclear, biological and radiological (CNBR) events. According to the PWG report, insurance coverage for CNBR losses historically has not been available unless it was mandated (as is the case with some nuclear reactor operators). Given the general reluctance of insurance companies to provide coverage for these types of risks, the report adds that there may be little potential for future market development. 

"MBA agrees with the report's finding that the availability and affordability of terrorism risk insurance has improved since the terrorist attacks of September 11, 2001," said MBA Vice Chairman Kieran Quinn. "We believe the statutory requirement that commercial insurance carriers make terrorism coverage available on par with other hazards has vastly improved the availability and affordability of terrorism insurance. Therefore, we strongly recommend that any long-term solution to the problem of terrorism risk continue to require this 'make available' provision, in order to ensure that terrorism insurance is commercially affordable."

Last spring, MBA sent a comment letter to the PWG stating the need for a long-term terrorism insurance solution that makes coverage inclusive, available and affordable. The letter suggested that this solution is essential to the efficient operation of the commercial real estate finance sector and is also a key component in the nation's preparedness against future terrorist attacks.

To ensure all perils are covered and priced in an affordable manner, MBA strongly recommends a private/public partnership to provide a long-term solution for terrorism insurance that will cover all perils including CNBR losses.  This partnership would also allow for risk sharing among insuring parties. 

The PWG report follows on the heels of a study released last week by the Government Accountability Office, Terrorism Insurance—Measuring and Predicting Losses from Unconventional Weapons Is Difficult, but Some Industry Exposure Exists. The GAO found that insuring CNBR risks is distinctly different from insuring other risks because of the potential for catastrophic losses, a lack of understanding or knowledge about the long-term consequences and a lack of historical experience with such attacks in the United States. 

According to that report, measuring and predicting these risks presents distinct challenges to insurers because the characteristics of the risks largely diverge from commonly accepted principles used in determining insurability. The study concluded that given the challenges faced by insurers in providing coverage for, and pricing, CNBR risks, any purely market-driven expansion of coverage is highly unlikely in the foreseeable future.

Key Findings of the PWG report include:

• The availability and affordability of terrorism risk insurance has improved since the terrorist attacks of September 11, 2001. “Despite increases in risk retentions under TRIA, insurers have allocated additional capacity to terrorism risk, prices have declined, and take-up (purchase) rates have increased,” the report said. “The take-up rate—or the percentage of companies buying terrorism coverage—has reportedly increased from 27 percent in 2003 to 58 percent in 2005, while the cost of coverage has generally fallen to roughly 3 to 5 percent of total property insurance costs. These improvements have transpired in a marketplace that has had access to a federal backstop that has gradually contracted through the life of the temporary TRIA Program.

• Insurers’ retention of risk has steadily increased under the TRIA Program: deductibles have increased from 7 percent of direct earned premium in 2003 to 17.5 percent in 2006 and other changes made to TRIA in 2005 have also increased insurer retentions. The general trend observed in the market has been that as insurer retentions have increased under TRIA and policyholder surpluses have risen, prices for terrorism risk have fallen and take-up rates have increased.

• The improvement in the terrorism risk insurance market is due to several important factors, including better risk measurement and management, improved modeling of terrorism risk, greater reinsurance capacity and a recovery in the financial health of property and casualty insurers. “State regulation does not appear to have had a significant impact on capacity, and a significant number of policyholders are still not purchasing terrorism coverage,” the report said. “How these factors continue to evolve will importantly affect further developments in the long-term availability and price of terrorism risk insurance.”

• Insurers have made great strides in measuring and managing their risk accumulations. The amount of capital an individual insurance company is willing to allocate to a particular risk in a given location depends on its understanding of its maximum loss under different scenarios. Since September 11, insurers have made greater use of sophisticated models that allow them to identify and manage concentrations of risk in order to avoid accumulating too much risk in any given location. This improvement in risk accumulation management has allowed insurers to better diversify and control their terrorism risk exposures, which has enhanced their ability to underwrite terrorism risk.

• A “significant effort” has been made by the insurance industry in modeling the potential frequency and severity of terrorist attacks, which helps insurers to assess their potential loss exposures. An understanding of the potential frequency and severity of terrorist attacks is important for insurers to properly evaluate their risk exposures. “Improvements in probability modeling of terrorist attacks have likely had a positive impact on insurers’ willingness to provide coverage for terrorism risk following the re-evaluation of terrorism risk that took place after September 11,” the report said. “However, unlike other catastrophic exposures (e.g., natural disasters) where there are more refined methods of modeling frequency, modeling terrorism risk frequency relies largely on analysis of terrorist behavior. Given the uncertainty of terrorism in general and, in particular, the uncertainty associated with these modeling efforts, insurers appear to have limited confidence in these models for evaluating their risk exposures.”

• The quantity of terrorism risk reinsurance capacity has increased since the period following September 11. “Reinsurance for terrorism risk all but vanished after September 11 as reinsurers withdrew from the market,” the report said. “The market has since improved and reinsurers have gradually allocated more capital to terrorism risk…the presence of subsidized federal reinsurance through TRIA appears to negatively affect the emergence of private reinsurance capacity because it dilutes demand for private sector reinsurance.”

• The financial health and capacity of insurers has recovered since September 11. “There has been improvement in the financial health of the insurance industry, which plays a role in how much capacity an insurer is willing to expose to terrorism risk,” the report said. “Since September 11, policyholder surpluses in the property and casualty industry have risen, as the industry has remained profitable (even with the 2005 hurricane season losses) and has benefited from increased rates of return on assets. As a result, insurers have more available capital to allocate, and they apparently have chosen to allocate additional capacity to terrorism risk as demonstrated by the increased provision of terrorism risk insurance coverage over the past few years.”

• While take-up rates have increased as prices have fallen, a significant number of policyholders are still not purchasing coverage. “The willingness of consumers to pay for terrorism risk insurance is a determinant of how much capital insurers will allocate,” the report said. “It is unclear why approximately 40 percent of all policyholders do not purchase coverage, although the Treasury’s 2005 study and others have found that the primary reasons were price and assessment of their individual risk to terrorist attack. Individual perceptions of low risk are likely related to the lack of a successful terrorist attack within the U.S. since 2001, and perhaps to some degree an expectation that Federal aid might be available if a significant attack occurs.”

• Coverage for terrorism risk insurance in group life insurance policies has remained generally available and prices have declined, even though group life insurance is not part of TRIA. “Given these market signals, there is no reason to expect negative developments in the group life insurance market,” the report said. “Even though group life insurance has not had access to the Federal backstop under TRIA, private market forces (high competitiveness and extreme price sensitivity) have ensured the continued availability and affordability of group life insurance to employers and their participating employees.”

• As in the market for property and casualty reinsurance, there have also been improvements in the availability of catastrophic life reinsurance, and there is the potential for continued market development. “Just as with the property and casualty reinsurance, catastrophic life reinsurance all but disappeared after September 11, even though by most industry metrics, September 11 was not a catastrophe in terms of either individual or group life insurance losses,” the report said. “Still, the lack or limited availability of catastrophic life reinsurance following September 11 had no disruptive effect on the availability and affordability of group life insurance to consumers largely due to competitive market forces…Today, group life insurers are deciding whether to purchase reinsurance, or to forego and retain most of the risk – a decision that has not had any impact on the availability and cost of group life insurance to consumers.

• Historically, insurance coverage for losses associated with chemical, nuclear, biological and radiological risks has generally not been widely available unless it was mandated. “Insurers generally did not provide CNBR coverage even before September 11, and for the most part they do not provide such terrorism coverage even with a Federal backstop in place,” the report said. “Given the general reluctance of insurance companies to provide coverage for these types of risks, there may be little potential for future market development.”

• Some insurance consumers have expressed an interest in purchasing CNBR coverage, but due to limited capacity and relatively high prices, many have decided to forgo such purchases. “Some consumers may equate CNBR coverage with other coverages that are not generally available (e.g., war risk),” the report said.
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Trey Morsbach, senior managing director at HFF, worked exclusively on behalf of the borrower, Owen Holdings Inc., to secure the $17.2 million 10-year, fixed-rate securitized loan through Goldman Sachs Commercial Mortgage, New York. The loan has a four-year interest-only period with a 30-year amortization schedule after that.

Vista Ridge Marketplace is located nearly 20 miles northwest of Dallas. Completed in 2002, the property has two buildings that are 94 percent occupied by 10 national and regional tenants and is anchored by Best Buy, which occupies 44,848 square feet.

"Vista Ridge Marketplace is located in a prime retail area of Lewisville containing more than three million square feet and boasting traffic counts of more than 200,000 vehicles in a 24-hour period," Morsbach said.

The Houston office of HFF arranged refinancing totaling $5.28 million for two El Paso, Texas multifamily communities: Ashton Parke Apartments and Southview Apartments.

Working on behalf of Cash Investments, Greg Pappas, senior managing director at HFF, placed two 10-year, fixed-rate securitized loans with JP Morgan Mortgage Capital, the New York-based conduit lender. A $1.8 million loan was arranged for Ashton Parke and a $3.475 million loan was arranged for Southview Apartments.

Proceeds of the financings will be used to pay-off existing debt, cover any closing costs and return equity to Cash Investments, a Texas-based owner of 7,800 multifamily units.

Ashton Parke and Southview Apartments are two of a larger Cash Investments portfolio arranged by HFF.  

Ashton Parke Apartments has 10 residential buildings with 67 studio, one-bedroom and two-bedroom units averaging 746 square feet each. Community amenities include laundry facilities, storage units, a party room and a swimming pool. The 97 percent occupied property is located on 2.7 acres of downtown El Paso.

Southview Apartments is situated on a 4.1-acre site close to the Bel-Air High School and YUCCA park. The seven building community, which is 97 percent leased, has 121 one-bedroom/one-bath and two-bedroom/two-bath units averaging 614 square feet each. Residents have access to a laundry room, office area and playground.
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• Investment banks have stepped up their focus on leveraging "deal management" technology and automation, spending IT dollars on improving their ability to win deals, according to research from TowerGroup, Needham, Mass.

• Chief information officers plan to add IT staff in the fourth quarter, according to the Robert Half Technology IT Hiring Index and Skills Report. Thirteen percent of respondents plan to increase staff while 3 percent said they might have to reduce staff.

• The mortgage industry has clearly documented the efficiency and monetary gains of moving from paper to electronic document delivery. Forward-looking business leaders should be moving to a total fulfillment solution, incorporating electronic delivery and eSignatures wherever possible, while continuing to support paper based delivery as needed, according to Robert Nilsson, vice president of business development at eLynx Ltd., Cincinnati.

All this in more in MBA Tech NewsLink, a weekly look at mortgage technology issues from the Mortgage Bankers Association. MBA Tech NewsLink delivers value-added, original stories that don’t appear anywhere else. A subscription to MBA Tech NewsLink is free to employees of MBA member companies.
For free subscription information, email Gloria McCullough at gmccullough@mortgagebankers.org.
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The current DataNote, Residential Mortgage Origination Channels, provides some clarification of terminology surrounding different residential mortgage origination channels, while providing some estimates regarding shares of business across these various channels. 

To view the DataNote, go to http://mortgagebankers.org/files/Bulletin/InternalResource/44664_September2006-ResidentialMortgageOriginationChannels.pdf.
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The Best in Industry Awards distinguish companies which demonstrated superior performance in minority lending and minority market penetration. LIDCI uses ComplianceTech to perform the analyses for the Best in Industry Awards using its LendingPatterns.com platform to analyze HMDA loan application registers (LARs).   

LIDCI created the Best in Industry Awards to acknowledge those companies who have demonstrated superior performance in minority lending and minority market penetration and, by so doing, have shown themselves to be the best in the industry.

“Last year we saw a dramatic increase in minority lending across the country, especially in major metro areas.  The lenders who aggressively go after minority lending as an important business opportunity are those we want to acknowledge with our Best in Industry Awards.” said Mike Taliefero, managing director of ComplianceTech, co-founder of LIDCI and the organizer of the Second Annual Mortgage Lending Industry Diversity Conference, which took place September 27-29 in Arlington, Va. (The Mortgage Bankers Association was a conference sponsor.)

The following companies were selected as Best in the Industry in 2006:

• Bank of America earned the Best in Minority Market Penetration Award for the second consecutive year. This award recognizes the lender that has the greatest proportion of minority applications compared to the national minority population percentage according to the 2000 census.  To be eligible for this award the lender must have reported at least 50,000 HMDA applications, have less than a 51 percent HMDA reportable spread frequency and report no more than 10 percent of total applications as race unknown.

Minority Lending Awards by Regulatory Peer Group: These awards recognize mortgage lenders operating primarily in the continental USA that made the most loans to minorities within each regulatory peer group. The criteria for all of these awards is the number of originations that have no HMDA reportable spreads and where the lender has less than a 51 percent spread frequency (i.e., more likely to be a prime lender).

• Countrywide Home Loans earned the Minority Lending Award for Federal Reserve Board Reporters.

• Wells Fargo Bank earned the Minority Lending Award for Office of the Controller of the Currency Reporters.

• Washington Mutual earned the Minority Lending Award for Office of Thrift Supervision Reporters.

• Greenpoint Mortgage Funding earned the Minority Lending Award for Federal Deposit Insurance Corp. Reporters.

• Navy Federal Credit Union earned the Minority Lending Award for National Credit Union Association Reporters.

• American Home Mortgage Corp. earned the Minority Lending Award for HUD Reporters.

These lenders were recognized at the second annual “Best in Industry” Awards Dinner at the conference. 

“More than 3.8 million home loans were made to minorities in 2005, largely due to the success of this year’s minority lending award winners. They are shining examples to the industry,” said Maurice Jourdain-Earl, founder of ComplianceTech. 
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As the mortgage market prepares for a projected increase in default levels following the production boom of recent years and a changing economic climate, mortgage fraud continues to receive significant attention.

The Mortgage Bankers Association defines fraud as a material misrepresentation, or intentional giving of false information that deceives or misleads a lender into extending credit beyond the limits of what would normally be extended if the facts were known. In the past, much fraud went undetected because loans did not immediately default even though fraud was present.

High-profile fraud cases and adoption of new fraud detection technology has triggered greater awareness of the mortgage fraud issue. These technologies, which are embedded in almost every originator’s loan approval process, include mortgage fraud solutions that verify a borrower’s identity and others that triage appraisals that may be at risk of over-valuation.

Background to Today’s Solutions
The development of automated fraud solutions in the mortgage industry has closely mirrored the earlier adoption of fraud detection solutions in many other areas of financial services, such as credit cards.

During the first stage of introduction, fraud detection processes were manual, relied on sampling and were deployed largely by quality control departments. Over time, the manual regimen became partially automated and later fully automated with predictive analytics embedded in the loan approval process. With this evolution, the quality control function moved into a more strategic role, allowing more time to proactively manage fraud threats.

Because manual review is so expensive and time consuming, the overall industry trend is moving towards using automated tools that can detect flaws and focus review efforts on transactions with a high risk of over-valuation or other forms of misrepresentation. By employing technology, lenders have seen processing gains and reduced costs while improving the quality of loans originated.

With each progressive stage of technology adoption fraud rates dropped considerably. Over a ten-year period, fraud losses in the credit card industry dropped by two-thirds as predictive analytics gained widespread adoption.

Mortgage lenders are expected to see a similar containment as they deploy sophisticated analytical approaches to guard against all forms of mortgage fraud—whether it is inflated appraisals, illegal property flipping, double escrow or occupancy fraud.

Fraud Detection Technologies
Fraud detection technologies available in the market today can be classified under three broad areas:

Data validation
Valuation fraud
Fraud pattern recognition

Data validation tools
• Data validation compares key elements from the loan application against public record and credit bureau data to ensure that the information being provided is accurate.  Example: A social security number is checked to see if it belongs to the borrower.  These tools therefore facilitate the verification of information.

Valuation fraud products
• The property address is checked against a detailed history of the neighborhood and prior sales to locate instances of property over-valuation and flipping.  These tools are beneficial in determining the type of valuation product to order; for example, high-risk properties can be moved to an appraisal, medium-risk properties could require a Broker Price Opinion (BPO), and low-risk properties could be validated with an AVM. 

Fraud pattern recognition
• Statistical models find hidden patterns of fraud in the data and provide a ’fraud score’ for each application indicating its likelihood to contain misrepresentations.  Data such as a borrower’s income, assets and credit profile are checked against known fraud patterns. These tools are best used for precisely targeting loans when implementing fraud risk management policies.
 
Evaluating Fraud Solutions
Performing an evaluation of a score-based tool is an important part of any assessment to determine how a particular solution will meet business needs. Automated fraud solutions need to be rigorously tested before implementation to ensure they can deliver business value measured against a set of performance criteria. The mechanism for executing this is usually a pre-implementation test based on historic production data containing known ‘good’ and ‘bad’ loans. 

Among the many evaluation criteria lenders use, the following are generally accepted as fundamental:

• Coverage: What percentage of the test data does it provide a score for?
• Detection: How well does the tool detect known bad loans?
• False Positive Rate: Is there a low percentage of good loans incorrectly identified as high-risk?
• False Negative Rate: Is there a low percentage of bad loans incorrectly identified as low-risk?
• Lift : Does the review rate provide the desired risk mitigation?

Tool providers usually summarize analytical performance using a ‘lift chart’ where the bad rate (percentage of known bad loans) is measured against the review rate (percentage of loans reviewed). Performance against the above criteria can only be assessed by leveraging information yielded by the test in the context of a full return on investment analysis. The cost savings on reviews obtained by using a predictive score need to be set against the costs of tool implementation and support. Once an automated fraud solution is deployed, on-going testing is required to ensure that the solution’s benefits are measured over time.

Meeting the Future
If mortgage fraud risk management follows the pattern of credit risk management, then we are likely to see more and more technology-based solutions that employ sophisticated analytical approaches. As with most technology solutions, the key to success will be delivering business value—the successful solutions will be those that solve for fraud detection but do so in a cost-efficient way.

As the industry looks towards tougher market conditions ahead, lenders are increasingly recognizing that taking concrete steps to minimize fraud losses will provide significant incremental value to their businesses in 2007 and beyond. Evaluating a fraud solution is the first step to realizing that value.

(The views expressed in Forum do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA NewsLink welcomes your contributions. Articles and inquiries should be submitted to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)
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