Authentication: The process of identifying an individual or entity, usually based on user name and password, or possibly a hardware token and password.

"Default AVMs provide servicing managers and loss mitigation specialists with a simple and cost-effective alternative to BPOs that allow them to forecast a realistic property value and determine the current loan-to-value ratio, both of which are key factors in deciding whether or not to foreclose on a property." --Robert Walker, CMB, CMT, executive vice president of collateral solutions with First American Real Estate Solutions, Santa Ana, Calif.

Consumers Still Lacking in ID Protection
McAfee, Jamie
Consumers still lack knowledge in key areas of protecting their identity, and are not fully aware of their credit report, according to a survey by morefocus, Waltham, Mass. The survey results found contradictory behavior regarding how people handle documents containing their personal information.

Eight-six percent of respondents said they destroy documents and receipts that have personal information on them such as credit card numbers, account numbers, social security numbers, etc. before throwing them away. However, 38 percent put outgoing mail that contains that type of personal information in an unlocked mailbox for the postal carrier to pick up. Additionally, nearly 40 percent of those surveyed keep a vital piece of information such as their social security card in their wallet or purse.

"It's interesting to note that many people will take the time to destroy papers with personal info before they toss them in the trash, yet they'll turn around and leave similar papers out on their front porch for the mail carrier," said Regan Carey, morefocus research director. "People are missing the mark on some of the most basic steps in preventing a stolen identity."

The story is similar online. Eighty-two percent of those surveyed said their home computer has up-to-date anti-virus and anti-spyware software installed, and 76 percent have a firewall program on their home computer to prevent unauthorized access. Yet 70 percent make the mistake of using the same password on several Web sites.

Awareness of credit status is also an area where diligence is lacking. According to the survey, 33 percent of respondents never check their credit report, and 13 percent only do so immediately before they apply for a loan or credit. In addition, 16 percent of those surveyed check their credit report more than once a year.

"The data suggests that people are not as aware as they probably should be of what their records with the major credit bureaus show," Carey said. "Being smart in your own actions is important but it may not prevent everything, and it's best to be aware of what your report is showing in case something crops up."
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eLynx Acquires Swiftview
MBA Staff
eLynx Ltd., Cincinnati, a provider of secure Web services, announced yesterday that it had acquired SwiftView Inc., Portland, Ore., a provider of electronic document processes.

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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Mortgage Fraud Requires Sophisticated Approaches
Weldon, Damien
(Damien Weldon is director collateral risk analytics at First American Real Estate Solutions. He can be reached at (415) 536-3561 or by email at dweldon@firstam.com.)

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 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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Execs Plan to Increase Compliance Spending
McAfee, Jamie
Banking and insurance executives plan to increase their financial commitment to anti-money laundering and terrorist financing compliance programs over the next 12 months, according to research by KPMG LLP, New York.

Respondents plan to spend more, especially on staff, to help strengthen their compliance programs. Competition for experienced professionals, however, seems to be at a record high, according to KPMG's research.

"Financial executives tell us that they plan to add headcount to make their AML and terrorist financing compliance initiatives more robust and dynamic, but we are noting an ongoing struggle in the market to find the appropriate available talent to get the job done," said Darren Donovan, a principal and forensic leader for the banking and finance sector in KPMG's Forensic Services practice.

The survey of banking and insurance executives at the Institute for International Research's annual Anti-Money Laundering Audit & Compliance Forum in New York found that 77 percent of respondents said they plan to increase their financial commitment to these compliance programs over the next 12 months. Fifty-three percent said they would increase their AML and terrorist financing compliance workforce in the next year.

"It's clear that senior management understands that they will need to add resources to their compliance programs," said Antonio Pereira, a principal who focuses on the financial services industry and anti-money laundering services in KPMG's Forensic Services practice. "Now the trick for them is to strike a balance between adding enough resources to achieve and maintain AML and terrorist financing compliance, while positioning their institutions for success in the market."

KPMG said program-spending priorities would focus on monitoring and training. Nearly 80 percent of respondents said they plan to invest in transaction monitoring, which Donovan said would require a commitment to technology and proper training of employees. Seventy-six percent said they have already invested in new technology, with 17 percent of the executives noting plans to improve their IT in the near future.

"Financial institutions that are planning to add technology to assist in their AML and terrorist financing compliance efforts should understand that the work really begins before implementing a new system," Donovan said. "They will need to consider how to best implement the new IT system with current risk management programs already in place and ensure that it is tailored to meet their institution's specific risks and situation."

In addition, the survey also revealed that 72 percent complete a risk assessment of their customers at account opening, and 53 percent of respondents said account-opening procedures are among their investment priorities in the next year.

Among those who complete a risk assessment of customers at account opening, 46 percent said that they update the risk assessment at least once every 12 months, while 11 percent of respondents do not update their risk assessments at all.

KPMG's survey was based on surveys distributed September 18-September 21.
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eMortgage Update
Gardner, Harry
(Harry Gardner is senior director of industry technology with the Mortgage Bankers Association and vice president of eMortgages with MISMO. He can be reached at 202/557-2839 or hgardner@mortgagebankers.org.)

Many exciting efforts are underway within MISMO® and the Mortgage Bankers Association in support of eMortgage technology infrastructure, industry guidance and industry adoption. These efforts build on the existing eMortgage Guidelines and Specifications that the eMortgage Workgroup has released over the past five years, including the eMortgage Guide 2.0, eMortgage Closing Guide 1.0, eMortgage Vaulting Guide 3.0 and eClosing Cost Benefit Analysis 1.0 that were released at the MBA Technology Conference in March. (Note: All MISMO eMortgage final publications and specifications can be freely downloaded at www.mismo.org).

The MISMO eMortgage Workgroup formally established five subgroups during the past year, to better organize the many task efforts underway. These subgroups are:

 Technical Infrastructure (led by Patrick Hartford, QuickenLoans)
 Industry Guidance (Rob Rothkopf, MBMS)
 Document/Data Mapping (Leo Bijnagte, Wells Fargo Home Mortgage)
 Data Transactions (Lisa Bolelli, First American Corp.)
 Legal Issues (Grace Powers, Countrywide Home Loans and Chris Christensen, PeirsonPatterson LLP)

A number of new and ongoing tasks are underway within these five subgroups:

 The SMART Doc® Specification and Implementation Guide are being updated to incorporate new capabilities and to align fully with the overall MISMO transition from XML DTD to XML Schema format.

 ePackaging and eMessaging--specifications are being updated to align with the most recent MISMO request/response XML architecture.

 Electronically Signed PDF Documents--New guidance is being developed for implementing electronically signed PDF® documents in a standardized way.

 eMortgage Vault Regulatory Reference Guide--This new document pulls together a summary of eMortgage Vault-related regulations and requirements (operational, legal, security, availability/recovery, etc) from a number of organizations and government agencies' published resources.

 eRecording Guidance--This new document is being developed in cooperation with MISMO alliance partner PRIA (the Property Records Industry Association). It will provide guidance on electronic recording of eMortgage documents.

 eMortgage Cost-Benefit Analysis and Return on Investment--New scope and task efforts are underway to expand the 1.0 release of the cost-benefit analysis spreadsheet, and to reach out to the industry at large with an eMortgage adoption survey.

 Other Investor Requirements--With Fannie Mae and Freddie Mac both accepting eNote delivery now, the eMortgage Workgroup and MBA are developing an outreach program to other industry investors and to the ratings agencies, to ensure support for their eMortgage efforts moving forward.

 Document/Data Mapping--Mapping an electronic form view (the on-screen version of a paper form, with fillable fields) to the underlying XML data is a key component of building up an industry-standard eMortgage infrastructure. This subgroup has developed a new mapping process document to make all mappings efforts consistent, and is working on several new electronic document mappings, including a standardized eNote Modification form.

 eMortgage Closing Interface Transactions (eMCIT)--part of the Data Transactions subgroup, this group is developing a broad set of use cases and XML Request/Response transactions for electronic closing communications between lenders, closing agents, eClosing platforms, electronic vaults and other business partners.

 The Legal Issues subgroup develops legal chapters (covering ESIGN/UETA and eSignature-related questions) for the various eMortgage guides-currently underway, the eSigned PDF Guidance document. They are also reviewing evidentiary issues relating to various eSignature technologies.

Finally, in conjunction with MISMO, MERS and key industry representatives, MBA is supporting several other initiatives relating to eMortgage adoption:

The MBA Board of Directors Technology Steering (BoDTech) Committee has established eMortgage adoption as a key priority and is currently sponsoring an analysis of the state of electronic recording in the industry today.

The Residential Technology Steering (ResTech) Committee is establishing an eMortgage Adoption Task Force, to work with industry leaders and the BoDTech Committee to support eMortgage adoption.

The ResTech Software and Services Subcommittee is developing two white papers-an IT Roadmap to eMortgage Adoption, and an overview of Service-Oriented Architecture (SOA) technology-for the benefit of the industry.

MBA and MERS are working together to support industry task forces on both eMortgage Servicing and eMortgage Warehouse Lending. These task forces are working to identify and vet the detailed questions and issues relating to their specific aspects of the eMortgage process flow. 

To volunteer and participate in any of these efforts, or for more information, please contact Harry Gardner at 202-557-2839. MISMO specifications, information and listserv signup can all be found at http://www.mismo.org.

Technology Briefs
McAfee, Jamie
Portellus Inc., Irvine, Calif., released its Customer Readiness Lab (CRL). The expanded CRL allows for multiple prospective client visits to its onsite evaluation testing and product simulation facilities.

The goal of the CRL is to offer a structured, step-by-step user-defined experience that mitigates risk involved with purchasing enterprise-level applications and ensures buyer ROI. The CRL offers double the space of its previous lab, which is designed to allow for increased visits by prospective clients. It includes training classrooms, product demonstration rooms, user testing facilities, implementation planning rooms and a dedicated client lounge.

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Metavante Corp., Milwaukee, announced the Metavante Lending Solutions suite of products and services. Metavante Lending Solutions will provide point-of-sale and loan origination technology associated with originating, processing and closing each mortgage or consumer loan. Metavante Lending Solutions will also provide financing solutions for the retail industry provided by its Retail Financing Solutions (RFS) arm.

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Advectis Inc., Alpharetta, Ga., released its BlitzDocs Connector for New York-based Citigroup. Citigroup has also become a BlitzDocs Networked Investor, where it can receive imaged loan documents from any lenders using the BlitzDocs Collaboration Suite. 

BlitzDocs Connector, a component of the BlitzDocs Collaboration Suite, collects individual or multiple loan packages and their associated documents and provides automatic mapping of document types and names between parties. BlitzDocs Connector also provides lenders the ability to manage stipulations and synchronize documents between parties.
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MBA Research Data Notes Offer Industry Analysis
MBA Staff
Research DataNotes, produced by the Mortgage Bankers Association's research and economics staff, provide insight and analysis into some of the most important topics affecting the real estate finance industry. Research DataNotes are produced, at a minimum, on a quarterly basis, and cover residential, commercial/multifamily and benchmarking issues and will be available on MBA's Web site, www.mortgagebankers.org.

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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MBA Membership Directory Available Online
MBA Staff
The Mortgage Bankers Association's Membership Directory is now available to members directly from the MBA Web site at www.mortgagebankers.org.

Touted as one of MBA's most coveted resources, the Membership Directory has been enhanced to give you and your company access to the most up-to-date information on MBA member companies.

Available exclusively to the staff of MBA's more than 3,000 member companies, the Membership Directory allows members to find each other and communicate via a recognizable and credible source. Using your individual username and password, you can search by market focus, business or product type, location and other detailed categories, all to help you find other MBA members faster and easier than ever before.

MBA's Membership Directory is available to MBA members only. The information listed is provided by MBA member companies for publication in MBA's Membership Directory.

For more information, visit the Directory Web site at www.mortgagebankers.org/Tools/MemberDirectory.aspx.
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MBA Tech NewsLink Reprints Available
MBA Staff
Articles appearing in MBA Tech NewsLink are available as reprints for a nominal fee. Reprints are done on quality paper or can be sent electronically as a .PDF file. Reprints can be distributed to your employees, to illustrate presentations or for other communication purposes.

For reprint information on stories in MBA Tech NewsLink, contact Bob Thornton at (800) 394-5157, ext. 28.
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Effective Use of Default AVMs
Walker, Robert
(Robert Walker, CMB, CMT, is executive vice president of collateral solutions with First American Real Estate Solutions, Santa Ana, Calif. He can be reached at 714/250-6684 or by email at robwalker@firstam.com.)

Mortgage industry experts are forecasting that defaults will increase in 2007, due in part to mortgage rate resets that result in higher monthly payments for borrowers.
 
Experts further predict that this trend will be especially visible in the subprime and Alt-A segments, where many of the loans written in 2004 were adjustable-rate mortgages offering very low teaser rates or interest-only loans. Both of these loan types have the potential for significant payment reset shock when the initial interest rates expire. 

Servicers Focus on Loss Mitigation Strategies
With the prospect of this development, mortgage servicers are focusing on updating their collections and loss mitigation strategies to prepare for the additional numbers of delinquent loans likely to be on their books.

When a home loan becomes 60 to 90 days delinquent it is considered to be in the early-stage loss mitigation phase of the delinquency-default cycle. It is during this time that a lender will typically obtain a preliminary indication of the property's current value. This preliminary valuation helps to determine the servicer's loss mitigation strategy in the event that the borrower continues to miss payments. During this period, servicers must evaluate and decide on their loss mitigation options on a loan-by-loan basis. These options are typically classified by servicers as either forbearance or foreclosure.

Foreclosure is among the largest sources of loss for the industry, so most lenders prefer to work with the borrower to understand the cause of the missed payments and assist them by making payment arrangements that will allow the borrower to stay in the home. When payment arrangements can not be made, the lender's fiduciary responsibility is to take possession of the property and foreclosure sale is the likely next step.

Property Valuations Based on Broker Price Opinions
During early stage loss mitigation, valuation is most often determined by ordering a broker price opinion (BPO). BPOs typically cost more than $100 per report and are often received by servicers several days after an order is placed. Because nearly 50 percent of all loans cure within the 60- to 90-day delinquency timeframe, many of the BPOs ordered turn out to be unnecessary. While BPOs
have a key place in the loss mitigation process; they are not the most efficient method of valuing a property during early-stage loss mitigation.

Despite the benefits of cost efficiency and speed, automated valuation model (AVM) use for loss mitigation has been limited. The primary reason servicers have not deployed AVMs as widely as originators, is due to the belief that AVMs are best used for properties in "average" condition for the neighborhood. No matter what stage of delinquency or default a loan is in, many servicers feel that assuming the property is in average condition will lead to erroneous valuation conclusions. Their view is that borrowers experiencing payment difficulties are more likely to postpone or even eliminate necessary maintenance of the property, thereby lowering the property's value.

Step Forward Default AVMs
The valuation technology industry has recently introduced a class of Default AVMs that are designed specifically for early-stage loss mitigation and provide statistically accurate value estimates for properties in default.   

Default AVMs provide servicing managers and loss mitigation specialists with a simple and cost-effective alternative to BPOs that allow them to forecast a realistic property value and determine the current loan-to-value ratio, both of which are key factors in deciding whether or not to foreclose on a property.

Loss mitigation managers will find it beneficial to allocate resources in the most efficient way possible to achieve greater loss recovery. By starting the valuation process with an AVM designed specifically for default, managers will reduce the number of unnecessary BPOs ordered, enabling them to spend their funds on more seriously delinquent loans and saving on overall loan servicing costs.

(The views expressed in Tech Forum do not necessarily reflect the views or policies of the Mortgage Bankers Association. MBA Tech NewsLink welcomes your contributions. Articles and inquiries should be submitted to Mike Sorohan, editor, at msorohan@mortgagebankers.org.)
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About MBA Tech Newslink
 
Publisher: Cheryl Crispen, Senior Vice President - Communications and Marketing
Director of Online Publications: Mike Sorohan MSorohan@mortgagebankers.org
Deputy Editor: Michael Murray MMurray@mortgagebankers.org
Senior Staff Writer: Vijay Palaparty 202/557/2904 VPalaparty@mortgagebankers.org
Advertising Opportunities: Bill Farmakis 203/834-8832 bill@jlfarmakis.com

Any reprints or other use of these articles in whole or in substantial part, in any medium, requires advance written permission from the Mortgage Bankers Association. For reprint information on stories in MBA Tech Newslink, please contact Joanna Vulakh at 1-800-394-5157 x25.

MBA Tech Newslink, a weekly electronic publication, is a member benefit free to employees of MBA member companies, and available by paid subscription to non-members. For membership information, visit MBA's website at http://www.mortgagebankers.org/AboutMBA/membership

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