A loan performance powerhouse: the acquisition last year of LoanPerformance by First American transformed it from small innovator into part of a real estate data empire. The combination has created a new product launching pad that's already bearing fruit.

In order to set benchmarks for prime, subprime, jumbo and home-equity loan performance, San Francisco-based LoanPerformance tracks 46 million individual mortgage payments each month. At the same time, the company provides loan-level information on more than $1 trillion in non-agency mortgage and asset-backed securities (ABS) in another database.

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Its proprietary databases and suite of predictive prepayment and risk-modeling solutions enable clients to make informed business decisions about credit risk, loss mitigation, customer retention, securitization and investment. Those assets also enabled First American Real Estate Solutions (RES), Anaheim, California, to make one of its most important announcements of the year when it acquired the firm.

The First American Corporation, Santa Ana, California, is a Fortune 500 company that traces its history back to 1889. It claims to be the nation's largest data provider. The company operates within the title insurance and services, specialty insurance, mortgage information, property information, credit information and screen information businesses. With revenues of $6.72 billion in 2004, First American claims its databases cover 95 percent of all property transactions.

RES fits into the company's property-information business. Sister companies in that sector include Data Tree LLC, Santa Ana, California; Data Trace LLC, Santa Ana, California; and eAppraiseIT, Poway, California. In all, there are nearly 40 separate companies in the First American family.

RES announced in April 2005 that it had come to an agreement to acquire LoanPerformance, but did not disclose terms of the deal. At a symposium held in New York later that month, LoanPerformance President and Chief Executive Officer Daniel Feshbach said that part of the deal was that he remain at the head of the company for a period of four more years.

In that April announcement, RES pointed to two reasons the acquisition made sense. The first had to do with the company's brain trust. LoanPerformance has a highly trained staff of analysts, including two doctorate-level economists, a bioinformatics Ph.D., and a full complement of mathematicians and computer scientists.

But there was another reason RES found LoanPerformance an ideal target for acquisition. In addition to powerful analytics, the company brought with it a book of business that included ratings agencies, mortgage-backed securities (MBS) investors, major Wall Street investment banks, the country's largest mortgage lenders and servicers, and the government-sponsored enterprises (GSEs).

Looking for a good match

Feshbach would not deny that it was nice to have a larger company want to acquire his firm. He also admitted that four years from now, it could offer him a nice exit strategy from the business, if he was inclined to exit. But he also says it was the product-related reasons that made this deal so good.

"What's exciting about the First American situation for me is that clients are asking us to do new things because we're in a more secure environment," says Feshbach. "For example, you know we have second-mortgage customers. Now those customers want to monitor the status of the first liens."

LoanPerformance tracks what the company claims to be the only home-equity loan and home-equity line of credit (HELOC) database in the industry, consisting of more than 5 million loans. Benchmarking loan-level characteristics that can be used to predict when a second lien will go into default is a worthwhile exercise, but there may be an easier way to tell if there is danger on the horizon. If the first lien is in trouble, the second probably won't be far behind. RES can provide information on the status of a first-mortgage lien.

"We've never been willing to do anything like that before, because we just didn't have the computing infrastructure and I'm a very cautious person by nature; I always have been," Feshbach says. In fact, in the past, he says, the company didn't even store the address information relating to the loans in its database. Now, things will be different.

"With this new environment, we're going to do this," Feshbach says. "We can monitor fraud, we can build new kinds of scores; all because we have a huge partner with a fantastic environment and capabilities that we didn't have before."

At the April symposium, which focused on best-practice mortgage risk-management strategies and was attended by LoanPerformance customers, Feshbach outlined a number of other advantages to becoming a subsidiary of RES.

First on the list was LoanPerformance's access to the substantial data, technology and capital resources of RES. This would lead to improved accuracy and additional features being built into LoanPerformance products, Feshbach says. In addition, the two companies would be working together to develop new products that combine mortgage, property and credit information. Finally, the company's technology environment would be upgraded to leverage RES' TruSecure[R]-certified data centers and technology infrastructure.

"We've never had that kind of support, that kind of team to take some of our analytical ideas and be able to implement them quickly," Feshbach says. This begs the question: What will the new RES subsidiary work on first?

"I'm a very focused human being," Feshbach replies. "Yes, I'm a kid in a candy store right now, but we have to start with what our customers need. We're going to be very focused, very client-driven. Because I can have the best ideas, [but] if the client doesn't want it, it barely matters."

Interpreting the data

LoanPerformance wanted more power with which to crunch its giant database, and its new parent company was looking for the same thing. RES has the infrastructure, but it wanted the analytics that the minds at LoanPerformance had developed. Specifically, it wanted the power to do more with its information in four specific areas: loan default, fraud detection, portfolio retention and marketing.

"For many years, we've purchased our information from all over the country, from all sorts of sources. We have endeavored to acquire those sources over time. We are now the largest provider of real estate information in the country. In fact, we're the largest provider of information of any kind in the country," says Parker S. Kennedy, chairman and chief executive officer of The First American Corporation. "We are now ready to interpret that information, and that's where LoanPerformance comes in. It is now possible for us to take the various elements of data that we own and control and make predictions based on that information."

First American already has a number of firms in the business of analyzing information, some in the same part of the business as RES, but according to Kennedy it made more sense to acquire LoanPerformance than to count on resources already inside the company.

"There are a lot of smart technology people, a lot of good engineers in the world, but none that are as tested and proven as those at LoanPerformance," he says. But Kennedy adds that there were two other reasons it made sense to choose this particular firm. "The second reason is that the expertise of the LoanPerformance people relates primarily to real estate, and our data relates primarily to real estate. Thirdly, LoanPerformance brings a huge database of information," he says.

George Livermore, president of RES, agrees that LoanPerformance was the right company to buy. "We've known [Feshbach] and his company for quite a long time. There's not a better company out there," he says. "They were the No. 1 choice. Of course, it was good timing. Just because we wanted to do something doesn't mean that LoanPerformance was ready. Fortunately for us, it was a good time for LoanPerformance as well."

According to Livermore, who took over the reins at RES back in 2000 when it was still a young firm, the company had been developed into a successful property information business but was primarily involved on the origination side of the industry. LoanPerformance would allow the company to move deeper into mortgage loan servicing and on to the secondary market.

"We had a lot of work to do on our side to get our database assets to a point and our customers to a point where we were satisfied that we were doing the right things," Livermore says. "As we branched more into mortgage lending--and, in particular, into the servicing and the Wall Street sides--we found there was no greater collection of individuals more knowledgeable about loan performance than LoanPerformance."

Not only did the company know the lending business, but the industry knew the company. "The LoanPerformance folks have a lot of great contacts on the loan servicing side and on Wall Street at a very detailed level," Livermore says. "They've developed their base of business over the years."

Taking RES and LoanPerformance together, Livermore says he has a team that can sell either company's products to any market--and not just the products the company has today.

First American says it was the first company to make a huge splash with an insured automated valuation model (AVM). Having access to better analytics could allow the company to develop additional insured products, giving RES a competitive advantage in the market--which is exactly what Livermore wants to do.

"We'll be more confident when it comes to wrapping those results in either insurance or assurance than someone who doesn't have access to that information," he says. "If you wrap something with insurance, it's because you're very confident in the results. I think competitors of ours will not be that familiar with the performance or the efficacy of these models, and probably less likely to ensure results."

He says that when RES works with insurance underwriters, people who really have to understand how these models work before a policy is created, "I think they're very impressed with the fact that we can test our models on such a large test bed. That can make a dramatic difference in how insurance is created and how it's priced."

An edge on the product side

Just before LoanPerformance finalized its deal with RES, it launched a new product in conjunction with Bellevue, Washington-based Intelligent Results Inc.

Intelligent Results came to the financial services industry to provide customer relationship analytical solutions that use mixed-data to analyze and better predict customer behavior in marketing, collections and recovery. The company says it's currently working with four of the top 10 U.S. banks, and points to one credit card-issuing client that reportedly improved annual returns by $4.2 million using Intelligent Results' mixed-data models to target early-stage settlement offers.

In January, LoanPerformance and Intelligent Results released ScoreText, a new predictive-modeling solution that integrates structured data with unstructured, text-based data. The companies say the new product would enable mortgage servicers to better understand and more accurately predict customer behavior in servicing and collection efforts.

Historically, mortgage servicers have identified and prioritized potential problem loans using structured numerical data. However, it has been difficult to systematically access information and observations generated by other forms of interaction with borrowers. This mixed-data analytics approach combines freeform text from lenders' and collectors' notes, call centers, customer relationship management systems and borrower e-mails, with structured data from traditional sources including credit scores, payment histories, loan balances, customer demographics, property-record information, collections systems and account master files.

"Current collections and recovery processes utilize both automated systems and human interaction to determine a delinquent borrower's ability to repay and the type of workout the servicer should pursue," says Craig Focardi, senior analyst at TowerGroup, Needham, Massachusetts. "But important information is locked in unstructured memo fields, and it is expensive to add new data fields to servicing systems. This unique offering can help mortgage servicers by adding greater predictive ability to existing collections and loss-mitigation systems and processes. This helps keep more borrowers in their homes and lowers mortgage delinquencies and foreclosures."

"Today's best predictive models only incorporate about 20 percent of the available data," says Richard Harmon, senior vice president, scoring analytics and services, at LoanPerformance. "By exploiting the available unstructured data that makes up the other 80 percent, mortgage servicers cannot only improve their ability to predict customer behavior, but can have a much better understanding of the key factors differentiating behavior. We believe many servicers will be able to improve their current loss-mitigation performance by as much as 50 percent."

Improving loss mitigation by half is huge, especially for portfolios full of subprime loans. But the partnership between LoanPerformance and Intelligent Results itself might be even more important than their initial products.

"With mortgage, we did a two-part deal with LoanPerformance. We executed the second part almost a year ago, which gave [LoanPerformance] exclusive rights to our n onstructured modeling in the mortgage industry," says Trever Rubel, chief executive officer of Intelligent Results.

While Intelligent Results is free to sell its technology in other industries, anyone that benefits from it in the mortgage lending industry must get it from LoanPerformance. Prior to the acquisition, Rubel says, RES paid his firm a visit.

"A few months before the acquisition was announced, we had a long conversation with First American," Rubel says. "We didn't know at the time that we were part of their due-diligence operation, but they were certainly checking us out from the technical side."

Off to a good start

Since the acquisition, LoanPerformance has launched three new products and passed a major milestone.

At the time of the acquisition, LoanPerformance was monitoring between $800 billion and $900 billion in mortgage securities. Last August, the company announced that it had passed the $1 trillion milestone.

"This milestone reflects not only the ongoing cooperation of our clients, but also the willingness of the non-agency securities market participants to provide the data, which, in turn, works to attract new investors and helps increase market activity and liquidity," Feshbach says.

In mid-September, LoanPerformance introduced TrueSeconds, a new service designed to uncover the existence of second mortgages added after origination. That product came on the heels of First American's companion product, LienWatch[TM]", which provides holders of junior liens with an automated method for monitoring a first lien's delinquency status--the very product Feshbach promised us the companies would deliver when we interviewed him in April.

Both LienWatch and TrueSeconds combine the resources of LoanPerformance's HELOC and second-lien loan database with First American RES' property data, in effect delivering the synergies the executives hoped to see from the beginning.

"We're talking about delivering tools in a much more useable way, in a much more predictable way, with the kind of statistical due diligence behind it that allows adoption to take place quickly," says Livermore. "There's no guesswork. We can show on paper how these products perform, because we're able to apply the new products or analytics to a historical database of data and retroactively prove to the marketplace how predictive they would have been had they been used five years ago. Those are the kinds of things that increase adoption."

For his part, Feshbach is pleased with the results of the acquisition and confident about the future.

"I think our customers have really embraced the transaction," says Feshbach. "Our customers are always looking for reliability, for proof. We can never predict what customers will adopt and when they'll adopt it, but you certainly know that having a larger company behind innovative products and even more data to test them has got to be a winner."

Rick Grant is a freelance writer based in Jim Thorpe, Pennsylvania. He specializes in writing about technology for the financial services industry. He can be reached at [e-mail].