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Integrating credit and collateral portfolio risk management.

In last quarter's Tower on Tech column, I presented results from the FICO/TowerGroup Mortgage Credit Risk Management 2009 Survey, (end) commissioned by Minneapolis-based FICO and completed in September 2009 by Needham, Massachusetts-based TowerGroup. This survey revealed the strategies, attitudes, accomplishments and 2010 information technology (IT) spending plans of leading credit-risk managers. In this column, I look at integrated credit and collateral risk-management systems (CCRMs) that credit-risk managers are investing in to manage credit risks.

CCRMs are comprehensive platforms that integrate borrower credit and property collateral risk assessment with multiple data sources and multiple analytic systems. These solutions also may incorporate data for the economic and demographic factors that drive mortgage defaults.

This is an established but still maturing and rapidly growing IT product category. Financial institution (Fl) demand is, of course, driven by the persistently high mortgage defaults, home-price weakness and weak economy that have led stockholders, rating agencies and government regulators to demand more data for greater information transparency and oversight.

The major benefits of using CCRM systems are derived from the combination of many different types of data that together enable more complete analysis of an Fl's mortgage portfolio credit risk. For example, mortgage borrower default is most typically caused by job loss, divorce or major medical expenses, which impact the ability to pay. However, home prices matter greatly because the amount of equity a borrower has also drives the borrower's desire to pay. Further, the type of loan product may influence the borrower's ability to pay if it calls for future mortgage payment increases. And finally, local and regional economic and demographic factors will impact both the borrower's ability to find work and home values.

Collecting and combining these data enables FIs to more finely forecast the probability of default, the loss severity if the borrower does default, and individual treatments of delinquent borrowers.

The major components of a CCRM--platform, integration, data, analytics, reporting and presentment--can be acquired and integrated separately or bought in bundles of components to create a comprehensive system. Data access, collection and management are the core sources of value upon which CCRM relies. However, it is not easy or cheap for lenders to save, scrub, normalize and share all required data internally. For this reason, vendors such as First American CoreLogic, Santa Ana, California, and Lender Processing Services Inc. (LPS), Jacksonville, Florida, collect raw loan servicing data from individual servicers on a monthly basis and sell back related data, analysis and reporting.

A financial institution's CCRM platform and integration requirements may be relatively simple or very complex. For example, mortgage investors such as pension funds can license third-party systems that provide detailed monthly updates of mortgage-backed securities (MBS) and whole-loan performance. On the other hand, FIs with mortgage portfolios having tens of thousands or more loan records with hundreds of data fields have more complex data-management requirements, and use tools from vendors that include Harte-Hanks Trillium Software, Billerica, Massachusetts; IBM Corporation, Armonk, New York; Informatica Corporation, Redwood City, California; Pitney Bowes Inc., Stamford, Connecticut; SAP America Inc., Newtown Square, Pennsylvania; SAS Institute Inc., Cary, North Carolina; and 1010data Inc., New York.

Large FIs may also use third-party systems for some risk-management functions, but they will also build custom systems that require in-house platforms built with enterprise-class database-management system (DBMS), integration, business process management (BPM), business rules management system (BRMS) and networking tools.

Vendors providing many of these DBMS, BPM and BRMS tools include Corticon Technologies Inc., Redwood City, California; Computer Sciences Corporation (CSC), Falls Church, Virginia; FICO, Minneapolis; Oracle Corporation, Redwood Shores, California; Pegasystems Inc., Cambridge, Massachusetts; IBM; SAP; SAS; and TIBCO Software Inc., Palo Alto, California.

Fls can perform dozens of different types of analysis on loan, borrower and property collateral data. These include delinquency rates, reinstatement rates, loss forecasting, severity estimate, fraud analysis and prepayment analysis. Vendors that sell data products usually leverage the data by developing analytics, reporting and presentment products, and consulting services. These vendors--such as Equifax Inc., Atlanta; Experian, Costa Mesa, California; First American CoreLogic; LPS; and TransUnion LLC, Chicago--attract highly specialized experts to develop more comprehensive models than other vendors may provide.

Every vendor that has data and analytical tools also has reporting and presentment tools either built into those products or as a separate product. Vendors have improved the quality of these products as programming tools have become more powerful, feature-rich and flexible to program and reprogram. However, vendors sometimes build these products with their own vision and just to present their own output. These products do not always permit custom screen and report formatting. In this case, Fls use other vendors such as IBM that offer products for Fls to create their own custom analysis, reporting and presentment of results.

Financial institutions need to know that this IT category, although defined with specific criteria, is heterogeneous in nature and broad in scope. Each vendor tends to have capabilities that map to its core business and core products. No one vendor currently possesses and sells a complete, end-to-end CCRM system, because of the comprehensive nature of the database management, rules management, integration, analytics and reporting requirements.

Because no one vendor owns and controls all the data types, financial institutions should also consider vendors with joint data-sharing partnerships to develop and sell an integrated solution and build integrated analytics. One example is TransUnion and First American CoreLogic's partnership to combine loan-level product performance data with borrower-level credit data.

Unfortunately, the mortgage lending and real estate markets are unlikely to fully recover for a few years. However, investment in integrated credit and collateral risk-management systems are essential to improve performance of mortgage investors' mortgage portfolios. Financial institutions that automate sooner rather than later will also be better able to more profitably take on new mortgage loan risk for competitive advantage.

Craig Focardi is senior research director with TowerGroup, Needham, Massachusetts. He can be reached at TowerGroup research is available to subscribers on the Internet at
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Title Annotation:Tower on Tech
Comment:Integrating credit and collateral portfolio risk management.(Tower on Tech)
Author:Focardi, Craig
Publication:Mortgage Banking
Article Type:Column
Geographic Code:1USA
Date:Mar 1, 2010
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