Globally, the current economic landscape is characterized by increasing household debts and other market vulnerabilities. Low interest rates and inability to repay old loans are leading to significant financial losses for mortgage institutions. On top of that, the losses can prolong the potential inability of borrowers to meet their debt obligations, as well as declining values of real estate pledged as collateral in mortgage loans.
Identifying delinquency: need of the hour
Given the current macroeconomic climate, where financial crisis is majorly driven by inability of financial institutions to effectively identify and manage underlying credit risks in complex investment portfolios, it is imperative to install strong risk-management models. By analyzing credit risk aspects, lenders can put in place tight measures to mitigate financial as well as reputational losses, and thereby protect their firms from losses.
Markets are demanding high levels of transparency around risk trends. The NYSE requires all registered firms to disclose their risk assessment policies. Rating firms such as Standard & Poor’s have incorporated risk management capabilities as a factor in assigning ratings. Hence, it is essential for mortgage firms to invest in delinquency assessment models.
Leveraging technology to avert risk
Sophisticated risk analytics tools offer dashboards and visual reports that let companies easily and quickly assess exposure to risk. These tools don’t just identify operational risk, but also monitor and manage credit-risk factors such as borrower risk, market risk, and concentration risk.
Tools effectively value loan portfolios through real-time connection to MBS pricing from organizations like Fannie Mae, Freddie Mac, and GNMA. They allow mortgage lenders to determine the market value of portfolios and also develop insights on expected losses in the portfolio.
Companies are increasingly using reporting tools to generate reports on consumer loan portfolios, tailored for each stakeholder. Such tools simplify daunting tasks like formulating complex, customized consumer reports, and they also provide valuable information that can help lenders take important business decisions.
The focus is now on technology and data quality. To manage data generated from multiple systems and stored across multiple databases, industry practitioners have begun implementing innovative software technologies to improve credit analytics and management reporting. They are taking steps to improve their credit decision-making policies and transparency in dealings and assessment. As good data and better reporting help senior management identify problems early, leading practitioners are increasingly relying on IT to mitigate losses. The lenders recognize that such investments may lead to revenue generation as long as huge credit losses are preventable.
Loss mitigation is one of the key operational areas in banking. Improvements in the bottom line are hard to come by when you have a blurry picture about potential risks. Delinquency data models provide the foundation on which lenders can improve policies, understand potential risks, and put forth risk-mitigated plans. A gradual improvement strategy may have been the norm a few years back, but with the arrival of technology, the US financial sector has a “mandate” to ensure smaller margins of error more quickly than ever.
Implementing technology for faster loan processing and lower overheads is an idea which entered the mortgage industry a few years back. But delinquency and related data models are important risk-mitigation subjects of today. Many banks feel that sophisticated data models are going to be expensive to implement and are asking whether the benefits of reduced risk will actually outweigh the cost of IT implementation. The answer is a resounding Yes when you have agile development and calibrated implementation of technology on an as-required basis. Due-diligence analytics and reporting tools are the starting point, say many lending companies across the country, while risk mitigation tools are seeing widespread overhaul from their on-premise days..
Preethi vagadia is a business architect worked in Mortgage and Finance software department with top notch companies and has over 8 years of experience in Mortgage Lending Technology, enterprise mortgage origination software solutions. She has also worked in several process improvement projects involving multi-national teams for global customers in warranty management and mortgage