Independent mortgage companies pride themselves on meeting unique financial needs of borrowers, with custom portfolio loan products and personalized attention. While such a flexible approach is a competitive differentiator, it makes risk management a critical imperative. Portfolio managers, responsible for managing the value of their loan portfolio, can’t afford to gloss over the details of risk. They need up to date, nuanced information on borrowers’ financial health in real time so they can minimize delinquencies and grow their portfolio.
The mortgage industry learned the danger of incomplete, outdated information the hard way during the 2008 financial crisis, when poor data quality led to mistaken assumptions and flawed risk models. Banks lost money on mortgage defaults, interbank lending froze, and credit to consumers and businesses dried up.
As the mortgage industry now faces another financial crisis, this time driven by the COVID-19 pandemic, portfolio managers must take an honest, unvarnished look at their assets. And they need to do it now.
Prior to the pandemic, portfolio managers had a set of tools to measure and adjust for risk that worked pretty well for an economy that wasn’t rapidly changing. They’d evaluate factors such as credit scores, past delinquencies and bankruptcies, and debt-to-income ratios. For real estate investors, they might review business history and understand expected cash flow, including the rent received from tenants. Based on the results, they could adjust down payments, variable interest rates, or other payment terms at the time of loan origination.
Over the past year, however, the risk picture has changed dramatically.
Millions of homeowners have lost their jobs. Some are picking up work in the gig economy and are now self-employed with irregular paychecks. Many investors aren’t collecting the income they expected due to rent concessions or holidays.
It’s much more difficult for portfolio managers to accurately assess the changing risk of loans on the balance sheet. With an erratic economic environment , portfolio managers need information on borrowers’ personal financial situation in real time.
To understand borrowers, portfolio managers need real-time mortgage analysis to know:
Who lost their job?
Who has less or more income than before?
Who is receiving unemployment benefits?
Who has debt obligations?
Who has liquid cash?
Who is making or missing payments?
By capturing and analyzing this information as it changes, portfolio managers can quickly value their portfolios, gain a realistic understanding of assets, and assess risk more accurately.
Once they accurately assess the circumstances using mortgage analysis, portfolio managers can take immediate action to offset customers’ financial circumstances and reduce risk of delinquencies. For example, they might adjust underwriting practices for new loans. For existing loans, they might adjust variable interest rates. They could also allow borrowers more flexible payment schedules, such as making two monthly payments or tying a partial debit of full loan monthly loan obligation, with paydays.
Armed with real-time mortgage analytics on borrowers’ financial status, portfolio managers can more effectively diversify and ultimately grow their portfolio. They can offer new and larger loans, buy loans, and proactively offer competitive refinancing options to secure business from low-risk borrowers.
Portfolio managers have attempted to use many types of data sources to assess portfolio value and risk, but information is typically aggregated or out of date. For example, they might receive updates on an individual borrower’s financial status, but only months after that status changed – well after payments were missed or credit scores changed – and it’s too late to do anything about it.
EarnUp fills the blind spot with real-time data on individual financial health, and provides a layer of insights to improve value and risk analysis. For the first time, portfolio managers can now access and analyze near real-time data to evaluate the financial health of borrowers via EarnUp’s GetAhead Dashboard. This innovative solution is unlike anything that exists in the market today and is changing how portfolio managers achieve their goals and support their borrowers.
EarnUp’s intuitive dashboard surfaces signs of distress in not-yet-delinquent accounts in real time It provides a 360° view into borrowers’ personal finances: income and assets, debt obligations, credit score, employment, and financial trends. EarnUp gathers and analyzes this data and assigns a score for each borrower to measure risk and prioritize action.
Portfolio loans provide a path to homeownership many borrowers can’t access through traditional banks. For lower income citizens in search of a home loan and real estate investors looking to invest in economically distressed areas, portfolio lenders are a much-needed resource.
It’s the responsibility of portfolio managers and the mortgage industry as a whole to avoid a repeat of 2008. The good news is that they can. Mortgage analytics makes it possible to understand granular data on borrower’s financial health in real time, and proactively offer solutions before a crisis becomes a catastrophe.