A NEW ERA OF MORTGAGE SERVICING

Out of Crisis, Solutions Except for the S&L crisis of the 1980s, the mortgage servicing industry has never been under the

spotlight it is now. The current HAMP and HAFA initiatives are by themselves bringing an

unparalleled degree of scrutiny to this corner of the business, but the fact is, the industry’s been

getting a good overhaul for the last year and a half for its role in the foreclosure crisis. And, rightly

or wrongly, many of these changes are due.

To its collective defense, much of the industry’s loan servicing technology was built to handle a far

more stable and far less demanding world. The sudden reality of millions of delinquent transactions,

each in need of individual, personalized attention, was, and is, staggering to say the least. As a result,

the industry finds itself in sudden need of answers for the millions of questions flowing in daily from

borrowers.

Strategies resulting in homeowners staying in their homes are the key, and servicers without effective

valuation capabilities are, and will remain, more than a little hampered. The good news is technology

has emerged to address the situation, and some mortgage servicing companies are already making a

meaningful difference to the industry, and ultimately, homeowners.

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THE NEXT GENERATION OF INTELLIGENCE

Granularity With Meaning

Lenders, investors, and servicers are keenly interested in transparency these days, and for good

reason: they need as much actionable information they can get across the entire mortgage process.

Fundamental to all of this, of course, is having a true assessment of the value of the collateral in

order to mitigate risk. Indeed, adding transparency to this part of the mortgage business might be as

important as the origination process itself while the nation struggles with a burgeoning foreclosure

inventory.

To their great credit, top-tier valuation providers—at arguably the most volatile time in the history

of the U.S. housing market—have answered the call to action with a next-generation electronic

valuation program. This new technology is not only providing ways to find the answers in today’s

new servicing environment, in many cases it’s redefining the questions. Sounder decisions can be

made on short sales, loan modifications and other workout scenarios from an informed perspective

thanks to these transparent automated products. And the black box automated valuation model, a

standby product of the last decade, is no longer viable.

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Today’s powerful new technology and process combines hard data with

both comparative and predictive analytics to bring a level of granularity

never thought possible to value estimates. By clustering together like

neighborhoods the process creates a homogenous level of granularity—

trend lines—that can be aggregated at larger geographies. The trend line,

then, becomes the foundation for any kind of valuation work performed.

And all the solutions built along the valuation supply serve a higher

purpose, to mitigate risk.

These new reports deliver truly powerful insights to industry professionals,

and they do so in a relatively inexpensive and nearly instantaneous fashion.

Lenders and investors gain immediate insight in to the subject property’s

neighborhood, including detail on multiple available comparable sales,

usually twice as many as those shown on the primary appraisal. In

addition, they can assess the neighborhood’s price ranges and perhaps

most importantly, the area’s valuation trending, shown in easily referenced

graphs rather than a list of numbers. A confidence score tied to the

efficacy of the valuation methodology is often included too, offering

additional peace of mind.

Electronic valuation technology that incorporates transparency has created

a comprehensive version of the next-generation AVM, complete with

extensive listing of properties in the area where notices of defaults have

been filed. Using one of these documents, an REO manager or loss

mitigation specialist can get a feel for the realities of the subject property’s

marketplace, right down to foreclosure sale specifics with proximity, room

count, square footage, and other information.

The technology can also combine with the ‘human touch’ to bring a broader variety of automated

reports than clientele hungry for transparency ever thought possible. These reports include

additional analysis of trends and forecasts, photographs and input on property condition, and other

aspects that combine human and data resources to create a prompt and accurate picture of value.

THE NEXT GENERATION OF SOLUTIONS

A Critical Combination At A Critical Time

Relying on raw computing power and proprietary algorithms, what’s known as ‘intelligent

segmenting’ integrates multiple data sources, including census information, socioeconomic

information, property information, and income information, to create homogenous segments for

like neighborhoods. Trend lines, then, can be produced down to these very granular, yet

homogenous, market segments.

What is the basis by which a REO

market plan can be qualified?

Market Trend Lines present a

glimpse into the future of what can

be expected to happen to real

estate values at the neighborhood

level. With an unprecedented level

of detail, this information is more

meaningful, allowing for better

recommendations on how a

property should be marketed. If

trend values are declining in a

neighborhood, the

recommendation to sell a property

“as-is” at a lower price could be

made, while if neighborhood trend

values are increasing, the

recommendation to repair and

take a longer time to sell could

result in a higher realized gain on

the property. Because of the

volatility in the market, it is

increasingly important to have

real-time, accurate information to

better manage market plans for

real estate.

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As a result, rather than depending on a hundred or so of the nation’s largest metro areas, any sort of

valuation product can incorporate hundreds of thousands of very small areas around the country.

Why does that matter? Simple: Houses simply don't sell all that often, and even at the zip code level,

the probability of any one property following the direction of the segment is pretty remote.

Properties are going up and properties are going down in their own neighborhoods and in their own

microeconomic environment.

Intelligent segmenting enables users of the data to look into these

neighborhoods and make confident assumptions that any particular

property is going to move along the trend line, or just as importantly has

moved along the trend line. A reliable time machine, if you will, for property

valuation.

To date, Integrated Asset Services’ IAS360 House Price Index represents the

industry’s first and best effort toward rolling up the benefits of this next-

generation trending methodology. With the ability to aggregate hundreds

of micro-geographies characterized by any number of scaled and weighted

social, economic, geographic and housing attribute dimensions, the

IAS360 produces an unprecedented level of meaningful granularity.

Whereas traditional HPIs have relied on paired sales methodology, which

by definition limits the number of transactions available to define a trend,

the IAS360 was built on a modern platform that considers insured, non-

conforming, bank owned and conventional sales transactions separated by

property type, and has since evolved to include REO and arms-length

transactions. Simply put, the IAS360 fills critical gaps left by traditional

HPIs, specifically accuracy, timeliness and more highly localized market

conditions.

And, very importantly, the high-powered Integrated Asset Services

platform can continually refresh trends as new data becomes available.

The net result is a kind of accurate and useful insight in to local activity

that hardly seemed possible even a few years ago. This insight into market

movement at a local level—this intelligent segmentation—should prove

particularly powerful for mortgage bankers, traders, real estate

professionals, and the general public.

Above all, the IAS360’s combination of data and analytics will enable proactive organizations to

rapidly optimize their risk mitigation programs, from monitoring performing loans to early detection

of defaulting loans. By logical extension, the application of the trending methodologies would likely

include identifying borrower risk, monitoring collateral value risk and market risk, contextualizing

neighborhood value, and managing REO quality control.

The measurement of broker

performance has long been difficult

to achieve, but with the help of

Market Trend Lines, the task is

becoming much easier. Current

market intelligence offers a way to

keep broker valuations in check.

Values presented by the broker can

be compared against neighborhood

trends and a grading system can be

put into place to review broker

performance on both the valuation

and the sale of properties. Trends

can show when a broker has

oversold or undersold a property

based on the neighborhood values.

The broker who consistently misses

the mark on pricing based on the

neighborhood trends, will score

lower than the broker who is

pricing and selling within the

Market Trend Lines. The ability to

grade the overall long-term

performance of the broker pool

allows visibility into which brokers

are the cream of the crop and those

that under-perform and should be

eliminated from the pool.

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By segmenting real estate markets in an intelligent way, the IAS 360 allows

for better decision-making with regards to mitigating risk. That enhanced

decisioning model is bound to change how the valuation industry has

operated for the last 20 years.

THE NEXT GENERATION OF PRODUCTS

What’s Going On In The Neighborhood?

Since residential real estate markets are a local phenomenon and easily

influenced by numerous market factors, few could argue the most highly

desired information in the servicing industry is knowledge of what’s going

on at the local level. In other words, what are the trend lines for each

neighborhood. Armed with this intelligent granularity, decision-makers—

including regulators who now have a meaningful stake in the game—can

gain a far better sense of what to do about properties and borrowers

within each market and in trending market segment.

The emergence of improving or stabilizing trend lines can, in fact, go as far

as to effect regulation and/or policy about the mortgage industry itself. To

that end, regardless of what's going on with a borrower, regulators are

trying to monitor and make decisions based on whether a property is

deteriorating or appreciating. Service providers within the industry would

be smart to do the same.

If the good news is that technology has emerged to help the general

situation, the better news is that trending methodology can be used to help

particular situations. By making best use of the three different data points

that make up a trend line—history, current, and future—lenders, investors,

and servicers can indeed determine both a strategic and tactical deal for any given asset in the

marketplace.

From a servicing perspective, the key is to best use this knowledge and information for an ongoing

strategy, either with the borrower, with both the borrower and the property or just the property.

From a complexity perspective, the attendant valuation work could be described as falling along a

continuum from AVMs, to CVMs, to BPOs, to reconciliations.

AVMs—Automated Valuation Models

AVMs powered by intelligent granularity go a long way toward emulating the appraisal process. Built

on trend lines that go all the way down to the neighborhood, next-generation AVMs are accurate,

intuitive, and should be available in a matter of minutes. The net result is an accurate property

valuation with full transparency.

How can market intelligence be

leveraged to support Broker Price

Opinions? With the use of Market

Trend Lines, which reflect a

collection of scaled and weighted

social, economic, geographic and

housing attribute dimensions to

define trends under differing

market conditions, the BPO can be

crossed checked against real time

sources that have been filtered and

scrubbed. With a much more

granular look at a market segment,

Market Trend Lines provide a tool

for checking BPO values that

enable the user to project

declining, stable and increasing

markets and make more informed

recommendations about a property

value. The abili ty to be able to

review information provided by the

broker beyond that of what is

found on the BPO is key to knowing

how to value a given asset more

precisely.

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CVMs—Conditioned Valuation Models

CVMs represent a new level of due diligence that optimize the efficiency of today’s intelligent

analytics with robust inspection data to produce a real-time view of subject condition, value, and

market price trends. Its accuracy, deep intelligence, transparent data sources, and revolutionary

analytics are critical points of difference between the CVM and traditional AVMs that offer bundled

reports. The CVM is used predominantly for a more advanced valuation and should take into

account the trending data in that area.

BPOs—Broker Price Opinions

Today’s advanced BPOs should include a comprehensive and detailed report outlining comparable

real estate values as well as the condition of the neighborhood. Armed with robust trending

methodology, a licensed Broker can prepare detailed, interactive valuation reports that reflect

detailed transaction nuances that influence the market--trend lines for the market, trend lines for the

neighborhood, and whether or not a property is following the trend line. How the comparable sales

relate to the trend lines suggests if the property is listed too high or too low and if the valuation

should reflect a stable or appreciating market.

The next-generation BPO, then, turns from a purely subjective valuation to a moderately objective

valuation on the basis of real market trends to determine if the logic base and the valuation and the

comparable sales all coincide.

Reconciliations

The reconciliation process for property valuations assists with bottom line results in loss mitigation,

foreclosure, short sale, clearing loan conditions, loan modifications, and in processing an REO. The

process can also be utilized in the purchasing, transferring, or selling of loan pools, auctions, or any

other due diligence that is required in a servicing environment. Given the importance, accurately

determining whether or not the property has followed the market, lagged the market, or is ahead of

the market is critical in reconciliation work. Only a process that includes neighborhood trend lines

can make that determination.

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Taken together, all of this trend-based information is driving a variety of changes in the industry.

More than that, intelligent granularity is bringing new levels of clarity, accountability, and

transparency to a process that needs to be done properly. The stakes are very high when i t comes to

valuation risk, and the pursuit for better understanding will lead to a more stable and productive

mortgage lending industry.