Conduit to Use Early Warning System on Nonconformers

Mortgage servicers may soon have a new tool to keep jumbo and subprime loans from failing. These nonconventional loans will now be assessed by a system that Freddie Mac and MGIC Investment Corp. initially introduced to help servicers quickly spot and treat troubled conforming mortgages.

Residential Funding Corp., a leading securitizer of nonconforming mortgages, will begin this spring to police loans by using the Freddie-MGIC system.

The software system, called Early Indicator, is designed to turn up potential problems by monitoring loans for payment troubles or deterioration in underlying credit.

Until now, Early Indicator was licensed solely to lenders, including NationsBank and Crestar Bank, which signed on this week. The clients pay $25,000 up front and $10,000 annually for licensing the system, and have largely begun applying it to conforming loan portfolios.

Results from these applications are still preliminary, since the system was rolled out in January and workouts or foreclosures take six months to a year to complete, said Kathleen Valenti, manager of MGIC's claims department.

With the addition of a private conduit-Residential Funding-Freddie Mac and MGIC can test their theory that Early Indicator can effectively monitor jumbo and subprime portfolios.

Residential Funding recognizes that the system was initially tested predominantly on conforming loans, said Colleen Boyle, a director with the Minneapolis company.

But the conduit is cautiously optimistic about broader applications, Ms. Boyle said. "We're beginning to explore the tool as a way to predict defaults."

The company has its own servicing portfolio and also works closely with lenders who retain servicing rights for loans that Residential securitizes. If the loans sour, Residential or the lenders lose money through foreclosures or by having to support the underlying securities.

Freddie Mac works much like Residential Funding, but on a larger scale and with conforming loans. The prospect of cutting down on losses from delinquencies or foreclosures drove Freddie Mac to team with MGIC early this year.

Both companies envision the system as ultimately serving as the standard loss mitigation software for servicers of all types of mortgages. The underwriting technique involves developing credit-scoring models for defaults, using the companies' extensive data bases.

Freddie Mac has even been talking with rival Fannie Mae about employing the system, said Jericho Trianna, a director with Freddie Mac.

Ms. Trianna reasons that both companies have the same goals when it comes to servicing-helping themselves and lenders become more efficient and reduce losses.

Industry observers said the collegiality would not extend to the originations side, where Fannie and Freddie compete fiercely for business from lenders.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER