The traditional pool-reliant and often manual methods used to price and manage mortgage-backed securities portfolios are gone with the winds of the economic storm, leaving a future strategy reliant on deep dives that measure rapidly changing individual borrower data.
"Institutions may have been more comfortable with aggregated information for the assets underlying the MBS," says John Jay, a senior analyst for Aite Group. "But if institutions can get a handle on loan-level information, they will be better off."
In an attempt to sell that handle, portfolio management tech providers such as Simcorp and First American Core Logic recently developed new technology and are expanding existing services to allow investors and institutions to track changes in LTV ratios, income, defaults, local real estate prices and other loan data to provide greater transparency into MBS portfolios for accounting, pricing and reporting purposes.
"You want to be able to have better drill down tools, to be able to slice and dice a portfolio, to cut it a number of different ways, by state, by loan, etc," says Bill Berliner, an asset-backed securities researcher.
For example, Wells Fargo signed an agreement to use Simcorp Dimension for accounting and back office operations for all U.S. MBS portfolios, a move that will integrate these activities for both Wells and acquired Wachovia MBS. Simcorp Dimension combines front office, trading and compliance functions to manage multiple MBS portfolios. The tech firm contends that many of these functions at institutions are still siloed [between credit due diligence and accounting, for example] and run on a combination of spreadsheets or legacy systems.
Aite's Jay says consolidating these tasks allows firms such as Simcorp to sell institutions on the idea of filling MBS management gaps with an end-to-end platform instead "of using systems put together by chicken wire and Band-Aids."
David Kubersky, president of SimCorp North America, which has about 180 institutional clients, says the product gathers transaction histories; risk management data is integrated with performance measurement and analyzed to give an updated picture of the state of a portfolio. For back office procedures, the product executes post-trade processing and related operational processes, such as corporate actions, regulatory and client reporting, and fund accounting.
"Part of the problem [with traditional portfolio] is data collection," says Craig Focardi, a senior research director at TowerGroup, adding broad, fast, accurate data is also needed so institutions that buy MBS can get a better view into the risk they are assuming. "Previously the investors assumed that other parties were taking on risk through credit enhancement and credit risk guarantees from the mortgage issuers."
Simcorp's rivals in the space include First American CoreLogic and LPS, which provides valuation and risk management services for fixed income securities such as CMOs, ABS, MBS and others through alliance partner Derivative Solutions-with tools including the ability to model mortgage asset behavior.
First American CoreLogic has recently upgraded its product suite to provide what it calls a "true LTV." The information and analytics firm, which counts most of the largest 20 banks, as well as hedge funds and government agencies such as FHLBs as clients, draws property address data from counties and trustees to determine locations of hidden or additional liens on properties. This can help institutions form better estimates of borrower-level balance sheets and changes in LTV ratios. For the most part, LTVs have traditionally been calculated at the time of origination, with subsequent pricing and management of MBS sales, as well as most accounting and servicing, based on that LTV. Steve Pennington, senior director of bond analytics for First American CoreLogic, says that additional liens and consumer price index changes may increase the LTV, and under traditional risk management methods, the default risk never been realized, and the overall risk goes up. The firm also recently released Bond Analytics, a platform that offers valuation and surveillance of MBS though a prediction of loan-level behavior-based on bond-pricing reports, which include principal loss projections; credit enhancement loss coverage ratios; implied ratings and bond prices driven by user-defined or market-based spreads.