Senior mortgage managers at banks are relying in growing numbers on desktop software programs that allow them to check on the condition of their portfolios in minutes.
Some programs predict the likelihood of defaults and prepayments. Others also present guidelines for managers on how to handle defaults.
"Quickly and easily, they can identify the condition, composition, and performance of their portfolios," said John F. Walsh, president of RF Spectrum Decision Science Corp. in Oakland, Calif., a supplier of software that monitors large numbers of mortgages.
High-level executives do not have to wait for critical data to flow up from lower-level management or wait for a long spreadsheet to be printed out, said Mr. Walsh.
By using the software, a bank's chief credit officer, who might oversee 200,000 loans, can gain a sound understanding of the condition of the loans in about 20 minutes, said Douglas L. Bendt, president of Mortgage Risk Assessment Corp., Jersey City, another software supplier.
Mr. Walsh estimates that, on average, a senior manager can stay on top of his or her portfolio by reviewing it for about two hours a month.
A top executive with a major bank with two million loans would need about two hours to review the portfolio in a single sitting, said Mr. Bendt. But that is still much better than the several days it takes to simply obtain the details about a large portfolio from a mainframe computer before being able to analyze it, Mr. Bendt added. "That's not very good if you've got a credit policy committee meeting coming up in two days," he said.
The software the two companies provide enables executives to monitor and manage loans from origination to maturity.
For example, with a quick point-and-click of the mouse, a mortgage banker can know how many loans were put on the books by each origination channel, said Doc Baldwin, president of Baldwin Financial Corp. in Elizabeth, Colo. Mr. Baldwin plans to roll out a software program sometime in the fall.
These channels are usually branch banks, brokers, correspondents, homebuilders, internal calling rooms, the Internet, and wholesalers. "You are able to understand which channel is performing better and you can use that to your competitive advantage by providing incentives accordingly," Mr. Baldwin said.
Moreover, a broker who churns a bank's customers can be detected, added Mr. Walsh. "You may find that a broker is going back continuously to your clients and offering them refinancing," Mr. Walsh said.
He added that his programs give bankers information that might cause them to raise the underwriting standards of brokers who provide a disproportionate number of loans that default, or whose good credits are refinanced excessively.
Another characteristic that can be spotted quickly is the geographic dispersal of loans to determine if they are too concentrated.
"You can investigate geographic concentration by loan size or transaction type," said Mr. Bendt. "You can know the occupancy status -- owner-occupied or investment property, single family or condo -- and size of mortgage."
After learning this, bankers may decide to buy or sell certain mortgages to get their portfolios in better balance, Mr. Bendt added.
The software can also help a banker decide when to foreclose. "That still has to be a personal decision, but (the program) has a foreclosure calculator," said Mr. Bendt.
The software provides an estimate of foreclosure costs, a property's current market value, and how much the bank might reap in a quick sale.
Some equipment allows bankers to prepare for potential defaults that they might not otherwise know may be in the offing. Some customers may have stellar records in making their mortgage loan payments and therefore give the appearance of being solid credits.
However, some of those borrowers, after their loans are approved, may run into trouble with their other indebtedness, such as credit cards or automobile loans, Spectrum's Mr. Walsh said.
He added that his equipment can warn bankers whether customers' overall credit conditions have deteriorated, which may eventually lead to their defaulting on the home loans.
Bankers can also be made aware of geographic areas where depreciation in home value has occurred.
Where that happens, borrowers who made 20% down payments may see their 80% loans spike to, say, 105% of the property's value, Mr. Walsh said.
A borrower in that situation has a high probability of walking away from his home, Mr. Walsh said. Before that happens, Mr. Walsh added, the computer program can figure out what the lenders' costs may be if customers actually default.
Default is always a possibility when borrowers have a small amount of equity in their homes. Computer programs alert management to how many of them are on the books and where they are located, Mr. Walsh said.
Homeowners with substantial equity in their properties are the least likely to default or even fall into delinquency. But they are also good candidates for the other event bankers dislike -- prepayment.
Many bankers look at prepayment as merely a function of falling interest rates, said Mr. Walsh. "But it's not the complete answer," he said.
"Modeling future performance takes into consideration a lot of other factors, such as adjusted loan-to-value."
Owners of properties that appreciate significantly will see their loan-to-value ratio improve substantially, tempting them to do a cash-out refinancing, Mr. Walsh said.
In this type of transaction, borrowers take out a new loan that is larger than the old mortgage to get their hands on some of the equity they have built up over the years. Typically, customers obtaining a new loan with an LTV ratio of 75% or less will not have to pay higher interest rates.
The borrowers opt for cash-outs to finance such things as their children's' education, home remodeling, and debt consolidation.
Some homeowners prepay by selling their homes outright and they use their capital gains to trade up to a bigger house, Mr. Walsh said.
An attractive market that RF Spectrum is serving is subprime lenders, said Mr. Walsh, and other computer software suppliers are looking to get into that market.
But cracking the subprime market can be tricky for suppliers of programs that manage lending portfolios, said Mr. Bendt, who added that he was therefore approaching that segment cautiously.
A sometimes-overlooked benefit that portfolio management software programs provide is a boost to users' bottom lines, Mr. Bendt said. Bankers who do not have the ability to quickly call up a comprehensive and up-to-date description of their portfolio tend to overestimate the amount of reserves they need, he said.
Computer programs, Mr. Bendt said, tell bankers they do not have to be quite so conservative. "They can perform better for their shareholders," he said.
Mr. Heffernan is a writer in Atlanta.
