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Government Housing and Loan Production Conference 2009 Automated Underwriting: Are the Underwriting Tools still Usable? 4:30-5:15pm Geoffrey Oliver, CPA, CMB, Hilltop Advisors Allen H. Jones, AMP, Senior Vice President, Bank of America Home Loans Linda Simmons, Executive, Overture Agenda

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Government Housing and Loan Production Conference 2009

Automated Underwriting: Are the Underwriting Tools still Usable?

4:30-5:15pm

Geoffrey Oliver, CPA, CMB, Hilltop Advisors

Allen H. Jones, AMP, Senior Vice President, Bank of America Home Loans

Linda Simmons, Executive, Overture


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Agenda

  • Overview of Panel

  • Industry Perspective of the Future Automated Underwriting Tools and Usage

  • Bank of America’s Use of Automated Underwriting

  • Bank of America Perspective on TOTAL and Proposed Enhancements

  • Vendor Perspective of the Future Automated Underwriting Tools and any changes

  • Questions and Answer


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Industry Perspective of the Future Automated Underwriting Tools and Their Usage

Presented by:

Geoffrey A. Oliver

CEO & Managing Partner

Hilltop Advisors, LLC

Hilltop Advisors, LLC

Helping you climb to success…


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Are Current Automated Underwriting Tools Broken? Tools and Their Usage

What makes the tool broken?

  • Poor results – delinquencies are very high, first payment defaults are very high, foreclosures are at the highest levels in many years…

    • But did the AU tools approve all these loans? No is the simple answer.

    • If approved by the AU tool, was the appropriate data used concerning the borrower or the property? No.

    • Was the loan made despite the caution or recommended declinations? Yes in many cases.

  • Inconsistent results ?

    • Tools have been tested, validated by third parties as to their accuracy of reponse given the same inputs.

    • Loans that were approved were consistently approved based on loan characteristics – borrower and property

  • Loans approved inappropriately - where if they were manually underwritten, the loans would have been rejected

    • No evidence in the marketplace

      So it does not appear that the current credit crisis resulted from poor underwriting tools – either in whole or part.

Hilltop Advisors, LLC

Helping you climb to success…


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So what will happen to the Automated Underwriting Tool? Tools and Their Usage

The basic underwriting assumptions that are being crafted in the Federal MHA program and are still being used to make new loans returns the lender to using all of the same underwriting criteria that have existed for many years.

  • Borrower’s financial condition and ability to pay (maybe some change here)

  • Debt to Income ratios (DTIs are back but not the same as 28% and 36% from the 70’s and 80’s)

  • Loan to value (the property value is still a critical ingredient)

  • Total indebtedness (the “piggy back” loans are substantially gone from the market)

  • FICO score (while this score has tarnished in some lenders’ minds – all agree it is still a source among others to assess the credit / debt side of the borrower)

    The biggest change (“back to the future”) is the verification of data for employment, income, and assets. The SI-SA loans are gone.

    So does this mean that lenders will have to double their underwriting staffs because there will be less automated underwriting efforts? HOPEFULLY NOT because the AU tools were not the problem. There are 3 basic issues that lenders experienced…

Hilltop Advisors, LLC

Helping you climb to success…


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3 Basic Issues with Automated Underwriting Tools? Tools and Their Usage

Three basic issues have caused the current credit crisis, which when considering the impact of automated underwriting, further demonstrates that the credit problem is not an AU tool issue. The three issues are as follows:

  • Poor data put into the underwriting models

    • Borrower fraud in providing such data

    • Lender fraud in changing borrower data

    • Incomplete data never received and/or input into the models

  • Bad assumptions (these are not AU tool components)

    • Little or no equity in the property would be ok and the borrower would continue to be “willing to repay” the loan

    • Just because there was a secondary buyer of the product, the loan was a good loan

    • Real estate values would continue to rise

  • Manual overrides or the lack of pursuing the questioned items (stipulation or contingent underwriting issues)

Hilltop Advisors, LLC

Helping you climb to success…


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Recommended Future Enhancements for Tools and Their UsageAutomated Underwriting Tools

To improve the automated underwriting tools available today, lenders and vendors will need to address some key enhancements/capabilities. The recommended enhancements are as follows:

  • Better access to current date personal financial position information – what is the borrowers ability to repay throughout the life of the loan, what are their assets and liabilities and how to electronically access verifications.

  • More automated feeds of borrower data that is put into the underwriting models will reduce fraud, manipulation and clerical error. This would include validating assets, verifying employment, assessing debt, etc.

  • AU tools should automatically send “warnings” to management and possibly the Audit Committee when either bad assumptions or overrides of the automated decision occur.

  • AU tools should be equally positioned to use in the origination and servicing aspects of the business. The ability to effectively modify or refi a loan from the servicing portfolio is impacted by whether AU tools are consistently used.

  • Access to public and private databases should be used in conjunction with the AU tools to allow “freshening” of borrower financial data.

Hilltop Advisors, LLC

Helping you climb to success…


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Bank of America Tools and Their Usage

Bank of America Use of Automated Underwriting and Decisioning Engines

Presented by:

Allen Jones

Senior Vice President

Bank of America


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Bank of America Home Loans Tools and Their Usage

  • Automated Underwriting

    • Historical Perspective

    • Development of Loan Prospector

    • Transition to TOTAL

    • Current State

  • Use of the TOTAL Scorecard in 2008 and 2009

    • With market changes, GSE and MI tightening, our FHA business soared

    • As the business grew, risk management applied countermeasures to ensure the tremendous growth in volume met Bank of America’s commitment to providing sustainable homeownership

    • Bank of America risk management team increased review of FHA accepts and refers

    • Bank of America supported the FHA management tightening of cash-out refinances and participated in all of the FHA Industry Calls


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Bank of America Home Loans Tools and Their Usage

  • Bank of America Perspective on TOTAL

    • Fundamental Value of Automated Underwriting

    • Bank of America Home Loans Current Use of TOTAL

  • Proposed Enhancements

    • With appropriate funding, TOTAL can be enhanced to enable real time risk management adjustments

    • In this market environment, FHA volume is likely to remain significant and enhancing technology will enable sustainable growth

    • FHA is to be commended for maintaining its market role; and, be given the resources to enable the fruition of the original concept of automated underwriting

      • With limited data input, TOTAL should provide a score and the rationale for the score, i.e., an Accept based on credit, reserves, etc; and a Refer should likewise pinpoint the areas of risk that a Direct Endorsement Underwriter can hone in on to decision the loan

      • TOTAL could also be used to check CAIVRS, validate Social Security Numbers, and run fraud checks, and condominium approvals

  • FHA

    • Meeting its mission and safeguarding the Mutual Mortgage Insurance Fund


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Overture Technologies, Inc. Tools and Their Usage

Issues and Wishes in Automated Decisioning Engines

Presented by:

Linda Simmons

Executive

Overture Technologies


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What we are hearing Tools and Their Usage

  • Scarce Funding is Driving Process:

    • Loan Quality Rules: Perfect deliveries meetingcompliance, pricing/fees and investor eligibility are being driven with investor real time loan level audits

    • Policy Variations: Some investors are imposing proprietary policy variations beyond the DU/LP/FHA decision.

  • Aligning Borrower and Product is Harder:

    • Give Me Product! There are fewer loan types available than there are legitimate borrower needs.

    • Musical Chairs: Not able to match products effectively to borrowers early in the process.

    • Inefficiencies ->Fall Out: Mis-matches and manual (re-)underwriting is taking so long borrowers are going elsewhere

  • External Forces Putting Additional Pressures:

    • Credit to the Nth: Extra investor scrutiny requires line-by-line scrutiny of full-credit report to identify all reported debts (liens and judgments)

    • Fraud is a Cancer: Because of the depth and breadth of fraud, every loan is considered guilty until proven otherwise.

    • Repurchase: Not only have repurchase requests escalated but every request “modifies” the decisioning process.


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Automated Decisioning Wish List Tools and Their Usage

  • Get Me to Yes:

    • Give me a near-certain “yes” decision right up front. Align the borrower, lender, investor, program, and all related requirements right up front

  • Keep It Fresh:

    • Provide the freshest borrower, property, credit, pricing, eligibility and product data and information at the outset

  • Nimble and Quick:

    • Keep me both compliant and timely so I can make this loan salable, suitable, and soon. Find the flexibility to introduce a new product offering in less than 6 months.

  • Focus:

    • Give me microscopic focus while I scale up by providing consistency and transparency. Reduce and/or eliminate my repurchase risk with a history of my decisions

  • Safe and Sound:

    • Automate the decision and approval processes up until the time of delivery. Eliminate any errors, missed steps, and miscalculations.

  • Please do all of this without making me replace my legacy system


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Background Tools and Their Usage

  • Founded in 2000, the founders of Overture Technologies, Inc., leveraged lessons learned from the largest mortgage finance constituencies with 21st century technologies to create a new decisioning paradigm for mortgage.

  • By implementing automated decisioning, Overture leverages the power of information, data and technology to achieve a “best fit” decision at any point in the life of the loan.

  • Overture is emerging as the leading provider of transparent, consistent and defensible solutions across the mortgage value chain.


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