Fallout Analytics

NEURAL NET/AI FALLOUT ANALYTICS

Efficiant secondary market operations rely on a good understanding of exactly what product the lender will have ready to sell and what it will likely be worth on the market. Loan fallout and related renegotiations are a constant risk that negatively impacts the lender’s bottom line.

Effective pipeline hedging requires accurate fallout forecasting and measurement.  An error of just a few percentage points between the estimate and actual fallout levels can create serious issues for lenders as well as measuring fallout accurately. Many do not measure correctly for example treating loans that fallout after 3 days the same as those that fallout after 60 days.

MCM is expert in quantifying this risk for our clients and our fallout analytics is a critical component of our work, and fully integrated into our overall OAS Valuation and Hedge Optimization system.

For more than 20 years, MCM has been an innovator in the use of Neural Net/Artificial Intelligence and statistical tools to better predict the lender’s actual loan fallout, even in volatile markets. More than half of MCM’s current lender clients have sufficient data to make use of these new tools. Over time MCM collects enough data to make all tools available.

While a fallout error can result in an unexpected gain or loss, in practice we find that most errors lead to losses for lenders. In the recent past, lenders have faced the risk of closing fewer loans during a market rally and that requires a sophisticated approach to pipeline hedging.

In highly volatile markets, where higher loan amounts increase the impact each loan has on the pipeline (California, Texas, etc.), it can be challenging to estimate pipeline fallout using traditional means. Traditional models work well in less volatile markets, where borrowers are somewhat less sophisticated and loan balances tend to be lower.

For instance, a lender in the Midwest that originates $100 million per month of mostly government loans with balances under $250,000 is unlikely to see a lot of volatility in their pipeline. We use traditional statistical methods for these lender clients to estimate fallout to within a few percentage points of actual.

But many of our clients need more powerful tools. Larger lenders operating in hot real estate markets around the country see much higher volatility and correspondingly higher fallout. This can have a critical impact on their hedging strategy.

Since 2000, we’ve been working on new Artificial Intelligence algorithms that use neural networks to better estimate pipeline fallout for our clients. Over the years, we’ve seen the emergence of much better tools and computers with much higher processing speeds, allowing us to use these new methods to consistently estimate overall pipeline fallout to within 1 percent or less of actual lender performance.

These tools require a certain amount of the lender’s historical data to be effective, typically a year or two worth of production data.

In either case, our analysis is based on a very sophisticated model we developed in house that takes into account all factors relevant to the potential for loan fallout, including loan program, purpose, intent, loan amount, status, interest rate level, the amount of interest rate change, or pricing change between the time they took the lock and today, number of days in each status and whether the loan timeline has been extended.

Once the model is in place, we shock the system by moving interest rates and other economic indicators to determine what impact, if any, these changes could have on the lender’s loan pipeline fallout. This allows us to hedge appropriately.

As with most of our products and services, MCM provides this service to clients working with us through either type of relationship:

Or, the lender can do as many other institutions do and partner with MCM to manage the entire process. MCM offers this product through both types of standard MCM business relationships:

Our experience shows that lenders who succeed in today’s market will be the ones who create an extremely profitable process, and Hedge Commander is a vital part of the process for lenders of all sizes in markets across the country. This is, in part, why our OAS based approach to hedge construction, management and sophisticated, statistically analyzed and forecasted fallout management system, have made us the “Gold Standard” in pipeline risk management service.

 Since 1994, Mortgage Capital Management has helped mortgage bankers of every size become more profitable through the use of best-in-class pipeline risk management tools and strategies. Our pipeline risk management services, secondary marketing consulting, and hedging/trading services enable clients to prosper in any market environment.

 For nearly 30 years, the U.S. mortgage industry has called upon Mortgage Capital Management for expert advice and proven technologies all designed to deliver best execution in service to a more profitable enterprise. Our technology has attracted a customer list that includes some of the most successful firms in the industry.

 It costs you nothing to view the online demo, which will shed light on this unique approach to secondary marketing success. It’s an opportunity that you won’t find anywhere else.

 We’re also open to discussing any unique requirements you may have to arrive at a workable solution that will help you achieve your unique goals. Once you see what’s possible with modern financial services technology, your successful future will begin to come into focus. Don’t settle for mediocre when excellence is so easily achievable.

 Get the MCM Competitive Advantage! Call us to today to learn more or schedule an online demo: 858.483.4404 x220