SitusAMC recently announced the launch of Securent, an innovative risk management and insurance program that protects mortgage market participants from liabilities and losses associated with covered errors, omissions, or fraud introduced in the loan manufacturing process. We spoke with Securent president and industry veteran Justin Vedder about how Securent improves profitability for clients, by mitigating financial and counterparty risks associated with loan defects and fraud across the residential mortgage loan lifecycle.
Who is Securent for and what does it do?
Securent is designed for mortgage lenders, investors, residential mortgage-backed securities (RMBS) issuers, warehouse lenders, and other market participants. Securent takes a proactive and preventive approach to managing loan risk and pricing it appropriately. We offer Loan Defect Insurance (LDI), Mortgage Application Fraud Insurance, Residential Mortgage-Backed Securities (RMBS) Pool Defect Insurance, and Mortgage Servicing Rights (MSR) Loan Defect Insurance policies. We offer portable insurance that protects against manufacturing defects such as miscalculation of income, data corruption, fraud, misrepresentation, appraisal errors, and guideline and compliance-related violations.
What makes this product unique?
The innovation is really in the combination of our exclusive insurance model and SitusAMC’s technology. When humans are handling loan files, finding errors occurs by doing quality control on the loan after origination. The horse is already out of the barn, so to speak. Securent combines a proprietary insurance model and leverages SitusAMC’s dynamic technology tools in a powerful, seamless solution that offers end-to-end risk management for loan manufacturing. We drive increased efficiency, better accuracy, and cost effectiveness in our review process. Ultimately, the product increases the value of residential mortgage loans through comprehensive insurance programs, backed by a proprietary risk-rating model and A-rated insurance carriers.
How does it work?
We created a risk-based identification and pricing model which identifies the appropriate level of due diligence on each loan and the amount of insurance required to protect sellers, purchasers and RMBS issuers from origination risk. Our model evaluates all loans, and scores them based on the likelihood of default, loss, and repurchase demand. The model analyzes those three probabilities, and writes rules against them, which results in identifying the loans that are highest risk -- those that require a deeper dive.
What does this look like in practice?
Consider a 90 percent loan-to-value (LTV) mortgage in Las Vegas to a borrower who has a 55 percent debt-to-income (DTI) ratio. Las Vegas as a market has a propensity to drop rapidly when the economy declines. So as a higher-risk loan, the model will identify the loan for thorough evaluation to ensure solid value, correct income calculation, etc. Compare that to a 30 percent LTV mortgage in Chicago, with a borrower showing a 12 percent DTI ratio. The model will categorize the loan as requiring less scrutiny due to the low DTI and 70 percent equity. Our model scores the loans and determines the sampling level based on quality and risk. If the quality of the borrowers, collateral package, debt-to-income ratio, or program guidelines start to slip, the model will recalibrate it with a higher risk rating.
What are the key benefits?
Securent mitigates repurchase risk and potential losses in the mortgage manufacturing process by turning unknown contingent liabilities into quantifiable known liabilities. We increase the overall value and desirability of loans and RMBS issuers and buyers. Because sellers and buyers have higher confidence in the loans, Securent facilitates faster purchases, shorter trade commitments, and reduced funding costs – resulting in shorter transaction timelines. We help lenders who use correspondent networks confidently scale their businesses because the insurance protection supports use of the full credit box, and minimizes the risk of adding a new channel or riskier loan products. Finally, by eliminating repurchase risk, we reduce losses associated with defects, increase the value of the loans, and help clients build more profitable businesses. In addition, our model is open-source, providing the flexibility to choose a preferred third-service provider, if the firm has completed Securent’s service provider review and approval process.
How does this insurance program facilitate the transfer of risk and increase value?
Let me give you analogy from the consumer credit card space. Company A serves borrowers on the lower tiers of the credit curve – people with inconsistent payment histories and defaults. These customers are higher credit risks. As a result, Company A’s stock trades at five times its price-to-earnings (P/E) ratio. Company B, by contrast, only works with high-end borrowers who have good credit histories, so Company B’s stock trades at 20 times its P/E. I view our insurance product as the Company B of the securitization world. Just as credit card companies measure credit risk, we measure mortgage loan risk. It’s almost as if we are offering a ‘mortgage loan FICO,’ if you will, because we actually go in and look at loans, decide which ones present the highest risk, and we can transfer that risk to us, raising the value of the pool. Everybody's good at pricing credit risk. But they don’t know how to structure the price of manufacturing risk or fraud. We'll take that risk, transfer it to us, and we'll take care of it.
What’s the macro benefit to the residential mortgage market?
Securent will strengthen the whole non-QM infrastructure and allow for lower securitization costs, which leads to better execution and quicker trading. I also think it can change the whole way we do securitizations. When you develop a process where you analyze all the loans through an analytical framework to assess risk and insured those assets accordingly, you’ve improved the ultimate investors’ value in those pools. For example, if you have a market-related credit event, such as COVID-19 or the subprime crisis, when loan performance and home values decline rapidly, investors in those pools are protected from the downside of any manufacturing defects. Every program is insured by Securent Risk Retention Group and back by A-rated London reinsurance carriers to ensure every valid claim is paid.
Currently, RMBS pools with insurance, focused on credit-only issues, do not receive much if any value in securitizations. What makes the RMBS LDI different?
We look at loans as if we were buying them, just like our clients. The only difference is we are insuring them. If we are going to take the origination risk, we want to be sure every loan is independently reviewed by an independent third-party reviewer. The fact that we look at every loan independently allows us to provide the most comprehensive coverage the market has seen. In addition, the independent review gives our clients the comfort that claims will be paid. This may sound odd but when a review is completed, we are saying that the claim is highly likely to be paid.