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Chicago-based TransUnion is partnering with Santa Ana, CA-based First American CoreLogic on technology to help financial companies develop better risk-based valuations. TransUnion describes its two new Consumer Risk Indicators as a solution that will improve visibility into the hidden risk of many of the mortgage assets currently plaguing the financial system and capital markets.” It was designed to give banks and investors additional information for Mortgage Secondary Market risk analysis and modeling.

According to TransUnion, the Consumer Risk Indicators for Residential Mortgage-Backed Securities (RMBS) and Whole Loans provide “comprehensive, current and historical loan-level consumer credit information” for in-depth risk analysis. The data includes complete adjustable-rate mortgage (ARM) exposure–beyond the loan in question–as well the consumer’s capacity to pay. The data is already used to predict risk and consumer behavior for mortgages, auto loans and credit cards, but has previously been unavailable for mortgage-backed securities, the company indicated.

Jeff Hellinga, president of TransUnion’s US Information Services division, noted that billions of dollars in mortgage securities were traded without full transparency about the potential risk posed by the borrowers of the loans backing the securities. The mortgage industry focused instead on pool-level home price appreciation (HPA) and initial loan-to-value (LTV), he continued, which “was sufficient as long as property values continued to rise.”

“But now, with the collapse of the housing market, direct insight into the actual risk of the underlying borrowers is critical,” Hellinga says. It’s particularly important in light of the recent creation of the Public-Private Investment Program (PPIP), which is designed to draw private capital into the market to facilitate price discovery of legacy assets and the expansion of other government programs, such as the Troubled Asset Relief Program (TARP) and the Term Asset-Backed Securities Loan Facility (TALF), he explained.

George Livermore, chief executive officer of First American CoreLogic, says sophisticated traders and investors are “always looking for an information edge.”

“These solutions provide that,” he says, “enabling early adopters to capitalize on the superior insights generated.” Livermore says the products have received positive early reviews from select hedge funds and investment banks, which tested the prerelease versions.

The TransUnion Consumer Risk Indicators for RMBS uses proprietary matching algorithms it developed together with First American CoreLogic. The algorithms link individual loans within non-agency mortgage-backed securities to the consumer credit information of the specific borrowers of the loans. Because of the methodology and data used to create it, the algorithms reportedly make it easier to match the data with specific borrowers and also increases the confidence in the accuracy of the data.

It illuminates the credit risk a borrower represents, beyond just the loan data available in a given security, and is superior to other types of consumer credit information generally available, the firms concur. It provides geographically aggregated data for individual loans and consumer credit information from the origination date. It also allows investors to directly tie the newly available consumer credit information to the First American CoreLogic Loan Performance Securities Database, which spans subprime, Alt-A, option ARM, and jumbo securities and represents over $1.8 trillion in loan-level data or 96% of all non-agency securities.

This impact is potentially significant, the companies boast, and will enable industry participants “to develop better valuations based on the composition and risk of consumers in individual mortgage pools.” For example, two pools of loans with similar aggregate characteristics, including loan size, original consumer risk and LTV and geographic mix, could have significantly different expected default rates–and, therefore, different cash flows and valuations–based on current and trended individual consumer credit characteristics.

While results will vary from portfolio to portfolio, TransUnion says its analysis showed improvements of more than 15% in default predictions over current predictive methodologies.

TransUnion’s Consumer Risk Indicators for Whole Loans also provides new information previously unavailable for risk assessment of Whole Loan bids and portfolio monitoring. It includes select data specifically proven to predict risk, Hellinga says, adding, “We’ve also developed it to be easily incorporated into the existing bid process.”

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