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Articles Tagged with: Securitization

Case Study: How a leading loan and MSR investor reduced costs with a loan-level approach

Learn more about how one whole loan and MSR investor (a large mortgage REIT) successfully overhauled its analytics computational processing with RiskSpan. The investor migrated from a daily pricing and risk process that relied on tens of thousands of rep lines to one capable of evaluating each of the portfolio’s more than three-and-a-half million loans individually (and how they actually saved money in the process). 

The Situation 

One of the industry’s largest mortgage REITs sought a more forward-thinking way of managing its extensive investment portfolio of mortgage servicing rights (MSR) assets, residential loans and securities. The REIT runs a battery of sophisticated risk management analytics that rely on stochastic modeling. Option-adjusted spread, duration, convexity, and key rate durations are calculated based on more than 200 interest rate simulations.

The investor used rep lines for one main reason: it needed a way to manage computational loads on the server and improve calculation speeds. Secondarily, organizing the loans in this way simplified the reporting and accounting requirements to a degree (loans financed by the same facility were grouped into the same rep line).  

This approach had some significant downsides. Pooling loans by finance facility was sometimes causing loans with different balances, LTVs, credit scores, etc., to get grouped into the same rep line. This resulted in prepayment and default assumptions getting applied to every loan in a rep line that differed from the assumptions that likely would have been applied if the loans were being evaluated individually. 

The Challenge 

The main challenge was the investor’s MSR portfolio—specifically, the volume of loans needing to be run. Having close to 4 million loans spread across nine different servicers presented two related but separate sets of challenges. 

The first set of challenges stemmed from needing to consume data from different servicers whose file formats not only differed from one another but also often lacked internal consistency. Even the file formats from a single given servicer tended to change from time to time. This required RiskSpan to continuously update its data mappings and (because the servicer reporting data is not always clean) modify QC rules to keep up with evolving file formats.  

The second challenge related to the sheer volume of compute power necessary to run stochastic paths of Monte Carlo rate simulations on 4 million individual loans and then discount the resulting cash flows based on option adjusted yield across multiple scenarios. 

And so there were 4 million loans times multiple paths times one basic cash flow, one basic option-adjusted case, one up case, and one down case—it’s evident how quickly the workload adds up. And all this needed to happen on a daily basis. 

To help minimize the computing workload, the innovative REIT had devised a way of running all these daily analytics at a rep-line level—stratifying and condensing everything down to between 70,000 and 75,000 rep lines. This alleviated the computing burden but at the cost of decreased accuracy because they could not look at the loans individually.

The Solution 

The analytics computational processing RiskSpan implemented ignores the rep line concept entirely and just runs the loans. The scalability of our cloud-native infrastructure enables us to take the nearly four million loans and bucket them equally for computation purposes. We run a hundred loans on each processor and get back loan-level cash flows and then generate the output separately, which brings the processing time down considerably. 

For each individual servicer, RiskSpan leveraged its Smart Mapper technology and Configurable QC feature in its Edge Platform to create a set of optimized loan files that can be read and rendered “analytics-ready” very quickly. This enables the loan-level data to be quickly consumed and immediately used for analytics without having to read all the loan tapes and convert them into a format that an analytics engine can understand. Because RiskSpan has “pre-processed” all this loan information, it is immediately available in a format that the engine can easily digest and run analytics on. 

What this means for you

An investor in any mortgage asset benefits from the ability to look at and evaluate loan characteristics individually. The results may need to be rolled up and grouped for reporting purposes. But being able to run the cash flows at the loan level ultimately makes the aggregated results vastly more meaningful and reliable. A loan-level framework also affords whole-loan and securities investors the ability to be sure they are capturing the most important loan characteristics and are staying on top of how the composition of the portfolio evolves with each day’s payoffs. 


Automated Legal Disclosure Generator for Mortgage and Asset-Backed Securities

Issuing a security requires a lot of paperwork. Much of this paperwork consists of legal disclosures. These disclosures inform potential investors about the collateral backing the bonds they are buying. Generating, reviewing, and approving these detailed disclosures is hard and takes a lot of time – hours and sometimes days. RiskSpan has developed an easy-to-use legal disclosure generator application that makes it easier, reducing the process to minutes.

RiskSpan’s Automated Legal Disclosure Generator for Mortgage and Asset-Backed Securities automates the generation of prospectus-supplements, pooling and servicing agreements, and other legal disclosure documents. These documents contain a combination of static and dynamic legal language, data, tables, and images.  

The Disclosure Generator draws from a collection of data files. These files contain collateral-, bond-, and deal-specific information. The Disclosure Generator dynamically converts the contents of these files into legal disclosure language based on predefined rules and templates. In addition to generating interim and final versions of the legal disclosure documents, the application provides a quick and easy way of making and tracking manual edits to the documents. In short, the Disclosure Generator is an all-inclusive, seamless, end-to-end system for creating, editing and tracking changes to legal documents for mortgage and asset-backed securities.   

The Legal Disclosure Generator’s user interface supports:  

  1. Simultaneous uploading of multiple data files.
  2. Instantaneous production of the first (and subsequent) drafts of legal documents, adhering to the associated template(s).
  3. A user-friendly editor allowing manual, user-level language and data changes. Users apply these edits either directly to a specific document or to the underlying data template itself. Template updates carry forward to the language of all subsequently generated disclosures. 
  4. A version control feature that tracks and retains changes from one document version to the next.
  5. An archiving feature allowing access to previously generated documents without the need for the original data files.
  6. Editing access controls based on pre-defined user level privileges.

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Overview

RiskSpan’s Automated Legal Disclosure Generator for Mortgage and Asset-Backed Securities enables issuers of securitized assets to create legal disclosures efficiently and quickly from raw data files.

The Legal Disclosure Generator is easy and intuitive to use. After setting up a deal in the system, the user selects the underlying collateral- and bond-level data files to create the disclosure document. In addition to the raw data related to the collateral and bonds, these data files also contain relevant waterfall payment rules. The data files can be in any format — Excel, CSV, text, or even custom file extensions. Once the files are uploaded, the first draft of the disclosures can be easily generated in just a few seconds. The system takes the underlying data files and creates a draft of the disclosure document seamlessly and on the fly.  In addition, the Legal Disclosure Generator reads custom scripts related to waterfall models and converts them into waterfall payment rules.

Here is a sample of a disclosure document created from the system.


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Blackline Version(s)

In addition to creating draft disclosure documents, the Legal Disclosure Generator enables users to make edits and changes to the disclosures on the fly through an embedded editor. The Disclosure Generator saves these edits and applies them to the next version. The tool creates blackline versions with a single integrated view for managing multiple drafts.

The following screenshot of a sample blackline version illustrates how users can view changes from one version to the next.

Tracking of Drafts

The Legal Disclosure Generator keeps track of a disclosure’s entire version history. The system enables email of draft versions directly to the working parties, and additionally retains timestamps of these emails for future reference.

The screenshot below shows the entire lifecycle of a document, from original creation to print, with all interim drafts along the way. 


Automated QC System

The Legal Disclosure Generator’s automated QC system creates a report that compares the underlying data file(s) to the data that is contained in the legal disclosure. The automated QC process ensures that data is accurate and reconciled.

Downstream Consumption

The Legal Disclosure Generator creates a JSON data file. This consolidated file consists of collateral and bond data, including waterfall payment rules. The data files are made available for downstream consumption and can also be sent to Intex, Bloomberg, and other data vendors. One such vendor noted that this JSON data file has enabled them to model deals in one-third the time it took previously.

Self-Serve System

The Legal Disclosure Generator was designed with the end-user in mind. Users can set up the disclosure language by themselves and edit as needed, with little or no outside help.

The ‘System’ Advantage

  • Remove unnecessary, manual, and redundant processes
  • Huge Time Efficiency – 24 Hours vs 2 Mins (Actual time savings for a current client of the system)
  • Better Managed Processes and Systems
  • Better Resource Management – Cost Effective Solutions
  • Greater Flexibility
  • Better Data Management – Inbuilt QCs



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