Using Big Data to Improve the Mortgage Industry Operating Model Overview of the HMDA S B A Score By David K. Moffat Mortgage TrueView December 2014 Copyright 2014 Mortgage TrueView Inc. All Rights Reserved
Strategic Benchmarking While business intelligence supports traditional enterprise benchmarking, HMDA data demonstrates how strategic benchmarking comparing one or more key indicators for one institution to the same indicators for one or more other institutions produces a level of insight that unifies revenue, risk, and compliance activities in a way that enhances institutional sustainability by highlighting whether an institution leads or lags the overall market on risk and/or reward indicators. Mortgage TrueView LB As an indication of how the advanced analytics and strategic benchmarking capabilities of HMDA S B can constructively alter the mortgage industry operating model, Mortgage TrueView developed Mortgage TrueView LB, a proprietary scoring model of mortgage lenders based on both public and non-public datasets. Mortgage TrueView LB aligns the interest of mortgage industry stakeholders. Specifically: Borrowers can evaluate possible lenders on the basis of key mortgage origination metrics. Lenders can highlight their competitive advantages and address relative disadvantages through empirical differentiation. Regulators can more empirically engage in meeting statutory obligations and objectives. Mortgage TrueView LB enhances overall transparency which provides the basis for ensuring that each mortgage industry stakeholder retains their respective risks and rewards. Mortgage TrueView LB rankings based on 2013 HMDA Data will be provided after we have issued an overview of each HMDA S B score. Scoring and Benchmarking: Mortgage TrueView HMDA S B HMDA S B provides mortgage lenders and other stakeholders with insight through the five publically accessible proprietary scores and integrated dynamic benchmarking. 1 D Score. Measures lender decisiveness as expressed through the relationship between actionable applications (i.e., approvals and denials) and non-actioned applications (i.e., withdrawals and incompletes 2 ). A Score. Indicates a lender s relative rate of affirmative outcomes through the relationship between approved and denied applications. 1 Mortgage TrueView empowers user-driven scoring metrics to clarify, enhance, and extend the HMDA S B scores. 2 For purposes of the HMDA S B scoring, loans denied on the basis of incomplete information are reclassified from Denied to Incomplete. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 2
B Score. Presents the ratio of an applicants reported income, where included, to applicants requested loan amount to provide an overall indication of abilityto-repay. E Score. Measures a lender s level of engagement by comparing a lender s percentage of non-white, non-male applications for each racial group to percentage of denied applications for each such group. C Score. Compares the denial rates for twenty gender, race, and ethnicity groups relative to the denial rate for white, male, non Latino applicants. The first report in this series provided an overview of the HMDA S B D 3. This balance of this report provides an overview of the HMDA S B A Score Overview of the HMDA S B A Score 4 The A Score provides empirical transparency about lenders approval and denial activity. An A Score does not predict that a lender will approve a specific loan application. Rather, the A Score provides borrowers with an indication of a lender s absolute and relative approval and denial rates and therefore informs a borrower s decision as to where they might submit a loan application. The A Score is based on the affirmative ratio. The affirmative ratio indicates the relationship between a lender s approved and denied applications. Specifically, the affirmative ratio is calculated as follows: Affirmative Ratio = Approved Application Rate Denied Application Rate An affirmative ratio equal to 1.00 indicates that the lender s (or lenders in the case of aggregate affirmative ratios) approval rate equals their denied rate. An affirmative ratio greater than 1.00 indicates an approval rate is greater than their denial rate and an affirmative ratio less than 1.00 indicates an approval rate is less than denied rate. The A Score is calculated by dividing a lender s affirmative ratio by the aggregate affirmative ratio. Specifically: A Score = Lender Affirmative Ratio Aggregate Affirmative Ratio 3 HMDA S B white papers can be found at www.mortgagetrueview.com. 4 HMDA S B scores can be filtered down to a specific respondent. In addition, benchmarks can be developed based on specifically selected respondents. Although HMDA data is in the public domain, we mask respondent names when in respondent filters to keep the focus on features and functionality rather than the specific results of a specific respondent. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 3
An A Score of 1.00 indicates that the lender s selected 5 affirmative ratio is equal to the comparable aggregate affirmative ratio. An A Score greater than 1.00 indicates that the lender s affirmative ratio is greater than the benchmark affirmative ratio while an A Score less than 1.00 indicates that the lender s affirmative ratio is less than the benchmark affirmative ratio. Neither the affirmative ratio nor the A Score are weighted. This decision is based on a number of considerations related to the fact that the lending decision should not correlate to customary weighting dimensions such as number of applications or requested loan amount. Executive Summary As shown in Figure 1 6, the Respondent A Score equals the benchmark A Score until the selection of one or more respondents. Figure 2 on the following page shows the results for a Top 20 lender (the Selected Respondent). Figure 1. Executive Summary: 2010 2013 All Respondents 5 i.e., all loan applications, a specific loan group, or loan applications in a specific geographical area, or any HMDA data element or combination of data elements. 6 Enlargements of all Figures in this report are provided in Appendix B. Note: The following markers are used throughout this document: = Respondent(s) indicator = Benchmark indicator Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 4
Figure 2 indicates that the selected Respondent s 2010 2013 overall A Score is 3.15. This A Score is notably favorable to aggregate A Score benchmark indicating relative strength for the selected Respondent. Figure 2. Executive Summary: 2010 2013 Selected Respondent Figure 3 shows the selected Respondent s 2013 aggregate A Score is 4.5, indicating that 2013 was more affirmative than the four year aggregate A Score of approximately 3.15 indicated in Figure 2 above. Figure 3. Executive Summary: 2013 Selected Respondent Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 5
A Score Summary Drilling down to the 2013 A Score Summary (Figure 4) for the selected Respondent indicates: The selected Respondent does not have any Home Improvement applications. The selected Respondent shows better-than-benchmark affirmativeness for the other four loan groups (i.e., Conventional Purchase, Non Conventional Purchase, Conventional Refi and Non Conventional Refi). Figure 4. 2013 A Score Summary: 2013 All MSAs Selected Respondent While the 2013 A Score summary for the selected Respondent indicates overall favorable affirmativeness, the ability to look at one or more specific Metropolitan Statistical Areas (MSAs) allows us to evaluate and benchmark the selected respondent on a more actionable basis. Figure 5 on the following page shows the results for the selected Respondent in the Los Angeles-Long Beach-Glendale, CA MSA (the Los Angeles MSA ). Specifically, the selected Respondent s activity in the Los Angeles MSA indicates: The overall A Score of 4.50 indicates strong favorable performance relative to the benchmark. The strong overall A Score is driven by the selected Respondent s 4.96 Conventional Purchase A Score. The overall A Score is tempered by the selected Respondent s 3.04 Non Conventional Purchase A Score. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 6
Figure 5. A Score Summary: 2013 Indicated MSA Selected Respondent Comparison of Figure 5 to Figure 4 indicates the selected Respondent s overall A Score is comparable to its activity in the Los Angeles MSA. Benchmarking The introduction of a benchmark respondent provides even more insight in a lender s performance. Figure 6 selects a benchmark respondent of comparable national footprint to the selected Respondent to highlight relative performance in the Los Angeles MSA. Figure 6. A Score Summary: 2013 Indicated MSAs Selected and Benchmark Respondent Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 7
Figure 6 shows that for non-home Improvement loan groups, the selected Respondent outperforms the benchmark respondent. These results indicate a competitive advantage for the selected Respondent. The selected Respondent can be further benchmarked in the Los Angeles MSA by changing the benchmark Respondent to a Top 10 lender. As indicated in Figure 7, benchmarking the selected Respondent to a large national lender in the Los Angeles MSA indicates that the selected Respondent s performance is even more favorable relative to benchmark respondent and presents a more significant competitive advantage. Figure 7. A Score Summary: 2013 Indicated MSA Selected and Benchmark Respondents A Score Tables A more comprehensive evaluation can be performed by reviewing the A Score tables. Figure 8, which presents the A Score Table for all loan groups 7, details the 2013 aggregate Affirmative Ratio of 3.72 for the 4,221,745 applications submitted to 6,791 lenders. Figure 8 shows the first page of the aggregate A Score table, detailing the top 20 respondents based on total applications. A review of Figure 8 shows that aggregate A Scores range from.07 to 2.16 with 12 respondents showing an A Score below 1.00 and 8 respondents showing an A Score above 1.00. One of the top 5 lenders in fact the top lender shown in Figure 8 has an aggregate A Score below 1.00. This result is not surprising given the number of loan applications. 7 Loan group-specific score tables are accessible by selecting the drill-down icon associated with the specific loan group A Score gauge. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 8
Figure 8. Aggregate A Score Table: 2013 All MSAs (Sort: Descending Total Applications) Figure 9 below presents the top 30 respondents based on 2013 applications in all MSAs and for all loan groups sorted on the basis of descending A Score. Figure 9 indicates that, with three exceptions, lenders with fewer than 1,000 applications in 2013 have the highest A Score, ranging from 100 (indicating an affirmative ratio of 710 8 ) to 32.49 (indicating an affirmative ratio of 121). Figure 9. Aggregate A Score Table: 2013 All MSAs (Sort: Descending A Score) 8 Due to the limited number of A Scores that exceed 100.00, the A Score is capped at 100.00 to achieve a scoring range of 0.00 to 100.00. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 9
The results presented in Figure 9 bring focus to the issue of how strategic benchmarking can drive changes to the mortgage industry operating model by positing questions such as why are smaller firms more affirmative than larger firm? (are they better at underwriting?) and what are the potential consequences, if any, of firms with high affirmative rates? (are they approving loans that would not otherwise be approved?) Such questions and answers can undoubtedly drive informed insight. Figure 10 provides further basis for raising questions such as those noted in the preceding paragraph. Figure 10 presents the top 30 respondents based on 54,794,019 applications for the period 2010 2013 for all MSAs and loan groups sorted on the basis of descending A Score. Figure 10. Aggregate A Score Table: 2010 2013 All MSA (Sort: Descending A Score) 9 Figure 10 confirms that A Scores for small lenders rank among the highest. In fact, only two lenders shown on Figure 10 have more than 4,000 applications during the 2010 2013 period. It s interesting to note that the two largest lenders shown in Figure 10 are not included in Figure 9. Returning to the Los Angeles MSA, Figure 11 on the following page shows that 387,542 applications were submitted to 770 lenders in 2013 producing an aggregate affirmative ratio of is 4.10. The following table provides a summary analysis of Figure 11 based on the annotations shown thereon: Top 10 Next 10 Next 10 Top 30 Maximum A Score 1.98 2.84 5.72 5.72 Minimum A Score.26.21 1.08.21 Number of A Scores Greater than 1 3 5 10 8 Number of A Scores Less Than 1 7 5 0 22 9 The A Score Table presented in Figure 10 sorted in ascending order is presented in Appendix A. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 10
The preceding table highlights the following: Significant A Score variability among the Top 20 lenders in the Los Angeles MSA with the majority of Top 10 lenders achieving an A Score below 1.00. The lowest A Score among the Top 30 lenders in the Los Angeles MSA belongs to the lender ranked 12 th based on total applications. The 27 th lender in the Los Angeles MSA based on total application achieved the highest A Score 5.72. These observations also prompt a number of follow-on questions that can be further defined by evaluating the A Score in the context of A Score loan groups, other HMDA S B scores, and other HMDA data elements 10. The follow-on questions include an understanding the A Score in the context of loan purpose, loan type, and gender, race and ethnicity characteristics. Figure 11. Aggregate A Score Table: 2013 Indicated MSA (Sort: Descending Applications) Figure 12, which shows the Top 20 Respondents for 2013 based on descending aggregate A Scores. The results confirm that small lenders are favorably affirmative relative to larger lenders with the A Score results driven by the fact that these smaller lenders have denied few, if any, loan applications. 10 See footnote 1. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 11
Figure 12. Aggregate A Score Table: 2013 Indicated MSA (Sort: Descending A Score) Summary This overview of the HMDA S B A Score demonstrates how strategic benchmarking comparing one or more key indicators for one institution to the same indicators for one or more other institutions produces a level of insight that unifies revenue, risk, and compliance activities in a way that enhances institutional sustainability by highlighting whether an institution leads or lags the overall market. Strategic benchmarking is an essential element in improving the mortgage industry operating model through intelligent governance, risk and compliance insights that, among other things, allow: A lender to evaluate relative lending patterns across multiple dimensions to proactively address weaknesses and leverage advantages. A servicer to evaluate key performance and business process indicators that differentiate service quality and associate revenue with performance. A borrower to make an informed decision when seeking a purchase, refinance, and/or home improvement loan and, being so engaged, to bear the consequence of such decision. Regulators to empirically evaluate the performance of lenders and servicers and identify meaningful remedies. We invite you to read the subsequent volumes of this case study to learn more about the HMDA S B B, E and C Scores and Mortgage TrueView LB in coming reports. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 12
Appendix A The following table presents the 2010 2013 aggreate A Scores ascending order. The number of respondents achieving a 0.00 A Score exceeds 30; however approximately 30 respondents are displayed at a time. With regards to those 30 shown in the table, their majority have an A Score of 0.00 because they did not approve any loans. Further, the majority of the respondents listed in the above table are included based on their 2010 results. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved
Appendix B Enlarged Report Figures Figure 1. Executive Summary: 2010 2013 All Respondents Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 14
Appendix B Enlarged Report Figures Figure 2. Executive Summary: 2010 2013 Selected Respondent Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 15
Appendix B Enlarged Report Figures Figure 3. Executive Summary: 2013 Selected Respondent Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 16
Appendix B Enlarged Report Figures Figure 4. 2013 A Score Summary: 2013 All MSAs Selected Respondent Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 17
Appendix B Enlarged Report Figures Figure 5. A Score Summary: 2013 Indicated MSA Selected Respondent Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 18
Appendix B Enlarged Report Figures Figure 6. A Score Summary: 2013 Indicated MSAs Selected and Benchmark Respondent Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 19
Appendix B Enlarged Report Figures Figure 7. A Score Summary: 2013 Indicated MSA Selected and Benchmark Respondents Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 20
Appendix B Enlarged Report Figures Figure 8. Aggregate A Score Table: 2013 All MSAs (Sort: Descending Total Applications) Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 21
Appendix B Enlarged Report Figures Figure 9. Aggregate A Score Table: 2013 All MSAs (Sort: Descending A Score) Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 22
Appendix B Enlarged Report Figures Figure 10. Aggregate A Score Table: 2010 2013 All MSA (Sort: Descending A Score) 11 11 The A Score Table presented in Figure 10 sorted in ascending order is presented in Appendix A. Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 23
Appendix B Enlarged Report Figures Figure 11. Aggregate A Score Table: 2013 Indicated MSA (Sort: Descending Applications) Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 24
Appendix B Enlarged Report Figures Figure 12. Aggregate A Score Table: 2013 Indicated MSA (Sort: Descending A Score) Copyright 2014 Mortgage TrueView Inc. All Rights Reserved Page 25