There’s a new one out every week, it seems: a report showing an alarming increase in foreclosures in a city or region particularly hard hit by the slowdown in the housing market.
Such reports are watched closely not only by bargain hunters, but by lenders who are concerned about the ripple effect foreclosures may have on the value of properties they’ve loaned money against or are considering underwriting.
For mortgage lenders, investors and insurers, a foreclosure report is like a canary in a coal mine. By the time the bird drops dead, they may already be exposed to considerable risk. What lenders — and prospective home buyers — would really like to know is where problems are likely to crop up in the future.
Using data extracted from millions of loan transactions, Sacramento, Calif.-based CoreLogic attempts to give mortgage lenders a glimpse into the future. The company’s new quarterly Core Mortgage Risk Monitor, first published in February, attempts to predict what areas will be at the greatest risk for loan delinquencies, foreclosures and mortgage fraud 12 to 18 months from now.
CoreLogic chief economist Mark Fleming said the Risk Monitor builds on collateral scores the company produces for its clients. CoreLogic looks at more than 55,000 mortgage loan transactions a day as part of the collateral scoring process, Fleming said.
“The basic premise is understanding the riskiness of the property, like you’d want to understand the riskiness of the borrower,” Fleming said. CoreLogic analyzes how accurately a property is valued at the time of a loan, and estimates the local market’s ability to sustain that price.
Unique local features — like railroad tracks or a beach — can add to or detract from a property’s worth, complicating valuations. A high foreclosure rate or an unhealthy local housing market are indicators that a property may not hold its value over time.
“The sustainability issue is whether or not the property will trend with its market or differentiate from it,” Fleming said. “A loan transaction is a commitment that’s going to stand for a few years, and the loan holder is not necessarily there at origination.”
CoreLogic’s clients include “anyone in the mortgage finance food chain,” including mortgage insurers and secondary-market clients who purchase loan portfolios from originators.
To produce its Risk Monitor, CoreLogic folds in local data on historical appreciation rates and economic indicators such as unemployment and wage trends.
The company tracks 379 metropolitan statistical areas — the same ones covered by government housing-price indexes — covering 80 percent of the U.S. population. The Risk Monitor focuses on the top 100 MSAs, which include 65 percent of the population.
The latest Risk Monitor, released Monday, pinpoints the Detroit area as the riskiest in the nation in the next 12 to 18 months, followed by Memphis, Tenn.; Dayton and Akron, Ohio; and Gary, Ind.
“It’s a combination of a lack of robust house price appreciation, and more importantly the health of the economy in that area,” Fleming said of Detroit’s place on the top of the list. “It’s been struggling for a few years now, and the auto industry is having significant impact on Detroit and surrounding areas. The auto industry stretches its wings into Ohio, as well.”
Armed with CoreLogic’s predictions, “Many of our clients will change their business practices in high-risk areas, performing more due diligence or tightening underwriting guidelines, Fleming said. “It adds another layer of understanding.”
Instead of making decisions looking at the past, “Ultimately, we’d really like to get that leading indicator to help us interact with our business processes today.”
CoreLogic claims 90 percent of the top 100 lenders are using the company’s software tools as part of their risk evaluation process, allowing them to flag questionable transactions and speed up the application and funding process for the majority of other loans.
