Executive Conversation: Justin Vedder on certified loans

Altisource addresses manufacturing risk on the front end with CastleLine Certified Loans


Q: How are the Certified Loan mortgage insurance products from CastleLine and Altisource different than traditional mortgage insurance?

Justin VedderA: First, taking a broader look at insurance products, the biggest difference between traditional mortgage insurance and CastleLine’s Certified Loans (or loans with certified insurance) is what they cover. Simply stated, the CastleLine’s Certified Loan is designed to cover mortgage underwriting defects including compliance errors, appraisal errors and fraud.  Mortgage insurance, on the other hand, typically only covers credit default. The two products can truly act as complements to one another in terms of providing security to lenders and investors. If a loan is certified by CastleLine, an originator has a much higher level of protection. 

Q: What are the benefits of addressing manufacturing risk on the front end?

A: There is a lot of value in looking at the manufacturing risk upfront, particularly because it can significantly decrease the likelihood of future loss. Most investors price credit risk, so the certification process allows the investor community to get back to managing credit risk rather than focusing on manufacturing risk.

Manufacturing risk has evolved greatly over the past decade. The historical view of repurchase demands was driven by default. An investor would wait for a loan to default and then the loan would be investigated to identify whether there were any manufacturing defects. If there were defects noted in the manufacturing of the loan, a repurchase demand would be sent.

Today, the investor community is much more focused on defect-driven repurchase demands. It uses technology and sampling to look at loans earlier and more often in the process to identify loans with higher risk. As a rough estimate, less than 20% of repurchase demands back in 2005 were for performing loans. We estimate that currently about 97% of loans are performing at the time of a repurchase. This shows that the repurchasing is happening earlier in the process. 

Q: What does your loan certification process look like?

A: In order to obtain coverage, each loan goes through CastleLine’s proprietary certification process. The process validates that the key elements of the file such as the income, borrower assets and appraisal are correct and meet investor guidelines. The loan certification process is tailored to the individual type of risk and operational flow of a particular lender or investor, and there are a number of ways in which a lender can receive the certification. 

Q: Selling into the secondary market has slowed down considerably under buyback fears. How can that be turned around?

A: Increased due diligence has no doubt slowed down several aspects of the secondary market. With that said, CastleLine Certified Loans have allowed lenders to limit the duplication of due diligence in the loan sale process. For example, if an investor buys a loan from a lender that is already certified, it can rely on the due diligence process because the loan is backed by insurance. They don’t need to re-perform due diligence, which allows them to buy loans more quickly. If more lenders and investors start adopting this mentality and process, we may see a more efficient loan purchasing process. 

Q: What’s next for Altisource?

A: We see the opportunity to continue to grow and onboard clients with our platform of due diligence and Certified Loan insurance. We also see a growth opportunity in creating an even more valuable loan by leveraging the certification process. 

Additionally, rebuilding the confidence of investors is one of the biggest opportunities for growth. The challenge in the past has been that investors perform due diligence of the lender upfront, but it was difficult to monitor the changing landscape or to know if corners were being cut when volumes fluctuated. We want to be the standard of quality in the industry by creating a consistent and transparent process that is backed by insurance to provide quality assurance in the industry.

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