Blogger: Lyn Robison
My colleagues and I in Burton Group's Data Management Strategies service have long suspected that data management ineptitude has been a significant contributor to this economic recession that we are all enduring. Well, I have found the smoking gun.
An article published in February 1, 2008 issue of the business journal Mortgage Banking, illuminates how the data silo problem contributed to the subprime mortgage crises, whose ripple effects resulted in the current economic recession.
The article, written by the research director of a leading research and advisory firm that focuses on the global financial services industry, states: “The problems of inconsistent data names, definitions, structure, cleanliness, usability, transfer and governance are well known in the mortgage industry. We subsist on a steady diet of missing, incomplete and inaccurate data elements for loan origination, loan servicing, portfolio management and securitization processes.
“Dirty data persist despite the proliferation of automated computer systems for core lending processes and subprocesses. Similar to a ‘water-bucket brigade,’ where water is lost as water buckets pass from hand to hand, duplicative legacy systems, the lack of one database of record and less-than-seamless integration between lending subsystems result in lost, inaccurate and manually re-entered data. This results in slow, expensive loan processing; weak underwriting decisions; inaccurate loan pricing; excessive quality-control costs; incorrect portfolio management; loan buybacks; and other costs to lenders and mortgage investors.
“Poor data governance is a contributing cause to the current mortgage liquidity crisis in the U.S. nonconforming loan market. During the summer of 2007, subprime mortgage funding liquidity disappeared in part because subprime lenders and mortgage investors lacked the data to accurately reassess and reprice credit, collateral and prepayment risks. Many lenders that could not internally fund or sell their loans went bankrupt.
“Clearly, the unexpectedly high level of defaults is a primary cause, but subprime mortgage defaults are always very high. Bad, missing and inaccessible data exacerbated a difficult situation. Many nonconforming mortgage investors lack accurate data to support updated models and forecast assumptions to reprice existing credit and prepayment risks. Until this is rectified, subprime investors will remain on the sidelines or, in the case of jumbo mortgages, will continue to overprice new jumbo loans until they have better data with which to estimate risk and profit.”
See “Data quality: the cost of dirty data in the secondary market.” AllBusiness.com. 1 Feb 2008. Accessed online 24 April 2009. http://www.allbusiness.com/banking-finance/banking-lending-credit-services/8886090-1.html.