Expert systems for mortgages

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An expert system for mortgages is a computer program that contains the knowledge and analytical skills of human authorities, related to mortgage banking. Loan departments are interested in expert systems for mortgages because of the growing cost of labor which makes the handling and acceptance of relatively small loans less profitable. They also see in the application of expert systems a possibility for standardized, efficient handling of mortgage loans, and appreciate that for the acceptance of mortgages there are hard and fast rules which do not always exist with other types of loans.

Contents

Since most interest rates for mortgages are controlled by the government, intense competition sees to it that a great deal in terms of business depends on the quality of service offered to clients - who shop around for the loan best suiting their needs. Expert systems for mortgages considers the key factors which enter the profitability equation. For instance, “part and parcel of the quality of a mortgage loans portfolio to the bank is the time which elapses between the first contact with the customer and the bank's offering of a loan. Another key ingredient is the fact that home loans have significant features which are not always exploited through classical DP approaches. The expert system corrects this failure”. [1]

The expert system also capitalizes on regulatory possibilities. In France, the government subsidizes one type of loan which is available only on low-cost properties (the HLM) and to lower income families. Known as "frets Conventionnes", these carry a rate of interest lower than the rate on the ordinary property loan from a bank. The difficulty is that granting them is subject to numerous regulations, concerning both:

To assure that all conditions have been met, every application has to be first processed at branch level and then sent to a central office for checking, before going back to the branch, often with requests for more information from the applicant. This leads to frustrating delays. Expert system for mortgages takes care of these by providing branch employees with tools permitting them to process an application correctly, even if a bank employee does not have an exact knowledge of the screening procedure.

Goals and Objectives

The expert system neither refuses nor grants loans, but it:

The goal is to produce applications which are correct in 80 per cent to 90 per cent of all cases, and transfer responsibility for granting or refusing loans to the branch offices.

The expert system provides the branch with a significant amount of assistance simply by producing correct applications for a loan. In many cases the client had to choose between different types of loans, and it was planned that expert system should enable bank employees to advise clients on the type of loan which best matched their needs. This, too, has been done and as such contributes to the bank employees' training.

The main tasks of expert system for mortgages focused on:

Simple expert systems constitute the first phase of a loan application for mortgage purposes. After a prototype is made, the construct should be presented to expert loan officers who, working together with the knowledge engineer(s) will refine the first model. But if there is no first try which is simple and understandable, there will not be complex real-life solutions afterwards.

Whether simple or sophisticated, an expert system for mortgages should be provided with explanation facilities that show how it reaches its decisions and hence its advice. The confidence of the loan officer in the AI construct will be increased when this is done in a convincing manner.

Application of expert systems for mortgages

Expert systems for mortgages find an application for mortgage loans. For example, Federal National Mortgage Association (FNMA), commonly known as Fannie Mae use the Mavent Expert System. Through the Mavent Compliance Console (MC2), the front-end interface to the Mavent Expert System, Fannie Mae review loans for compliance with its policies on the Truth in Lending Act (TILA), federal and state high-cost lending laws, and the points-and-fees test as outlined in the Fannie Mae Selling and Servicing Guide.[ citation needed ]

Expert systems for mortgages can be used not only in mortgage banking, but also in law. There are some expert system that was developed to assist attorneys and paralegals in the closing process for commercial real estate mortgage loans. "The system identifies the legal requirements for closing the loans by considering the numerous individual features specific to each particular loan. It was felt that an expert system could provide significant benefits to this process, which is extremely complex and involves large amounts of money. To our knowledge, expert systems technology had not previously been applied to this domain. Successful development and implementation of the system resulted in the realization of the anticipated benefits, and a few others as well". [3]

See also

The use of expert systems in law is illustrated by the QuickForm Contracts system. It uses a rule-based methodology to automate the drafting of approximately 60 types of agreements for technology and general business transactions. Users answer a series of term sheet level conceptual questions. The system then uses the data recipe to select interchangeable clauses to create a near-custom agreement. The system cuts the time to draft a first-cut document from several days to about 5 minutes.

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<span class="mw-page-title-main">Fannie Mae</span> Government-backed financial services company

The Federal National Mortgage Association (FNMA), commonly known as Fannie Mae, is a United States government-sponsored enterprise (GSE) and, since 1968, a publicly traded company. Founded in 1938 during the Great Depression as part of the New Deal, the corporation's purpose is to expand the secondary mortgage market by securitizing mortgage loans in the form of mortgage-backed securities (MBS), allowing lenders to reinvest their assets into more lending and in effect increasing the number of lenders in the mortgage market by reducing the reliance on locally based savings and loan associations. Its brother organization is the Federal Home Loan Mortgage Corporation (FHLMC), better known as Freddie Mac.

<span class="mw-page-title-main">Community Reinvestment Act</span> US federal law

The Community Reinvestment Act is a United States federal law designed to encourage commercial banks and savings associations to help meet the needs of borrowers in all segments of their communities, including low- and moderate-income neighborhoods. Congress passed the Act in 1977 to reduce discriminatory credit practices against low-income neighborhoods, a practice known as redlining.

<span class="mw-page-title-main">Freddie Mac</span> American government-sponsored enterprise

The Federal Home Loan Mortgage Corporation (FHLMC), commonly known as Freddie Mac, is an American publicly traded, government-sponsored enterprise (GSE), headquartered in Tysons, Virginia. The FHLMC was created in 1970 to expand the secondary market for mortgages in the US. Along with its sister organization, the Federal National Mortgage Association, Freddie Mac buys mortgages, pools them, and sells them as a mortgage-backed security (MBS) to private investors on the open market. This secondary mortgage market increases the supply of money available for mortgage lending and increases the money available for new home purchases. The name "Freddie Mac" is a variant of the FHLMC initialism of the company's full name that was adopted officially for ease of identification.

<span class="mw-page-title-main">Mortgage-backed security</span> Type of asset-backed security

A mortgage-backed security (MBS) is a type of asset-backed security which is secured by a mortgage or collection of mortgages. The mortgages are aggregated and sold to a group of individuals that securitizes, or packages, the loans together into a security that investors can buy. Bonds securitizing mortgages are usually treated as a separate class, termed residential; another class is commercial, depending on whether the underlying asset is mortgages owned by borrowers or assets for commercial purposes ranging from office space to multi-dwelling buildings.

Bank of America Home Loans is the mortgage unit of Bank of America. It previously existed as an independent company called Countrywide Financial from 1969 to 2008. In 2008, Bank of America purchased the failing Countrywide Financial for $4.1 billion. In 2006, Countrywide financed 20% of all mortgages in the United States, at a value of about 3.5% of the United States GDP, a proportion greater than any other single mortgage lender.

A government-sponsored enterprise (GSE) is a type of financial services corporation created by the United States Congress. Their intended function is to enhance the flow of credit to targeted sectors of the economy, to make those segments of the capital market more efficient and transparent, and to reduce the risk to investors and other suppliers of capital. The desired effect of the GSEs is to enhance the availability and reduce the cost of credit to the targeted borrowing sectors primarily by reducing the risk of capital losses to investors: agriculture, home finance and education. Well known GSEs are the Federal National Mortgage Association, known as Fannie Mae, and the Federal Home Loan Mortgage Corporation, or Freddie Mac.

A mortgage broker acts as an intermediary who brokers mortgage loans on behalf of individuals or businesses. Traditionally, banks and other lending institutions have sold their own products. As markets for mortgages have become more competitive, however, the role of the mortgage broker has become more popular. In many developed mortgage markets today,, mortgage brokers are the largest sellers of mortgage products for lenders. Mortgage brokers exist to find a bank or a direct lender that will be willing to make a specific loan an individual is seeking. Mortgage brokers in Canada are paid by the lender and do not charge fees for good credit applications. In the US, many mortgage brokers are regulated by their state and by the CFPB to assure compliance with banking and finance laws in the jurisdiction of the consumer. The extent of the regulation depends on the jurisdiction.

<span class="mw-page-title-main">Second mortgage</span> Additional loan

Second mortgages, commonly referred to as junior liens, are loans secured by a property in addition to the primary mortgage. Depending on the time at which the second mortgage is originated, the loan can be structured as either a standalone second mortgage or piggyback second mortgage. Whilst a standalone second mortgage is opened subsequent to the primary loan, those with a piggyback loan structure are originated simultaneously with the primary mortgage. With regard to the method in which funds are withdrawn, second mortgages can be arranged as home equity loans or home equity lines of credit. Home equity loans are granted for the full amount at the time of loan origination in contrast to home equity lines of credit which permit the homeowner access to a predetermined amount which is repaid during the repayment period.

Verification of Income and Employment (VOIE) is a process used by banks and mortgage lenders in the United States to review the employment history of a borrower, to determine the borrower's job stability and cross-reference income history with that stated on the Uniform Residential Loan Application. Lenders require complete VOE declaring all positions held for the last two years of employment history.

<span class="mw-page-title-main">HSBC Bank Australia</span> Australian subsidiary of multinational bank

HSBC Bank Australia Limited is the Australian subsidiary of HSBC. The bank offers a wide range of financial services in Australia through a network of 36 branches and offices. These services include retail and commercial banking, financial planning, trade finance, treasury, and financial markets, payments and cash management, and securities custody.

A mortgage bank is a bank that specializes in originating and/or servicing mortgage loans. In the United States, a mortgage bank is a state-licensed banking entity that makes mortgage loans directly to consumers. The difference between a mortgage banker and a mortgage broker is that the mortgage banker funds loans with its own capital.

Loan origination is the process by which a borrower applies for a new loan, and a lender processes that application. Origination generally includes all the steps from taking a loan application up to disbursal of funds. For mortgages, there is a specific mortgage origination process. Loan servicing covers everything after disbursing the funds until the loan is fully paid off. Loan origination is a specialized version of new account opening for financial services organizations. Certain people and organizations specialize in loan origination. Mortgage brokers and other mortgage originator companies serve as a prominent example.

Loan servicing is the process by which a company collects interest, principal, and escrow payments from a borrower. In the United States, the vast majority of mortgages are backed by the government or government-sponsored entities (GSEs) through purchase by Fannie Mae, Freddie Mac, or Ginnie Mae. Because GSEs and private loan investors typically do not service the mortgage loans that they purchase, the bank who sells the mortgage will generally retain the right to service the mortgage pursuant to a master servicing agreement.

Loan officers evaluate, authorize, or recommend approval of loan applications for people and businesses.

<span class="mw-page-title-main">Residential mortgage-backed security</span>

Residential mortgage-backed security (RMBS) are a type of mortgage-backed security backed by residential real estate mortgages.

<span class="mw-page-title-main">Federal takeover of Fannie Mae and Freddie Mac</span> Action by the U.S. Treasury to lessen the subprime mortgage crisis

In September 2008, the Federal Housing Finance Agency (FHFA) announced that it would take over the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation. Both government-sponsored enterprises, which finance home mortgages in the United States by issuing bonds, had become illiquid as the market for those bonds collapsed in the subprime mortgage crisis. The FHFA established conservatorships in which each enterprise's management works under the FHFA's direction to reduce losses and to develop a new operating structure that will allow a return to self-management.

Government policies and the subprime mortgage crisis covers the United States government policies and its impact on the subprime mortgage crisis of 2007-2009. The U.S. subprime mortgage crisis was a set of events and conditions that led to the 2007–2008 financial crisis and subsequent recession. It was characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. Several major financial institutions collapsed in September 2008, with significant disruption in the flow of credit to businesses and consumers and the onset of a severe global recession.

The Mortgage Industry Standards Maintenance Organization(MISMO) is a not-for-profit, wholly owned subsidiary of the Mortgage Bankers Association (MBA) responsible for developing standards for exchanging information and conducting business in the U.S. mortgage finance industry. It has more than 175 member organizations representing a cross-section of the residential and commercial mortgage industries.

<span class="mw-page-title-main">Mortgage industry of the United States</span>

The mortgage industry of the United States is a major financial sector. The federal government created several programs, or government sponsored entities, to foster mortgage lending, construction and encourage home ownership. These programs include the Government National Mortgage Association, the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.

Ellie Mae Inc., originally named Electronic Mortgage Affiliates, is a software company that processes 35% of U.S. mortgage applications. The services are based on a software as a service model (SaaS), and specializes in originating and funding new mortgage loans and facilitating regulatory compliance. The company is headquartered in Pleasanton, California.

References

  1. 1 2 Steinmann, Heinrich; Chorafas, Dimitris N. (1990). Expert systems in banking: a guide for senior managers. New York: New York University Press. pp. 222–225. ISBN   0-8147-1449-8.
  2. ↑ Mishler, Lon; Cole, Robert E. (1995). Consumer and business credit management. Homewood, Ill: Irwin. p. 115. ISBN   0-256-13948-2.
  3. ↑ Clancy, Paul, Gerald Hoenig, and Arnold Schmitt. 1989. An Expert System for Legal Consultation. In Proceedings of the Second Annual Conference on Innovative Applications of Artificial Intelligence, 125 - 135. Menlo Park, Calif.: AAAI Press.
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