INTRODUCTION

As the value of mortgage backed securities (“MBS”) continues to deteriorate, the sub-prime crisis grows deeper.  Focus has dramatically shifted from securities investing - to managing, mitigating and measuring risk. Determining accurate exposure to future write-downs, reserves and potential losses from these investment vehicles is paramount.  Understanding the nature of the original mortgage documents created to support these securities is critical.   MBS are ultimately only as good as the collateral, the underlying loans.  An efficient, effective and reliable process is needed to assess the risk of non-performance and the existence of fraud.

THE DAYLIGHT APPROACH

Daylight applies a risk-based approach to help investors identify and investigate large numbers of underlying loans with the greatest potential for non-performance or fraud. Our proprietary risk assessment tool scores the relevant risk of each underlying loan and prioritizes the highest-risked loans for review.  We can customize our risk assessment protocols and case management tool to the specific goals of the financial institution.  

To assess the underlying loans, Daylight works with the client to establish risk factors that may indicate non-performance and fraud.  The risk factors are a compilation of publicly available information and specific characteristics of the underlying loans.  Daylight has identified up to 30 risk factors that include the following:

•    Location of the Home
•    Loan Originator
•    FICO Score
•    Type of Loan
•    Loan to Value Ratio

Our risk assessment tool applies established and customized risk factors and then risk-ranks each of the underlying loans.  Based on the risk assessment, Daylight professionals conduct a detailed investigative analysis of the highest ranked individual loans to identify the loan-specific risk factors attributable to non-performance and fraud.  This approach allows Daylight to deliver a detailed analysis of the highest risk underlying loans and to use the results of the analysis as a predictive tool to limit future losses.   Daylight’s risk assessment protocols and case management tool also create lessons learned that financial institutions can proactively incorporate in their future risk assessments of loans and MBS. 
 
Daylight professionals have performed numerous large scale look-back investigations to assess and risk rank hundreds of millions of transactions to identify and make appropriate disclosures of suspicious activity.

 Daylight has over 17,000 square feet of dedicated workspace exclusively for the performance of large scale look-backs and similar labor intensive projects.  Daylight is committed to taking all necessary precautions to secure client confidential data in accordance with statutory, regulatory, and industry standard best practices. 

 Our overall methodology for assisting investors to KYMBS can consist of multiple stages including:

Reactive

•    High Risk Loan Review
•    Evaluation of Loan Risk Factors
•    Data Normalization
•    Reporting on Individual Loans
•    Analysis and Investigation
•    Refinement of Risk Factor Scoring

Proactive

•    Development of Lessons Learned to Analyze Future Loans and MBS
•    Development of Tools to Forecast Future Risk
•    Compilation of Activity to Facilitate Accounting Estimates and Disclosure Requirements

For more information, please visit us:
Daylight Forensic & Advisory LLC
www.daylightforensic.com
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