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If you borrowed to buy your home, chances are TheNumber knows a good deal about you.
The New York-based startup sucks in data from marketing firms, public loan filings, courthouses and dozens of other sources, and sells it to mortgage bond and loan traders. The vivid detail the company turns up — the types of stores borrowers tend to shop at and whether they rent out their homes on Airbnb, for example — may unsettle privacy advocates, but it’s a boon for investors trying to figure out how likely homeowners are to pay their obligations.
“We can do things that were not possible before,” said Hans Thomas, a serial entrepreneur who co-founded the firm in 2015 with Guhan Kandasamy and Ziggy Jonsson. The information the company compiles, which could previously have taken weeks or even months to track down, now takes seconds. Across the world of finance, startups are using big data to try to improve Wall Street’s success with everything from consumer lending to stock trading.
Good data is critical for investors in the $9 trillion mortgage bond market. For subprime securities, prices can vary widely due to the differing quality of loans backing them, and being able to compare bonds quickly can be the difference between finding a bargain and getting stuck with a turkey. The average fund manager can gain 0.40 to 0.70 percentage point of return by using more intelligent data when trading mortgages, at least for home loans that haven’t been bundled into securities, according to John Ardy, chief executive officer of Resitrader, an institutional marketplace for home loans.
But giving so much mortgage information to investors so quickly is raising fresh concerns among consumer-rights watchdogs that borrowers could suffer a loss of privacy, or even discrimination.
“We’re concerned about how this information is shared, and how it can have adverse consequences for individuals without their even realizing it,” said Lee Tien, a senior staff attorney at the Electronic Frontier Foundation, a nonprofit focusing on civil liberties in the digital realm.
Consumers may not understand how much of their information bond investors have access to. And money managers using information they get from TheNumber could face accusations of discriminating against borrowers based on race or religion if it turns out the factors the company looks at tend to single out particular types of people, said Frank Pasquale, a professor at the University of Maryland’s Francis King Carey School of Law. The Consumer Financial Protection Bureau in February asked for comments about the benefits, and risks, of using alternative data.
Kandasamy and Thomas say the company anonymizes some data, and can ensure that different professionals in an investment firm only see information they are legally allowed to see. It requires clients to agree not to abuse data, and it doesn’t give borrower names to mortgage securities traders. It doesn’t collect data on borrowers’ race or religion.
Any privacy questions from borrowers may end up being a problem for TheNumber itself. Fund managers that use TheNumber are typically buying subprime mortgages, many of which have defaulted. Investors and servicers have at least two options for dealing with these loans: foreclosing on the property, or trying to renegotiate the mortgage so the borrower can actually pay. But once a money manager or loan servicer starts changing mortgage terms, it may be subject to fair lending laws, among others. Their data providers, including consumer credit bureaus, often have strict rules about how their information is used, too.
Regulators could conceivably deem TheNumber a consumer credit bureau like TransUnion or Experian Plc, which could be an expensive problem for the company, said Jeff Taft, a partner focusing on bank regulation at law firm Mayer Brown. TheNumber tries to determine how much pride a homeowner probably has in his or her property, based on information it gleans from third parties, such as whether the resident tends to click on online ads from home improvement and gardening stores. It’s not a credit score, but if TheNumber’s customers use it to offer or tweak the terms of loans, a skeptical regulator may decide the company is acting like a credit bureau, Taft said.
Being labeled a credit bureau could be burdensome. Regulators demand these companies give borrowers a way to contest their figures, or at least opt out from sharing that information. Those requirements might make TheNumber’s expenses so high as to limit their competitiveness, Taft said.
TheNumber contractually forbids clients from using the company’s alternative data to make credit decisions, co-founder Thomas said.
These sorts of big-data questions are on the frontier of what is legal in the U.S. when it comes to areas including privacy, lending and securities law, said Michael Osnato, former head of an enforcement unit at the Securities and Exchange Commission that oversaw mortgage bonds trades. There’s nothing illegal about corralling public data, but regulators and market participants haven’t all thought through the implications of so much information being available so quickly, Osnato said.
Credit bureaus are careful to avoid giving too much data to their clients. Experian, for example, tries to make sure investors can’t readily determine borrowers’ identities when it hands out mortgage data, said Michele Raneri, a vice president of analytics and new business development at Experian. She was speaking in general about privacy, and not about TheNumber in particular.
TheNumber also anonymizes data and protects the identity of consumers when appropriate, Kandasamy and Thomas said.
Regulators are generally aware of the potential for privacy violations. When the Securities and Exchange Commission wrote new rules for how much information mortgage securities and related bonds should disclose about individual loans, known as Reg AB II, it ended up requiring less information from issuers than it had originally planned, to protect borrowers’ identities.
Having fast access to so much data “was revolutionary,” said Paul Mangione, a consultant who was previously an investor at Apollo Residential Mortgage. Mangione first saw a demonstration of TheNumber in January. He has since signed on to advise the firm about the mortgage market. “TheNumber gives investors the ability to get away from these manual processes,” he said, like going to county records offices to find documents. Those sorts of manual processes meant that learning about a pool of loans could take an investor weeks, said Brian Tortorella, a mortgage investor at Smith Graham.
Added information about borrowers could provide a needed boost to transparency in the mortgage bond market, where getting information about creditworthiness and prices can be much harder than in other debt markets, such as corporate bonds or Treasuries.
“Investors in every other market get to see what they are buying — but not mortgage bond investors,” said Adam Murphy, founder of Empirasign Strategies LLC, a trading data firm for mortgage bond professionals. “I believe in privacy rights, but investors should be able to drive by the properties if they want.”