Open Source Software for Mortgage Data Analysis

While open source has been around for decades, using open source software for mortgage data analysis is a recent trend. Financial institutions have traditionally been slow to adopt the latest data and technology innovations due to the strict regulatory and risk-averse nature of the industry, and open source has been no exception. As open source becomes more mainstream, however, many of our clients have come to us with questions regarding its viability within the mortgage industry.

The short answer is simple: open source has a lot of potential for the financial services and mortgage industries, particularly for data modeling and data analysis. Within our own organization, we frequently use open source data modeling tools for our proprietary models as well as models built for clients. While a degree of risk is inherent, prudent steps can be taken to mitigate them and profit from the many worthwhile benefits of open source.

Open source has a lot of potential for the mortgage industry, particularly for data modeling & analysis @RiskSpan (Click to Tweet)

To address the common concerns that arise with open source, we’ll be publishing a series of blog posts aimed at alleviating these concerns and providing guidelines for utilizing open source software for data analysis within your organization. Some of the questions we’ll address include:

  • Can open source programming languages be applied to mortgage data modeling and data analysis?
  • What risks does open source expose me to and what can I do to mitigate them?
  • What are the pitfalls of open source and do the benefits outweigh them?
  • How does using open source software for mortgage data analysis affect the control and governance of my models?
  • What factors do I need to consider when deciding whether to use open source at my institution?

Throughout the series, we’ll also include examples of how RiskSpan has used open source software for mortgage data analysis, why we chose to use it, and what factors were considered. Before we dive in on the considerations for open source, we thought it would be helpful to offer an introduction to open source and provide some context around its birth and development within the financial industry.


What Is Open Source Software?

Software has conventionally been considered open source when the original code is made publicly available so that anyone can edit, enhance, or modify it freely. This original concept has recently been expanded to incorporate a larger movement built on values of collaboration, transparency, and community.

Open Source Software Vs Proprietary Software

Proprietary software refers to applications for which the source code is only accessible to those who created it. Thus, only the original author(s) has control over any updates or modifications. Outside players are barred from even viewing the code to protect the owners from copying and theft. To use proprietary software, users agree to a licensing agreement and typically pay a fee. The agreement legally binds the user to the owners’ terms and prevents the user from any actions the owners have not expressly permitted.

Open source software, on the other hand, gives any user free rein to view, copy, or modify it. The idea is to foster a community built on collaboration, allowing users to learn from each other and build on each other’s work. Like with proprietary software, open source users must still agree to a licensing agreement, but the terms are very differ significantly from those of a proprietary license. 1

History of Open Source Software

The idea of open source software first developed in the 1950s, when much of software development was done by computer scientists in higher education. In line with the value of sharing knowledge among academics, source code was openly accessible. By the 1960s, however, as the cost of software development increased, hardware companies were charging additional fees for software that used to be bundled with their products.

Change came again in the 1980s. At this point, it was clear that technology and software were important factors of the growing business economy. Technology leaders were frustrated with the increasing costs of software. In 1984, Richard Stallman launched the GNU Project with the purpose of creating a complete computer operating system with no limitations on the use of its source code. In 1991, the operating system now referred to as Linux was released.

The final tipping point came in 1997, when Eric Raymond published his book, The Cathedral and the Bazaar, in which he articulated the underlying principles behind open source software. His book was a driving factor in Netscape’s decision to release its source code to the public, inspired by the idea that allowing more people to find and fix bugs will improve the system for everyone. Following Netscape’s release, the term “open source software” was introduced in 1998.

In the data-driven economy of the past two decades, open source has played an ever-increasing role. The field of software development has evolved to embrace the values of open source. Open source has made it not only possible but easy for anyone to access and manipulate source code, improving our ability to create and share valuable software. 2

Adoption of Open Source Software in Business

The growing relevance of open source software has also changed the way large organizations approach their software solutions. While open source software was at one point rare in an enterprise’s system, it’s now the norm. A survey conducted by Black Duck Software revealed that fewer than 3% of companies don’t rely on open source at all. Even the most conservative organizations are hopping on board the open source trend. 3 Even the most conservative organizations are hopping on board the open source trend.

In a blog post from June 2016, TechCrunch writes:

“Open software has already rooted itself deep within today’s Fortune 500, with many contributing back to the projects they adopt. We’re not just talking stalwarts like Google and Facebook; big companies like Walmart, GE, Merck, Goldman Sachs — even the federal government — are fleeing the safety of established tech vendors for the promises of greater control and capability with open software. These are real customers with real budgets demanding a new model of software.” 4

The expected benefits of open source software are alluring all types of institutions, from small businesses, to technology giants, to governments. This shift away from proprietary software in favor of open source is streamlining business operations. As more companies make the switch, those who don’t will fall behind the times and likely be at a serious competitive disadvantage.

Open Source Software for Mortgage Data Analysis

Open source software is slowly finding its way into the financial services industry as well. We’ve observed that smaller entities that don’t have the budgets to buy expensive proprietary software have been turning to open source as a viable substitute. Smaller companies are either building software in house or turning to companies like RiskSpan to achieve a cost-effective solution. On the other hand, bigger companies with the resources to spare are also dabbling in open source. These companies have the technical expertise in house and give their skilled workers the freedom to experiment with open source software.

Within our own work, we see tremendous potential for open source software for mortgage data analysis. Open source data modeling tools like Python, R, and Julia are useful for analyzing mortgage loan and securitization data and identifying historical trends. We’ve used R to build models for our clients and we’re not the only ones: several of our clients are now building their DFAST challenger models using R.

Open source has grown enough in the past few years that more and more financial institutions will make the switch. While the risks associated with open source software will continue to give some organizations pause, the benefits of open source will soon outweigh those concerns. It seems open source is a trend that is here to stay, and luckily, it is a trend ripe with opportunity.