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Weekly UpdatesSerious delinquencies are up, Uncle Sam is writing loan-modification rules, the economy is toppling the financial foundations of your prime borrowers and credit counselors over at HOPE NOW are sending a record number of troubled borrowers your way. * What's a servicer to do? The smartest ones are blending techniques and technology from the secondary market, origination and subprime servicing arenas in ways that not only attack the current default crisis but could forever change the way loans are serviced. * "When you look at how many loan modifications are getting done versus what HOPE NOW is doing and what the Office of Thrift Supervision [OTS] is reporting, it's clear loans are stacking up in servicers' offices," says Linda Simmons, general manager of mortgage finance solutions for Bethesda, Maryland-based Overture Technologies. "It's like a cow moving through a snake." * Making matters worse, the rules governing loss mitigation have been changing as fast as the guidelines for originating loans--including seven loan-modification programs dictated by the federal government in the past year alone, she says.
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Each program change forces servicers a little further out of the transaction business and a little further into the decision-making business that, up until now, was the province of secondary marketing, originations and marketing.
"The large servicing platforms were never built to do originations," says Jason Marx, vice president and general manager of Minneapolis-based Wolters Kluwer Financial Services' mortgage business unit. "They were built to collect and record payments and chase those that didn't make payments. There are solutions being integrated back into those platforms that allow servicers to triage faster, and monitor and measure the success of those programs."
If there's a silver lining to the credit-crisis cloud, it's the way that current challenges have given rise to new technology, new applications of existing technology, and breakthrough ideas for improving the process and procedures to get cash flowing again from delinquent borrowers.
Decisioning power
In the not-too-distant past, servicers and originators alike did their jobs by reading the guidelines, looking at the borrower's numbers and figuring out where the borrower belonged. When the capital markets exponentially expanded the variety of products offered in the market, originators began using product-pricing and eligibility decisioning engines to match borrowers with loan products.
That same technology is now transforming the loss-mitigation process. Servicing operations using decisioning engines say they reduce costs and speed the loss-mitigation process, and allow servicers to quickly and consistently:
* balance competing demands and desires of borrowers, investors, regulators and their own company;
* apply the rules to all borrowers;
* track and record the actions taken during the mitigation process;
* predict a borrower's willingness and capacity to repay;
* calculate the net present value (NPV) of collateral; and
* match borrowers to the mitigation programs for which they're qualified.
There's a bit of irony in applying originations technology to loss-mitigation challenges, and this is not lost on people in the industry.
"The tools that were applied to get the industry into these situations were automated underwriting platforms," says Dennis Stowe, chief executive officer of Residential Credit Solutions (RCS), Fort Worth, Texas.
As Stowe sees it, servicers are now doing to modification requests what should have been done when today's troubled loans were first originated--underwriting based on verified income, credit and collateral data.
"It was the fact that people could waive the rules and underwriting [stipulations] that got us into trouble, so it's critical that servicers have a quality-control process in place," Stowe says.
And while servicers are not underwriters, RCS has used Overture's Mozart for Special Servicing to set up the equivalent of an origination operation.
"We wanted something that would consistently apply all the rules, whether it's our program, the Home Affordable Modification Program [HAMP] or the requirements of a pooling and servicing agreement on a securitized deal, and apply the same techniques we used running our centralized origination program in a prior life--a quick analysis based upon current income, credit and collateral information, a decisioning run sheet that's almost a stip sheet [a list of the stipulations that must be met for a loan to be funded]," Stowe says. "We want to give the borrower an answer today and follow through to close the deal," he says.
Jacksonville, Florida-based Lender Processing Services Inc.'s (LPS's) Opti-Mod modification tool runs a calculation that maximizes net present value to the investor, taking into account a user-defined re-default rate and a payment the borrower can afford. It also can respond quickly when regulators and investors roll out new programs, says Mark Katibah, senior vice president for LPS' Strategic Consulting Services in Jacksonville.
Along the way, servicers must fulfill their own needs, he adds. "They can choose re-default rates, payment-to-income ratios, cost-of-funds ... there's a long list of items the model reflects, and we work with servicers to define what will work," Katibah says.
Once the servicer chooses rules, they're consistently applied. That's important because as the rules for modifications grow ever more complex, it can be challenging to consistently apply them.
Take, for example, calculating income. Borrowers have bonuses and overtime, as well as bi-weekly, semi-monthly and weekly pay periods. Using decisioning rules to calculate income results in every borrower's income being correctly and consistently estimated, Stowe says.
As a veteran of the Oil Patch crisis of the late 1980s and Resolution Trust Corporation (RTC) era, Stowe knows consistency in applying the rules will come in handy in the future. "Someone is going to ask you six months from now why you did what you did," he predicts. "Why did you go to this interest rate or that program, and why didn't you modify this one? You've got to keep a record of your decisions, and at the end of the day that's got to be available through enterprise reporting."
Automation also brings with it speed of execution. Like their counterparts on the origination side who sought instant credit decisions, servicers using decisioning say increased speed equals a higher "closing" ratio on modifications.
How fast is RCS' process? RCS boarded a financial institution portfolio of 1,350 loans in March, including 1,053 loans that were 60 days delinquent. The prior servicer had no recent contact with 367 of the borrowers. Within seven weeks, RCS had contacted 86 percent of the borrowers and completed 529 loss-mitigation transactions, Stowe says.
MI in the game
Part of the reason behind RCS' speed is having business rules that cover all parties in the transaction, including mortgage insurers. Camillo Melchiorre, senior vice president of loss management at Radian Guaranty Inc., Philadelphia, says including mortgage insurance (MI) business rules in loss-mitigation decisioning engines is a business imperative.
"Loss mit is changing forever," he says. "You've got to have point-of-sale software to change the output of that first call so someone is pre-qualified for the right program. It may halve my claim to buy down that LTV [loan-to-value ratio] to qualify for a government program, but if you can't calculate that, you're going to hit a pothole."
PMI Mortgage Insurance Company, Walnut Creek, California, is going beyond just having its rules embedded and is now embedding PMI staffers in its largest servicers' shops.
"The premise is that the more overwhelmed servicers are in terms of dealing with volume, the better off we are to make sure our loans are working through the process and borrowers who have PMI loans are getting what they need," says John Jelavich, PMI's vice president for homeownership preservation initiatives.
While PMI's 11 on-site consultants provide recommendations to management and share best practices, they primarily focus on loan-level actions. They generate new files, hand them over to the servicer and follow up on outstanding documentation.
"They have full authority to make [loss-mitigation] decisions, and it really does streamline the process," Jelavich says. "We can be more efficient working in your facility with your team than we can be working in Walnut Creek on our own."
PMI enhances its consultants' efforts with outbound letters, calling campaigns and invitations to borrowers to attend HOPE NOW forums. The borrowers who come in via those offers are handed off to the on-site consultant, which has improved loan workout rates among the borrowers those efforts generate, he adds.
The embedding strategy has paid off for PMI. Payment plans, loan modifications and claim advances all increased by 200 percent in the first quarter of 2009 as compared with the first quarter of 2008, Jelavich says. "The workout volume driven by PMI's on-site consultants and other supplemental outreach initiatives continues on a very solid growth trajectory," he adds.
Asking different questions
At the same time that special servicers are marketing their prowess with troubled borrowers, large, well-known servicing operations, such as GMAC's Residential Capital LLC, (ResCap) Minneapolis, are creating proprietary models of their own.
ResCap's model incorporates data about the borrowers' reasons for default and their attachment to the home: Do their children go to school in the area? Do they have relatives in the area? How stable is their employment?
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