Would You Choose a Lawyer or a Software?
The mortgage marketplace, especially the servicing arena, is being bombarded with new default management options that include new legislation, counseling, data analytics systems, technology and other tools designed to ease the crisis. And talking about the crisis, related issues within the servicing space are subject to debate and differing opinions. Their pros and cons reflect how servicing experts see the future of their industry.
In this issue we inquire whether companies that fully automate loan modifications actually have the potential to succeed in their efforts or will they fail to help homeowners avoid foreclosure. The unprecedented demand for loan modifications or audits to resolve financial difficulties has introduced the market to issues of scale. Technology has proven to be the answer to processing high volumes, even regulatory compliance. Some insiders worry that is a problem, especially when it comes to auditing loans. If auditors use the same software used by mortgage companies and banks to comply with the law - they cannot find non-compliance violations only trained attorneys can.
Since most mortgages have problems related to fraud, lawyers, not software, should handle mortgage fraud analytics and prevention.
Is it a good idea or a bad idea, and why?
Pro-Con: While servicers certainly face significant challenges in today's economic environment, not the least of which is how to use their limited staff resources to address the workout needs of their customers, relying solely on technology solutions to increase penetration of their portfolio is a mistake for several reasons.
First, recent studies suggest that most mortgage borrowers do not consider their servicer as a business partner to whom they can turn for help during desperate financial conditions - rather they are considered little more than a post office box to which payments are remitted. Making those that do call for assistance turn to borrower facing websites, offshore call centers with their language and culture differences, or auto attendant options on an IVR, only reinforce that negative opinion.
Second, the experience of our staff in working loans for several lenders and different loan products suggests that having a "real person" on the phone who isn't focused on collection but rather on working with the borrower in an empathetic but structured dialogue to find the underlying reason for the hardship and a solution to it that benefits both parties, works much better at establishing that missing rapport and results in a higher percentage of successful workouts.
I would also take issue with the assertion that most mortgages in trouble today are a result of fraud. While there certainly were a significant number of mortgage origination issues (including at times fraud by the borrowers in inflating their income), there is no denying that general economic conditions, decreases in home value, and a phenomenal increase in the average consumer debt outstanding per consumer, account for the overwhelming number of delinquent mortgage accounts today. For those reasons, technological solutions alone fail to take into account such "human" factors as the positive impact of consumer debt counseling, job training, proactive budgeting and general education on the responsibilities of homeownership.
When, as in recent years, this generation adopts a view that homeownership is a right rather than a privilege and that one's house is an investment rather than a home for the family, the ultimate success of large-scale modification initiatives must include these human factors and can't be solved by a mathematical formula applied universally against a population of statistically similar debt instruments.
Pro-Con: Though it is often very difficult to do in an economic environment such as this, servicers need to try to block out all the noise, and return to fundamentals of lending. The fundamentals, however, should not be implemented in the same way they were when these servicers learned these fundamentals. Technology must be used extensively to execute on these fundamentals in order for the mortgage industry to be able to tackle the problem. There is not one silver bullet. The key is in finding a suite of technology solutions that work together to apply the fundamentals. We now have some superb technology to help us apply these fundamentals better. Let's use it.
Where the manual intervention is most important is in making sure your technology providers can work together to implement your total solution. Your suite should include the following:
1. Predictive analytics to predetermine potential outcome of a workout solution, so that the servicer is effectively prioritizing its loss-mitigation efforts. These predictive tools are only as strong as their data sources and their historical predictions and they are definitely not all the same.
2. An automated underwriting tool, as these loans are essentially being re-underwritten. The suite should be able to compare data points to the same data points from origination. The problem here is that the origination data is often so difficult to find, especially in electronic format.
3. A verification tool to determine if the borrowers are telling the truth about their identity, income and their employment. Otherwise we are just providing NINJA modifications and we are just perpetuating the problem.
4. The software should have the ability to flag problem loans for manual underwriting.