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Piecing Together a Pre-Foreclosure Puzzle

The mortgage industry commonly thinks of fraud on the origination side without noticing how often it is taking place in pre-foreclosure activity. As with origination, there are many pieces on the servicing side that serve up red flags to fraudulent activities. Without understanding these pieces and how they tie together, servicers will not be able to monitor suspicious activity as a whole and fraud can go undetected.

The status quo can be hazardous to servicers’ health; what was once viewed as a safe approach to managing distressed assets is simply no longer as safe. To the contrary, old methods are often dangerously inefficient and can have severe impacts on the bottom line for banks and servicers, as well as to their relationships with investors and clients.

Technology can identify separate pieces in the pre-foreclosure process and determine many pitfalls that exist. Like a jigsaw puzzle, each piece is integral to finishing the puzzle and making it whole. A good default management system can take those pieces and bring them together efficiently to ensure sound data prior to any foreclosure activity.

When working through loss mitigation, servicers require valid borrower information, valuations, title reports and all the facts regarding other property liens. Without these essential pieces of information in place and accurate, problem situations face little hope of improvement and threaten the bottom line.

One aspect of fraud is in understating income. A 4506-T interface to the Internal Revenue Service will provide actual copies of tax returns to ensure that a borrower is able to make payments. Larger lenders will use a 4506-T form to collect copies of tax returns of self-employed borrowers for the past two years on the origination side.

However, it is paramount on the servicing side for all borrowers. If a borrower can make their workout payments, there is an opportunity to preserve the home rather than having to move it into foreclosure. Other opportunities exist as well, including selling the home or a possible short sale.

A social security number verification interface, also commonly used on the origination side, will provide a borrower’s true identity to ensure that the true borrower is living in the home. A false borrower in the home adds new complications to matching the name on the title with the actual owner of the home. An SSN interface can also weed out a fraudster who is trying to sell the home without the real borrower’s knowledge.

Understanding the borrower’s true intent is crucial for a servicer. A credit report, delivered on demand in under 60 seconds, can verify liens and debts the borrower has incurred. Imagine if you will a servicer negotiating on a loan modification only to find out that the borrower has just applied for a loan on a nearby house with a spouse as the primary borrower.

Apparently, the borrower has no intention of going through with a loan modification and instead might be planning to extend their “free stay” in the home. Skip tracing, locating a borrower that does not want to be found, is another efficient automated tool to find the borrowers looking to “skip out” on their mortgage payments.

The updated credit report might show the borrower, presumably unable to pay their mortgage, just bought two new cars and moved further into debt. Or, the borrower is able to ramp up credit card bills in lieu of paying the mortgage. This data ties together with the SSN interface and it enhances servicer negotiations to keep the borrower from foreclosure.

Proper valuations can determine whether a home can be sold or not, whether borrowers are underwater on their home loans, and even if the home should go to foreclosure. Real-time automated valuation models, broker price opinions and appraisals all provide these valuations. The valuations and other services return back not only as a PDF, but the data returns in an XML format, placing it in tables in the database. That makes it possible to use the data in rules and analysis. An automated reconciled market value process can quickly assist in determining the right value and if fraud is a consideration.

Automated RMVs compare two or more residential property valuations with public and private information to assist in reconciling different values.  A Multiple Listing Service determines if the property is already listed and a professional real estate analyst renders a value on the reconciliation. Some systems in certain areas can provide MLS data for its users.

Determining a valid borrower and valuation will clear a strategy moving forward, but nothing can happen without title reports and knowing if any liens exist on the property. A Lien Watch Service can identify other lenders that may hold a mortgage on the property. Automated bankruptcy notices will also tell in a quick and efficient manner if the borrower has a bankruptcy on the books.

Granted, it would appear that with all these steps—discovering a borrower’s true identity, finding an accurate valuation and discovering if any liens exist on the property—increase costs and time for servicers inundated with defaulted mortgages.  Technology can help.

A good default management system brings the process together and makes it more efficient by creating a workflow to ensure that all prescribed steps are taken, and a rules engine allows each client to add its own rules. For example, if an appraisal changes by a certain amount, the system can stop right there to ensure that the appraisal receives another review.

We have seen default management systems provide a dramatic increase in productivity with their automated efficiency; many more files are now handled per each full-time employee because of time saved.  Innovations in architecture and design have brought the industry highly scalable and configurable systems to meet virtually any particular servicer’s needs and business model. The results are maximum in-house control of data, reports and workflows across all departments, all in a secure and transparent environment.

Each piece to the puzzle fits neatly into place and, if it does not, rules review that piece to make sure it is part of the same puzzle. Once this jigsaw puzzle integrates into a whole picture—hopefully an uncomplicated and successful loss mitigation portrait -- servicers gain focus on a clear strategy moving forward.

Fred Melgaard is executive vice president and chief operating officer of DRI Management Systems, and has 20 years of experience in all aspects of loan servicing, default management, loss mitigation and REO management.  He can be reached at Fred.Melgaard@DRIdefault.com.