DRI Sees Technology Adding Scale to Default Management
While economists are generally optimistic about the pace of economic growth this year, some who follow the housing market still expect to see an increase in mortgage defaults.
Rising interest rates, the proliferation of new loan products, and the seasoning of loans originated in 2003 and 2004 all bode for an increase in defaults, they say. Plus, bankruptcy law reforms might push more troubled consumers over the edge by making it harder for them to shed unsecured debt.
While the jury is still out about where delinquency and default rates are headed, prudent lenders are making sure that their shops are ready to handle an increase in defaults if it should occur.
Duke Olrich, president of DRI Management Systems, says the rise of subprime credit quality mortgage loans has created a virtually constant need for default management services, regardless of the state of the overall economy.
Borrowers with adjustable-rate loans in particular could be vulnerable, he said. The origination of variable-rate products has increased over the past year and that has caught the attention of loan servicers.
"The variable loans, from a portfolio standpoint, could be a bigger problem because the rates are going up and marching past the ability of the borrower to pay them."
To be prepared, Mr. Olrich says lenders need to have a robust management system for handling defaulted loans. That's where companies such as DRI come into play.
Mr. Olrich said new techniques, such as using the Internet to communicate with real estate brokers in the sale of REO, have improved the timeliness of selling property by eliminating the faxing of offers and counteroffers. The Web can speed up the process of listing properties and considering offers once a sales agent submits them to the servicer.
To maximize the benefit, Mr. Olrich said servicers need to make sure they have a review and approval plan that allows them to respond quickly to offers. Too often, offers for the sale of an REO disappear because the servicer took too long to respond, and the buyers became restless and moved on to other homes.
DRI's technology is installed as a client-server environment on a lender's system. The DRI technology relies on a Microsoft SQL server back end powered by a Visual FoxPro front end. With security and accuracy becoming key concerns in the information technology field, Mr. Olrich said lenders like having control over the systems they use.
"They have complete control over the data and how it is distributed as well as who uses it in their company," Mr. Olrich said.
DRI's technology includes modules that help a lender navigate default management, loss mitigation, bankruptcy and REO claims, among other features. Users can choose particular features from the suite or use the whole thing.
"Each client may have unique needs. It is easy for them to turn off and turn on the modules they want to use."
Mr. Olrich said that in part because of regulatory scrutiny of foreclosure practices and a public policy emphasis on homeownership, servicers are being encouraged to find ways to avoid foreclosure whenever possible.
"I think we have had far more interest in the last two years in the loss mitigation side, as well as in the loss mitigation decisioning tools that we have built," he said.
In some cases, if people find themselves in a house where they just can't afford to make the payments, there isn't much that can be done to keep them there, Mr. Olrich said. For borrowers with ARM loans, some could see their monthly payments double from what they were paying in the beginning if interest rates keep rising, he noted. But in many other cases, a workout or repayment plan may bring the loan back into performing status.
As servicers gather for this year's MBA National Mortgage Servicing conference, Mr. Olrich said that the impact of Hurricane Katrina will be hanging over people's heads. Mr. Olrich said the mortgage servicing industry learned a lot about managing loans affected by a disaster in the aftermath of Hurricane Andrew a decade ago.
"I think they understood the disaster much better than they did when Andrew hit Florida," he said.
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