The HAMP Vs. HAFA Dilemma

Servicers are at A crossroad. The question is how to most effectively invest in technology to meet the needs of the growing number of government programs. The dilemma, according to Craig Focardi, senior research director, consumer lending, at TowerGroup is whether they should keep investing more in loan modifications or put more people and technology resources towards the newer Home Affordable Foreclosure Alternatives program and short sales.

"Institutions need to address both," he says. "HAMP is not dead." Loan modifications are still a viable alternative but since permanent modifications can stay on the books for as long as five years they require monitoring.

The top four players handle most mods, about 20 to 30 other servicers also are dealing with them and that means many technology vendors are chasing few potential clients, particularly given that automation may not make as much sense for those that don't have larger players' economies scale. But outsourcing might make sense for smaller players some of which have been outsourcing. Those that have "may continue to outsource some of the work and not invest so much in new technology," he said, noting that this would allow them to invest instead in HAFA-related changes to in-house systems. "If modifications can be managed through outsourcing over the next year, allowing companies to maintain the status quo without the need for increased IT investment. Servicers could instead allocate new IT resources toward foreclosure and short sale automation," Focardi said.

As to the extent HAFA could be outsourced, Focardi said servicers should keep in mind that, like the HAMP, HAFA will require loan program eligibility and reporting and tracking even of work that is outsourced. HAFA is newer and may allow more hands-on in-house decisioning. Draft HAFA requirements talked about last fall were not released until this year, so HAFA technology development is generally at the systems programming and codification stage, he said. "A lot of vendors saw this coming and saw it as a revenue opportunity for 2010 and beyond."

Decisions on what to outsource and what technology to invest in should be based on the cost of the net technology, the estimated processing costs and the return on investment over a three-year period, said Focardi. Other loss mitigation automation trends include collection systems, which he said were underinvested before the recent downturn. "Even after delinquencies hit it was in a bit of a reactive mode." Technology found helpful included business process management services such as document imaging and workflow tools offered by Pegasystems, or text messaging/SMS and e-mail outreach to borrowers by companies like SoundBite and Varolii, or decisioning engines from Overture, FICO and Dexma have helped. Since mods-as Focardi noted-are like "redecisions" or "reunderwritings" of loans in many ways, there has been a shift toward adapting underwriting and decisioning technology from the production side in the collections area.