Adapting Tech Solutions to Deal With Distressed Mortgages

Many lenders who funded payment-option ARMs and interest-only ARMs are very focused now on what is going to happen with the next wave of ARM adjustments.

Linda Simmons, senior vice president of business at Overture Technologies in Bethesda, Md., says using the company's new re-decisioning process six to 12 months in advance of any ARM adjustment can assist lenders with gathering additional borrower credit information and asset valuation, which actually helps the borrower out before the adjustment occurs.

Overture, a provider of decisioning software for the mortgage industry, has adapted its solutions to deal with distressed mortgages. She says the major impetus that drove Overture to create the re-decisioning process is that the industry got very comfortable using automated decisioning, specifically at Fannie Mae and Freddie Mac, to do underwriting but never truly pushed the automated decisioning any further down the mortgage value chain. For the past year, the company has been closely looking at other places where decisions get made in the mortgage process, either by people or by Excel spreadsheet, in the absence of automated decisioning. They looked closely at what loss mitigation efforts looked like through product pricing, eligibility and automated decisioning.

"Loan servicing is a great opportunity. There are lots and lots of decisions that get made," she said. "Is this the right product for the borrower? Is it the right rate for them? Are they really eligible for this product? It seemed to fit very nicely, using our existing automated decisioning capabilities in a different spot in the whole mortgage process. The components already existed. It seemed intuitive for us to take this approach. Since then, we have developed and delivered a proof of concept that takes data from the servicing system and enriches it in a variety of ways."

Through Overture's re-decisioning, there is much more credit information, better asset information and better understanding about whether the borrower is employed or not, Ms. Simmons adds.

The information is put through a series of rules Overture has written with the client for the proof of concept. The decision engine is the one that drives the rules to determine what of five options would be available in this scenario.

Bill Kelvie, CEO, Overture Technologies, says the re-decisioning process can be automatically performed on thousands of loans in a matter of minutes, permitting a national level of management and control.

"Loan servicers face huge uncertainty. Many of their loans were inadequately underwritten and priced in the first place. Eventually, and the sooner the better, every distressed loan will be examined and a workout path chosen."

In order to manage these troubled loans, decisioning technology is the only viable solution, he says. The decision engine applies rules-based loan modification guidelines.

The first option is a refinance. "We have written rules for FHA Secure and Hope for Homeowners," says Ms. Simmons. FHA Secure is much more likely. The execution is difficult for Hope for Homeowners. Part of the reason, many of the lenders participating in the H4H, want a three-month modification program where they want the borrower to do a trial loan mod before they will put them into the H4H program. Fannie and Freddie also have refinance options for distressed borrowers."

Repayment is another option, where the borrower pays the amount and resumes their mortgage payment. The third option is a loan modification. "We've received the rules from the FDIC and are in the process of developing the rule to be fed into the rule engine. There are multiple loan modification programs," she says.

A fourth option is loss mitigation where principal forgiveness is involved in the effort. The borrower can't repay. The loan-to-value is off from the home value and there has to be some debt forgiveness in order for the borrower to stay in the house.

The fifth option is liquidation, which is basically the deed-in-lieu, short sale and the foreclosure.

"The way the rules interact with the decisioning - it presents a whole array of options and recommends the best fit and also the ones that were not recommended and close calls for those five particular outputs," says Ms. Simmons.

There are also two ways for reaching out to the borrower. One is through a call center and an interview process. The company is also developing a Web-based borrower portal, through its higher education part of the business that would allow borrowers to enter the information themselves on the Internet, in a secure, robust environment.

"An array of options is available to the servicer. They've talked to the borrower, identified they want to stay in the house. All of this is automated. The servicer really doesn't have to do anything to go through these particular analyses. They add the borrower information to this: if they want to stay in house, their reason for default, is it temporary or permanent, informational that is critical to the servicing arena."

Then with the borrower, there is an optimizer piece, which allows the loss mitigation rep and the borrower to work through what the best possible options are. It also includes how many adults and children live in the house. This is a verification for how much cash aside from the servicer's hard and soft expenses there will be tied up to maintain the people in the house. "There is some validation here," she says.

"It allows us to take a couple of different approaches that the industry is tinkering with. In some respects, people look at the debt-to-income ratio and use that as a gauge for what the borrower would be eligible for. From the subprime world, it's more likely to see them calculate these hard and soft expenses. What do they have left over at the end of the month? If they have $250 with six kids, you know they are not going to make this program. It's not going to work for them. The DTI doesn't necessarily tell you that."