REO Scoring Provides Benchmark for Default Industry

Until now, the quality of services rendered by mortgage technology vendors and bank owned foreclosure management quality has been rated empirically. That reality may change.

Two mortgage market veterans have teamed up to provide a standardized scoring system for vendors and REO managers. In their view, it is about time. Servicers pressured to deal with hundreds of thousands of foreclosed properties and unavoidable capacity issues could benefit from a more consistent approach to REO management quality control.

Such scoring systems are not a novelty, but are mostly limited to separate systems and widely different, company-defined criteria.

This new type of scoring is a necessity driven by the multitude of systems and service providers now available and still flooding the mortgage market, said Rebecca Walzak, president of RJB Walzak Consulting Inc., at the SourceMedia Best Practices in Short Sales and REO conference in San Diego last week.

The concept is simple, she said. It’s about “best quality management practices,” that determine what process should be implemented to achieve a certain outcome. Then inquire whether the process was honored by creating a monitoring program that tests whether the process is followed, determine the success ratio, and follow up with a regression analysis to resolve which of the things that went wrong in the process impacted the outcome.

In the case of REOs, she says, “You want to get maximum return on the asset within the minimum days in inventory.”

It can be done by determining which steps of the process are more important to reaching that goal, assess those steps and then develop the score.

Steps may include asking questions: Did the field inspectors do all the inspections on time? Did they do so while following all the necessary procedures? Did they use an appraisal that was credible? Is the appraisal value accurate or in-line with the area values? Were all needed repairs done? Were they done correctly? Were they done within the approved cost limits?

The score runs from 0-100. At above 85 the score should be considered excellent, and anything at or below 35 bad. “Under 35 scores show that the servicer has a real problem in his hands, ” says Randall Clark, project director of Information Assurance Professionals, who has been working with Walzak on the scoring system.

Walzak and Clark have created an overall score system for the asset manager, as well as separate score models for property preservation vendors, real estate agents and brokers and another for the overall property that’s based on the disposition process and its impact on the property value.

The vendor score measures return on investment. It evaluates vendors’ compliance to the contracts they have signed with servicers, or whether they doing actually performing all the services they are supposed to perform.

“It’s two different scores measuring two different things that combined will tell you what the vendor performance is and what kind of return they will have on the asset,” Clark said.

As to how many score points are attached to the specific processes monitored by the scoring system, or “the black box,” Walzak told this publication it changes or is adapted to the environment in review and also is based on self-explanatory criteria.

Such scoring can be used to measure how a firm is performing its foreclosure or REO disposition duties and can also be adopted for generic scoring models based on rules and risk factors. For example, it can be used to determine why people are not getting to work on time.

This scoring system is new to the market and only time will tell if and when it will take off. But it appears to be the right timing. “We are seeing a lot of interest from banks and government entities,” Clark says.

Had this system been in place in 2006 when the mortgage crisis began, adds Walzak, it could have prevented a lot of distress.

If lenders are able to score a servicer’s default management practices, they can track performance or change their servicer and/or providers when necessary. It can be used as a competitive advantage tool, because the score is standardized and uses the very same rating criteria not subjective evaluations. “In God I trust, but let data do the rest,” Walzak says.

The same competitive advantage may apply to appraisers and appraisals. For instance, if 7 times out of 10 an appraiser has not used the same procedures in valuations, “It means you have an appraiser who doesn’t know what he’s doing or is deliberately adjusting these home values,” Walzak says, adding that information is important to know. On appraisals, a lender or servicer can compare price variation in individual valuations to local or national averages. If the price variation is too high, “you can tell there is something wrong there,” Walzak says, because the score captures all these variations and inaccuracies.

“Everybody is looking at those appraisals now, but to put the whole picture together and score it along the way to measure vendor against vendor, once that appraiser will cause the vendor score to go down, vendors will look for a better appraiser,” says Clark. “It gets going that vendor competition to improve the process.”