The REO market remains hot, so are business process management solutions that enable servicers to gain control of processes and increase efficiencies.
The biggest challenges facing loan servicers are the increased documentation and internal control procedures that heightened bank-owned real estate inventory requires. Historically, servicers didn’t need specialized technology because market dynamics were different.
As the number of delinquencies continued to rise during the past few years, servicers started to require more defined REO inventory processes and additional resources to manage the increased documentation and activity generated by foreclosure filings and accelerated shadow inventory.
Higher levels of demand appropriate technology, processes and resources. Without it, the result is a backlash of customer dissatisfaction and increased financial risk.
Along with reputational risk, holding onto foreclosed homes reduces profitability. Banks and mortgage lenders often need to make investments in REO property and the longer they hold on to unsold housing, the more time they are not making money on it. Additionally, the cost of asset servicing increases with heightened documentation requirements.
As more servicers struggle with a growing number of delinquencies and managing the time consuming and expensive foreclosure process,
The Pitfalls of Too Much Property
Foreclosure is not the desired state for lenders or borrowers because there are no winners. Homeowners are displaced from their home and often scared, ashamed and overwhelmed by the process. Banks and mortgage lenders have to coordinate a flood of paper from foreclosure filings, take possession of homeowner property, secure the residence, perform necessary repairs, and orchestrate the marketing and sale of the property.
The Home Affordable Foreclosure Alternatives program was introduced to thwart foreclosure and offer homeowners, mortgage servicers and investors an incentive for completing a short sale or deed-in-lieu of foreclosure. By taking advantage of the program, homeowners can gracefully leave their home to transition to more affordable housing and alleviate the mortgage debt they owe. However, based on rising rates of home foreclosures, the HAFA foreclosure prevention program was not altogether successful.
Loans not eligible for a modification proceed to foreclosure, which can be both time-consuming and costly for servicers. Owners who have not paid their mortgage might have many more months to stay in their homes before they are forced out. Once a loan is foreclosed on, the REO group needs to step in and market, manage and sell the property as quickly as possible—and get the best price that is available in the current market. However, the need for a rapid sale usually results in a reduction of the sale price.
One reason banks look to move REO property quickly is that it becomes more expensive over time. Similar to other property owners, the bank is liable for paying property taxes, and covering insurance costs. As foreclosure inventories grow, further downward pressure on prices is likely increasing the banks’ losses on their REO. And, the longer a bank holds onto a property, that asset is not being used to its full monetary potential because it immobilizes funds for further investment. Other risks of retaining property long term include squatters settling in the home, damage from vandalism or the neighborhood becoming blighted, affecting the resale value of the property. Once the property is sold the bank must pay real estate agent fees, seller closing costs and often concessions for the buyer.
For many servicers, they need to staff for both the loss-mitigation process as well as the asset management of the REO group. The process of taking ownership and managing the property through sale is complex and complete with an inordinate amount of documentation. Foreclosure requires resources to manage the process and associated documentation for activities such as evicting borrowers, securing the property, contracting with a real estate agent, repairing the home for resale, property inspections and other associated milestones.
For example, in New Jersey, the foreclosure process begins with the bank filing a lawsuit or complaint against the homeowner who has fallen behind in their payments. If a homeowner cannot make a payment within a defined period of time, the court advertises a sale of the home. The bank needs to coordinate various types of documentation, such as notifying the homeowner within 10 days before the scheduled sale of their home, to satisfy such process requirements before foreclosures can proceed legally.
These time constraints and regulations require servicers to track their progress, have visibility into what has been done as well as what needs to be completed. Without visibility into the process, oversight can result in elongated marketing time and increased costs.
As more servicers take ownership of a greater number of properties, they need both governance and defined processes to mitigate the financial risks of increased inventory. By having technology and processes in place to manage increased documentation, servicers can reduce the ramifications of the foreclosure epidemic and successfully service REO properties.
Are You Leveraging HAFA?
In cases where HAFA is a viable option, short sales require several different types of documentation and coordination between a number of parties such as the homeowner, buyer, a real estate broker, mortgage insurance companies and other lenders to make this alternative successful. If supporting documentation is not provided to the lender in a timely manner, they have no obligation to approve a short sale. For servicers, this high volume of documentation and demand for greater levels of customer service has contributed to inefficient processes resulting in delays, penalties, customer service issues and home foreclosures.
However, it’s not just customers demanding servicers improve their processes. The Treasury Department recently announced changes to the HAFA program. While they have reduced some of the requirements and made the qualification for HAFA easier for borrowers, the Treasury will be requiring servicers to provide borrowers with an answer or agreement to their short sale request within 30 days. Having an efficient document tracking and workflow process is critical to being able to meet these requirements.
Without standardized processes for dealing with the imaging, storing and tracking of documentation associated with short sales and deed-in-lieu, servicers are exposed to significant regulatory risk from faulty processes. Mishandled foreclosure documentation is shaking up the financial industry as banks face mortgage put backs, higher costs and other servicing issues that can impact profitability, reputation, customer service and overall business success.
Is Your Process Broken?
As noted earlier, when the market saw less foreclosure activity, there wasn’t great demand for servicers to have specialized technology and additional resources to manage delinquencies and REO properties. Typically, the processes were managed in-house, but today, that model is changing.
Over the last 24 months, as the number of foreclosed homes has increased dramatically, servicers have struggled to keep up with the volume of activity, managing the process, tracking documentation and meeting customer service demands. The cost of asset management is also rising because the process requires more people to service the pool of loans than it has in the past. If servicers are going to manage an accelerated number of delinquent loans and dispose of REO inventory in any reasonable period of time, they need to make some investments in technology and process tools that they haven’t had to make in the past.
How can a loan servicer determine if their process could be improved? Servicers should evaluate their existing processes and ask the following questions:
What is the average time from date of foreclosure to date of sale? Industry sources estimate it takes approximately 478 days before foreclosure begins. While there is state level variation in the foreclosure timeline, just a few years ago, foreclosure proceedings commenced after approximately 150 days. While the number of days before foreclosure has increased, technology and processes have not kept pace with the growth in volume. Additionally, with the number of foreclosures being the highest in history, the time line for the foreclosure process is likely to run longer rather than shorter. The amount of time to complete a sheriff sale varies state-to-state, but the average length of time is 60-90 days. Several major lenders have halted foreclosure actions in some or all states after concerns were raised over improper documentation and concerns over lenders signing sworn affidavits without reading them. With heightened concern over robo-signing, the result is holding onto properties for an extended period of time, which could have negative effect on sale price. Servicers who retain properties longer than 90 days following foreclosure could benefit from improving their processes and standardizing workflow.
How does your marketing time compare to other servicers in the market? Market research companies such as J.D. Powers conduct annual homeowner studies to gauge the level of satisfaction with mortgage servicers. This year’s J.D. Powers study revealed that mortgage servicers more often fail to deliver on certain best practices during the loan modification process, including providing and meeting a time frame for approval, not asking for information more than once, explaining the entire process during application, and providing proactive status updates during the process. Without a best practice approach and dynamic document management, servicers are unable to have visibility into the process, respond quickly to customers and maintain the momentum. Additionally, they risk elongating the time to progress a loan to foreclosure or sell the REO property.
Do you have a strategy for managing an increased inventory of REO property? Servicers that do not take proactive and preventative measures to prevent problems during the servicing process will not be able to effectively and efficiently manage their REO inventory. Most recently, several lending institutions have come under fire for flawed documentation. Many cite the enormous increase in the amount of foreclosure papers as to why their foreclosure procedures were improperly handled. A key component for success is having visibility into each step of the process to communicate effectively and keep the process moving forward. Organizations that rely on a paperless image-based repository can easily access documentation and work collaboratively.
Do you have visibility into the exception and approval process to understand your process flow? How much time and effort have you invested in process management? It is not enough for servicers just to automate processes. The goal should be that resources are used to add value and only called upon on an exception basis. Having insight into how many short sale offers have come in, new customer inquiries or deed-in-lieu requests are waiting to be approved can provide the business intelligence that enables servicers to adjust their processes and shorten the cycle time.
Getting Speed to Market
There is no doubt that the tremendous increase in foreclosures in recent years has strained the resources of lenders and loan servicers, creating challenges that any financial institution might find overwhelming. A business process management solution can provide the resources and technology to improve your company’s HAFA success rate, create a streamlined workflow, provide visibility into every step of the process and decrease the marketing time on REO inventory.
The biggest benefits include access to dynamic document management tools, a paperless image repository and automated workflow processes that enable servicers to better manage the increasing volume of documentation. By having a system to track customer inquiries and inbound documentation, third-party vendor communications, internal department handoffs and approval processes, servicers can ensure the best use of their internal resources and high levels of customer service.
Taking a best practice approach to the foreclosure process and embracing an automated process means fewer errors, increased accuracy and tighter collaboration between departments. A clear trail of documentation ensures organizations meet their legal obligations, return counteroffers and disclosures in a prompt and accurate manner, and avoid unnecessary bottlenecks in the process. It also provides customer care representatives with faster access to information and visibility into the process. This improves communication and enables company representatives to provide quality service to customers.
A standardized workflow that improves visibility also helps improve regulatory compliance. Servicers can ensure milestones are met, such as sending amendments before the expiration date, and that if a document needs to be signed or filed with the courts, it is prepared and ready when needed. Transparency into REO asset servicing mitigates risk, reduces expenses and enables more effective inventory management. And, with better control of the process, servicers can reduce the time to sale.
With heightened regulatory scrutiny and operational risk associated with completing foreclosures, servicers need standardized process to ensure that questions are promptly answered and that documentation is complete, accurate and readily accessible. Organizations that employ innovative strategies to mitigate risk and shorten the time to market REO properties can optimize their return, build customer loyalty and protect their brand reputation.
Michael Zwall, director of mortgage services for Sourecorp, has more than 20 years of operations and financial management experience in the mortgage industry. He can be reached at
