The volume of delinquencies and foreclosures continues to rise. How do you plan to keep up?
Business process management solutions are efficient tools that enable servicers to gain control of processes and help increase efficiencies.
With the escalating number of foreclosed homes, it is no surprise that the REO market is heating up. According to Barclays Capital, more than 478,000 loans are in REO status and analysts anticipate that the number of bank-owned properties will reach 640,000 by the summer of 2012.
Another data provider, foreclosure expert RealtyTrac, notes that one in every 389 housing units received a foreclosure filing in the month of October 2010. What does this mean for loan servicers? As a giant pipeline of distressed properties hits the market, they need to evaluate their processes to ensure they can effectively and efficiently manage increased REO inventory and reduce the time to market and sell bank-owned property.
The biggest challenges facing loan servicers are the increased documentation and internal control procedures that heightened REO inventory requires.
Historically, servicers didn't need specialized technology because market dynamics were different. As the number of delinquencies continues to rise, servicers now require more defined processes and additional resources to manage the increased documentation and activity generated by foreclosure filings and accelerated shadow inventory.
Higher levels of bank-owned real estate inventory demand appropriate technology, processes and resources. Without it, the result is a backlash of customer dissatisfaction and increased financial risk.
According to the most recent J.D. Power and Associates study of mortgage lender satisfaction, customer satisfaction with mortgage lenders continues to decrease to 734 (on a 1,000-point scale) in 2010 from 739 in 2009.
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, implementing tools and technology can help. Business process management solutions help servicers streamline processes, better manage delinquencies and reduce the time to market and sell REO inventory—all while improving customer service.
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.
According to the Mortgage Bankers Association, there are approximately 2.2 million properties in the foreclosure inventory, and 670,000 of those were new foreclosures that started in second quarter 2010. Further, there are more than 2.2 million loans 90-plus days late, more than 720,000 60-90 days late, and 1.7 million 30-60 days late. Those loans not eligible for HAMP, either because homeowners missed modification payments or were unable to afford the home even under modification terms, 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.
Michael Zwall is the director of mortgage services for Sourcecorp. He has over 20 years of operations and financial management experience in the mortgage industry. Zwall can be reached at
