Even in this relatively low-volume default environment, efficiencies matter. In fact, now may be the best time for mortgage servicers to re-evaluate their processes, since default management is one of the most complicated and highly regulated aspects of the overall residential mortgage life cycle.
This complexity is not surprising, given that the very nature of default means that one is managing exception processing and is highly likely to be dealing with a distressed consumer. Depending on the servicer, support organization and supply chain, these processes can be extremely fragmented, leading to multiple handoffs and increased probability of elongated turn times and defects.
Engineering a comprehensive process that spans the life cycle of default can not only eliminate significant waste for the servicer but also provide a better experience for the borrower.
Other than having the consumer recover and bring the loan current, the best-case scenario for both the servicer and the consumer is to execute a loan modification. Once the servicer engages a borrower and commits to doing a mod, the clock starts ticking. When borrowers successfully complete the trial period, lenders are required to convert those terms into a permanent mod. Failure to do so within a 60-day time period causes a delayed conversion, which impacts both servicers and consumers. The last thing a servicer, client, investor or borrower wants is a surprise, like an unexpected title issue that delays the mod and forces the lender to once again go back to the distressed borrower for more information.
As one might expect, this concern is magnified for large servicers that are modifying thousands of loans every month. Roughly 20% to 30% of modifications have title defects that require some level of curative work. Depending on what point in the process these defects are identified – and how efficiently they are addressed – time and cost consequences can adversely impact an already fragile customer experience.
Identifying issues earlier
Regardless of where a loan is in the default life cycle, the quality of title evidence is a critical success factor in driving consistent results. The same life events that cause loans to go into default – death, divorce and debts – frequently create title challenges, as well. Often, there are gaps between how these events are reflected in public record data and what has been discovered in the mod decisioning process.
For example, take the case of a family that falls behind on their mortgage payments because the father, the breadwinner, dies. After months of back and forth with the widow, the servicer is able to modify the loan. However, the husband is the owner of public record, and only his name is on the original note and mortgage. As the final mod documents are being prepared, there is a realization that no death certificate exists. Depending on the jurisdiction, the situation may require the matter to go to probate, which could freeze the mod process anywhere from a few weeks to more than 90 days.
For a servicer modifying 1,000 loans per month, these kinds of defects could potentially result in 200 to 300 difficult exceptions every month. Even if these issues are identified early enough in the process, the typical workflow at a servicer requires the title provider to escalate them back to the servicer’s already overworked staff to resolve. These escalation loops and rework cycles add more time and cost to the process.
Apply lessons learned
Several years ago, our company began working with a large national servicer that realized the potential value of creating a business process that identified and remediated these issues earlier and enabled them to operate more efficiently. The modification process was redesigned to synchronize data across systems and required document packages while business rules were executed through business process management to verify adherence to compliance guidelines.
The collaboratively developed solution leverages a title grading system and a workflow that compares public record data with servicer and borrower information farther upstream – rather than at the end of the mod process. The process also includes our personnel having direct access to our client’s native servicing and imaging platforms, so we can eliminate unnecessary handoffs and maintain data synchronization across multiple systems and versions of documentation.
Here’s how it works: At the point in a trial mod when the second payment has been received, we automatically produce a property report and grade the title based upon the status of the public records. Depending on the issues, for example, a missing death certificate or divorce decree, curative work begins at that point.
Our reviewers would first access the client’s servicing platform and imaging system to see if the death certificate and/or divorce decree are present. Given the amount of engagement and paperwork that goes into a mod, these critical documents (PDFs, scans, faxed copies, etc.) frequently have been collected but not shared with other key stakeholders to the transaction.
By executing against defined business rules, approximately 75% of curative conditions can be cleared without unnecessary handoffs back to the client. Of the 200 to 300 cases that arise each month, the client is now able to focus on the 50 to 75 that require deeper analysis.
Obviously, more material issues (e.g., a large mechanics’ lien or HOA lien in a super lien state) do get escalated, but since the vast majority don’t, the servicer’s staff is focusing primarily on exceptions. This saves time and reduces cost while streamlining the loan mod process.
Once curative efforts are complete, loan-level detail is combined with public record and real property information. All of this information is then merged to create a versioned copy of the loan mod documents. The combination of our proprietary technology, systemic controls and the very tight dual-approval process produces recordable loan modifications with 99.9 percent-plus accuracy.
After the borrower executes the documents, we record the necessary documents and issue the requested form of title insurance.
Default cascade
While these methodologies and technologies can drive efficiencies and process improvements, not every modification is successful. There can be any number of issues that cause a modification to fail, including borrower ability to pay, compliance, underwriting requirements, custodial guidelines and client/investor business rules. However, the processes and methodologies that were applied to the modification are also applicable to subsequent default processes.
Alternate default channels including deed in lieu (DIL), short sale, foreclosure and real estate owned (REO) can be leveraged when the modification fails or is not a viable alternative. For many servicers, process initiation in one of these alternate channels restarts the process from the very beginning. Depending upon the servicing system infrastructure and supporting processes, the ability to leverage previously obtained information across these alternative channels could be minimal.
While short sale transactions differ due to the title work being directed by the buyer, it is not uncommon for title work for DIL, foreclosure and REO to be housed in completely different systems and processes than those leveraged for modification processing. The impact of these processes not working in concert can be substantial, including lost title evidence expense, loss/negated curative actions, rework expense associated with file research, and elongated turn times associated with all of the corresponding functions.
Maximizing the utilization, efficiency and success of loan modifications needs continual focus because, in the end, it benefits the consumer and keeps them in their home. Unfortunately, not every defaulted mortgage can be addressed through a modification. However, as we’ve discussed, there are ways to leverage the data assets, curative knowledge and consumer interactions from early state default/modification processes to make it more efficient for the servicer and less disruptive for the consumer.
Joe Chappell is general manager of LenderLive Settlement Services.
