REQUIRED READING: Employment Verification Is As Important As Ever

unemployment rate in June reached 9.5% and may well reach[/b] 10% by the fourth quarter, according to the U.S. Bureau of Labor Statistics. While this figure pales in comparison to the 25% unemployment rate the country experienced at the height of the Great Depression in 1933, it does represent an important metric to servicers, as history has shown a correlation between unemployment and foreclosure numbers. Combining the nationwide unemployment rate of 9.5% with the almost 1 million foreclosures that had been filed through the first half of this year underscores why lenders and servicers need a real-time view of their borrower pool in order to mitigate further defaults. The American Bankers Association's (ABA) data indicate that late payments on home-equity loans alone hit a record level in the first quarter, with delinquencies climbing to 1.89%. The ABA's chief economist, James Chessen, was quoted in an official statement saying, "The number-one driver of delinquencies is job loss. Delinquencies won't improve until companies start hiring again and we see a significant economic turnaround." Weak credit underwriting standards of the past have given way to increased regulation and supervision under the current administration. With President Obama promising greater financial oversight and stricter lending guidelines as part of the administration's attempt to revamp the financial markets, servicers will be tasked with ensuring new loans they service meet those requirements. As jobless rates continue to remain high, the government's expanded loss mitigation programs have forced some servicers into an unfamiliar role of actively verifying employment and income. Servicers must now have current employment information at their disposal in order to successfully offer loan modifications to an ever-increasing pool of candidates. Servicers today require greater transparency when evaluating their mortgage portfolios in order to assess loan modification options. One of the best ways to gauge a borrower's propensity to pay is to see if the borrower's current income is truly enough to meet his or her payments. The right data can give insight into a borrower's willingness and intent to fulfill his payment requirements. As such, employment and income verification has evolved from being a relatively unused information source to serving as a leading indicator in predicting default. There is empirical data indicating that nearly half of all mortgage default is income-related in nature. NeighborWorks America, a national network of more than 240 community development and affordable-housing organizations, estimates that around 30% of borrowers in default cite a reduction in income, while another 19% cite a loss of income, as the primary drivers of their default status. The recent trend is that many borrowers, when faced with a reduction or elimination of income, choose to "lay low" and avoid contact with loan servicers rather than proactively communicating with their servicer to work out a home retention solution. As a result, it tends to fall on the servicer to find a way to better monitor its borrowers' economic situations to avoid more defaults. Greater transparency into borrowers' most current employment and income can enable servicers to contact borrowers immediately following any changes and provide options that are more likely to avert default. While necessary in some cases, loan modifications bring their own level of additional risk to servicing companies. Overall risk can be better managed through deeper levels of data transparency for its borrowers. For example, lenders have traditionally obtained and provided a credit score in tandem with a verbal verification of employment as part of the loan application process. The verbal verification of employment required lenders to manually contact stated employers and attempt to verify the information given, which has proven to be not only inefficient, but also inconsistent, under heavier scrutiny. In the past, when employers could not be reached to verify income and employment, many lenders chose to rely exclusively on the credit score, which, when used alone, is not a viable indicator of a particular borrower's financial health. Any changes to employment or income – or changes to payment patterns for debt obligations – are not immediately reflected in an individual's credit score and, as such, limit the accuracy of a lender's risk assessment of a borrower. The U.S. economy lost an average 691,000 jobs a month during the first quarter of 2009 and has cut about 6.5 million positions since the recession began in December 2007. As a sign that unemployed borrowers are leaning on credit cards as declining prices eat away at the value of their homes, delinquent bank-card accounts jumped to a record 6.60% of outstanding card debt in the first quarter, compared to 5.52% in the previous period, the ABA says. Unfortunately for servicing companies, they have inherited the loans that were originated and closed under the credit score alone and must now find a way to manage the inevitable rising number of defaults that we are seeing today. To effectively manage many of today's government-supported refinance options, servicers will need to ensure that borrowers meet the qualifications of the plan, and real-time borrower credit data is critical in this scenario. Loans that are properly underwritten should include information such as the borrower's current place of employment, employment status (active or not), the longevity of employment, job title and salary (including pay rate, year-to-date income and income over the past two years). Loan modifications must be done on an individual basis, and servicers need to review extensive income and employment information for each loan to determine what type of loan offer will result in the borrower remaining current on his or her mortgage. Having detailed, current employment and income information also aids in reducing the risk of mortgage fraud that was so pervasive in the "handshake deals" of the past that continue to pose a threat today. Several years ago, borrowers would simply provide brokers with photocopies of their paystubs and W-2 forms for the past two years – items that are all too easily forged or manipulated. Traditionally, mortgage fraud has existed as fraud for opportunity, where brokers would allow, if not assist, borrowers in inflating their income so they could get into a more expensive house. In today's environment, borrowers are more likely to engage in fraud for necessity, where borrowers who are desperate to stay in their homes may lie about their employment and income to do so. With increased government oversight and expectations, servicers need access to current employment and income data to tackle the towering loan modifications. Streamlining this step enables servicers to process more loan modifications in a more timely manner, which puts us on the path to a housing recovery. – Janet Ford [i]Janet Ford is senior vice president for The Work Number, an Equifax company. She can be reached at or (314) 214-74


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