Why Default Servicing Processes Haven't Improved Since the Crisis
BY
AUG 4, 2015 12:32pm ET
After years of historically high levels of distressed and default mortgages, servicers are still over-reliant on human mediation and interaction when there should be no subjectivity in the process.
Despite recent headlines indicating a normalized environment, significant residual issues persist that undermine the default servicing industry's potential for true healthiness. For example, the truly abysmal rate of borrower participation in traditional default servicing processes is a trend that continues to confound servicers and compromise their compliance strategies.
What the origination side has learned, and what servicing needs to understand, is that throwing bodies at a problem does not solve the problem, and changing internal processes is not the smoking gun, either. The servicing industry should adopt greater automation to more efficiently clear out its backlog of defaults and better manage spikes in the future.
What's needed is a fundamental shift in servicers' relationships with customers that modifies communication to speak the "language" of borrowers in a healthier way.
This begs two questions: "Is the default servicing process any better than it was in 2007?" And, "Have we learned from the faults of our past?"
Every lender/servicer has documented guidelines regarding foreclosure alternative qualifications, which are based on a set of calculations. Excise the always fallible, often-biased human element from default servicing calculations and get right to the facts.
Mediation, in states requiring judicial review of foreclosure, is redundant and a drag on the process. Self-service makes a non-mediated default resolution possible.
In automating as much as possible, servicers can devote their human capital to outliers or exceptions, and process finalization, instead of managing the entire process start to finish.
Mortgage delinquency rates increased a scant 1.46% from March to April, but the national mortgage delinquency rate is down 15% from one year ago. In addition, though non-foreclosure solutions outpaced foreclosures in Q1 2015, overall loan modifications, short sales, deed in lieu transactions, foreclosure starts and foreclosure sales, as well as serious loan delinquencies, continue to decline.
What these numbers don't address is the enormous backlog of defaults that have yet to be resolved. According to Federal Deposit Insurance Corp. data, banks have $57.9 billion residential loans in the process of foreclosure, representing 48% of all nonperforming loans.
Defaults are absolutely trending downward, but this cyclical industry guarantees that everything comes around again. Being better prepared for them helps ensure the waves don't knock you down.
Self-service options would enable borrowers to participate in a process that isn't really designed around the average consumer's level of understanding. The prevailing thought on how to fix the default industry and increase distressed borrower engagement is to change the documentation so that borrowers can better understand them, but the problem isn't with the documents. It's with the process itself.
Take tax preparation software, for example. Tax documents are difficult for even financially educated consumers to understand, and yet, every year, millions of consumers prepare and file their own taxes using tax preparation software. If the documents weren't filled out correctly, the software companies would be out of business.
These companies succeed not by changing the documents to make them easier to understand or by changing the tax laws, but by changing the process by which consumers calculate their tax responsibility. Document fulfillment is simply a byproduct of making the process easier.
Default servicing via a self-service platform can work much the same way. On average, borrowers are not well versed in the particulars of foreclosure alternatives.
Although borrowers are not loss mitigation experts, they are experts on their current situation. Borrowers can tell if you if they want to stay in their home, if they have income, what their current monthly expenses are. With self-service technology allowing borrowers to direct their own loan workout process, default servicers can capture data at the point of entry and use the information to drive the rest of the process, rather than requiring paperwork up front before an assessment is even made.
There is something fundamentally wrong with the way the default servicing process operates today, and it will not fix itself. If we have learned anything from the foreclosure crisis, it is that the default servicing process must be managed better, and servicers need to reimagine how this process works to avoid becoming buried by volume and ill-will during spikes in defaults.
Karl Falk is CEO and co-founder of ShortSave.
Comments (2)
Great article and great thinking, the answers seem so obvious but sometimes the obvious answers to our broken systems are drowned out by the noise of the dinosaurs that we have in place right now. Disruption is eminent in this industry and I cant wait to watch it unfold.
I will begin by saying that anyone that thinks outside the box will always have my respect. Asking a borrower in conjunction with a lenders self-service platform to provide the necessary personal and accurate financial data required by FNMA or FHLMC, so as to determine what loss mitigation program will best fit the borrowers hardship and cure the default. I see your idea as just one of many, for example the States that have went to a mandatory mediation program hoping to slow down their foreclosure rates, have found out that on average its less that 5% of the borrowers who mediate actually reach an agreement and cure the default. The mortgage servicing world is people talking to borrowers in default thats what the regulators want to see happening in all of the shops.
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