Genetic Modification

Mortgage servicing used to be a cut-and-dry system of debt collection and accounting. There was the occasional mortgage restructuring in cases where borrowers encountered hardship or refinanced out of their original loan entirely. But with 7.4 million loans now non-current, according to Lender Processing Services, and a shadow inventory estimated to take anywhere from three to five years for the industry to clear, default servicing has never been so complex. And that was before the Treasury Department launched the Home Affordable Modification Program (HAMP) in March 2009 to offer aid to 3-4 million troubled borrowers. The program did not get off to a good start, with servicers reporting only 170,000 permanent modifications a year and more than 1 million trial modifications later. Part of the hold-up occurs when borrowers fail to turn in necessary documentation or simply do not respond to servicer outreach. Then there is always the segment of borrower population that has already given up on the asset, or that strategically defaults with the intention of walking away from the mortgage. But these instances are difficult to track and really point back to the key issue underlying HAMP: servicers initially were not equipped to handle the program or the sheer volume of loans it targeted. Large servicers were built for soft collections, a highly automated, repetitive process. That system didn’t deal with emotions, special situations or the type of interaction that’s required to send a borrower through a process as complicated as HAMP. The program itself is profoundly complex, and it underwent extreme changes in its early stages. The wild rollercoaster has servicers overwhelmed; not only is the volume of distressed mortgages unprecedented, but the parameters of the modification program constantly change. The modification process itself has servicers changing their tact completely. Gone are the days of simple debt collection. Servicers are caught in a whirlwind of due diligence, of borrower documentation and income verification, of asset valuation and underwriting. Madness? This is modification! Treasury Department assistant secretary for financial stability Herbert Allison Jr., in testimony delivered to the House Committee on Oversight and Government Reform in March, noted HAMP is distinguished as the first national, standardized modification program. He said HAMP acted as a catalyst for servicers to develop the capacity and resources to execute modifications on a large scale. “Until HAMP, the industry did not have a standard process for mortgage modifications, an affordability standard, or standard timelines by which modifications would be processed,” Allison said. “HAMP has begun to systematize across servicers the method and process for modifying loans by setting affordability standards, requiring sound underwriting guidelines, and establishing a specific modification protocol and a defined timeframe for responding to modification requests. This has brought more efficiency and transparency to modifications, though challenges clearly remain.” When servicing platforms proved inadequate to provide the functionality required under HAMP, servicers had to get inventive. They began leveraging technology to automate the process. They looked to outsourcers to defray costs and hired personnel experienced the kind of documentation collection and underwriting processes needed to put borrowers into trial modifications. In short, they became originators. But instead of purchase mortgages, servicers were originating modifications. … Sum of the Parts First American’s Kevin Wall notes that a blend of both loss mitigation and origination expertise helped the find success from an outsourcing standpoint. “As origination volumes have decreased, it has placed a significant number of origination professionals out in the market. We are finding a tremendous talent pool and relevance in their background for this re-underwrite and customer management environment,” he says. An origination professional has more of a customer-centric mindset because they’re used to walking someone through a very tedious process of getting a new mortgage loan, Wall says. This experience comes in handy when re-writing the mortgage, as servicers must analyze the collateral, the borrower’s capacity and their ability to pay. HAMP also requires servicers to add in the borrower’s personal story or hardship. “It has changed the requirements and the DNA of what a servicer and their workforce, process and technology have to look like,” Wall says. TO READ THE FULL STORY, SUBSCRIBE NOW.