Magazine article Mortgage Banking

Predictive Tools for Delinquencies

Magazine article Mortgage Banking

Predictive Tools for Delinquencies

Article excerpt

For the better part of a decade, the real estate finance industry has funneled major resources into moving the mortgage process into the 21st century. Mortgage lenders, servicers, the two secondary mortgage market corporations, scores of vendors and other entrepreneurs have taken applications of old technology and developed new and different technologies and applied them to mortgage finance.

As technology takes hold, and it has happened far more quickly than most professionals in the industry thought possible, the tendency is for the personal touch to disappear, particularly amid the hubbub of high mortgage volume. And despite the promise that technology holds for reducing costs and enabling more people to come to the table of homeownership, there has been a downside - the loss of the personal relationship the lender and the servicer have with the borrower. And it's the loss of being able to monitor your investment by any other means than an impersonal, computer-generated phone call or form letter. Today, community lending has been largely replaced by a national marketplace where lenders generally see lists of names and mortgage numbers.

When borrowers and lenders knew each other, averting problems such as late payments and potential foreclosures, while not without challenges, was not insurmountable. The lender also understood the economics of the community and how that local economy affected the lives of local borrowers. A community lender could pick up the telephone and find out why a borrower had not sent in his or her monthly mortgage payment. The two parties generally could work out differences so that neither party would be hurt.

Yet the notion of building a personal relationship with borrowers may be unrealistic for many servicers today considering how technology has changed the industry, and given the sheer volume of mortgage originations and mortgage servicing.

Changes in a borrower's personal circumstances, or the reasons behind the changes, may be completely unknown to a servicer. The only information available to servicers is static evidence - bits of data on their computer or paper applications held in storage facilities. And when a payment is late, servicers have no way of assessing why it is late. As a result, they may not get the opportunity to correct a small problem before it becomes a big one. Moreover, a servicer may spend time and money on a problem of little consequence, mistaking it for a much larger issue.

Freddie Mac is unwilling to resign itself to having an industry where servicers have lost touch with their borrowers. Indeed, Freddie Mac believes a lender's ability to foster a relationship with a borrower is a key factor in mitigating losses by intervening before a loan becomes seriously delinquent or heads into foreclosure.

Lenders and servicers must have a relationship with their borrowers. Clearly, the more people in the industry that are acquainted with the borrower, the better it is for business in terms of understanding our investment in mortgages and our ability to guard against unacceptable losses. For that reason, Freddie Mac is developing a number of tools to help the industry reestablish a more personal relationship with their customers. The company's goal is to help mortgage lenders and servicers mitigate losses before delinquencies turn into a bigger issue.

Freddie Mac is perfecting a number of tools including Payment Prospector, Workout Prospector and Servicer Profiles. Also, Servicer Management, a new initiative, will help maintain clear lines of communication with servicers.

For the servicers' part, tools alone may not do the job. New operational processes may be necessary. Freddie Mac is developing a set of expectations in setting up Best Practices in Loss Mitigation and Collections. Further, the type of data that servicers capture and manage is different from what has been used. To optimize the benefits of Freddie Mac's new products and initiatives, servicers may have to redeploy resources. …

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