Return on Quality

The recent MBA Mortgage Servicing Conference in San Diego, at which the talk of loan modifications was front and center, reminded us of an article published in the November 2009 issue of Mortgage Banking magazine titled “Servicers as Originators“ [requires subscription]. That article described the most significant recent development in the world of mortgage servicing: the need for mortgage servicers to act like mortgage originators as they re-underwrite loans under various loan modification programs such as HAMP.

While loan modifications are not new, the sheer scale of pending loan modifications has overwhelmed servicers and drastically extended processing times.  At the same time, critical scrutiny of the process and pressure to accelerate the pace of completed modifications, has created fertile conditions for a new loan quality disaster. 

Image by Matthieu

This represents a vastly more complicated “servicing” process than traditional servicers are used to.  Indeed, the modification process is arguably more complex than the origination of a new loan, requiring a re-underwriting of the loan, complete with credit reports, appraisals and verifications (income, asset and employment).  All this in addition to program-specific documentation requirements, which in the case of HAMP, are onerous.

Recognizing this requirement for a different skill set, servicers have been hiring servicing reps with origination experience.  Thus, much of the production staff of now defunct mortgage lenders have new gigs as servicing staff, no doubt helping unemployment numbers in subprime epicenters such as Irvine, CA. 

In addition to massive new hiring, servicers are deploying new or modified software systems to automate what they can; outsourcing various sub-processes where they can; and trying to stay in compliance as program guidelines change.  Which they do, frequently.

As servicers struggle to meet these challenges, it falls on auditing and quality control professionals to ensure that the latest processes and compliance requirements are adhered to.  Unfortunately, this is not an area where software vendors have invested much time or effort.  Except Cogent, as it happens.

Cogent’s ServicingQC system was introduced more than a decade ago and has evolved into the most sophisticated quality control system available for servicing operations.  Moreover, with the release of the CogentQC.NET platform, virtually all of the functionality of Cogent’s ProductionQC system - designed to monitor origination quality - can now be embedded into a ServicingQC system.  Result?  A ready-made platform for servicing quality professionals to monitor their new “servicing” process: loan origination.

Ocwen Financial Corporation, which does residential and commercial loan servicing, special servicing and asset management, is reporting significantly better results in its HAMP modifications than the rest of the industry.  And they attribute it to superior technology. 

In congressional testimony, Ocwen’s President Ronald Faris claimed:

• that Ocwen is converting trial modifications to permanent modifications at a rate that is 10 to 20 times greater than industry average;
• a 3-month re-default rate of less than 5% for Ocwen, versus 18.7% to 33.7% for the industry; and
• a total of 100,000 successful modifications since the beginning of the mortgage crisis.

These impressive numbers could use a little clarification.  So could the statement that Ocwen has spent “$100 million in R&D to build loans servicing technology that incorporates behavioral science for effective customer communication and is also scalable for high volumes.”  But Ocwen is an industry leader and when they report these kinds of results, it’s worth listening.

Image by sgrace

Likewise, their recommendations for improving the HAMP program carry weight.  Among those:

• Lower the borrower debt-to-income (DTI) ratio for modifications to below 31%; in other words, allow for lower monthly payments on modifications  
• Allow for principal reductions on modified loans  
• Make additional funding available for housing counseling groups
• Require underperforming servicers in HAMP to outsource to servicers that perform 

Also worthy of note: Mr. Faris is one of the few industry voices who believes that HAMP is a “well designed response to the mortgage crisis”.  Maybe he’s on to something.

It’s no secret that the mortgage servicing sector is under severe strain, especially when it comes to loss mitigation and default management.  In response to massive distressed borrower volumes, servicers have hired armies of new, inexperienced servicing reps and asked them to manage loan modifications for a wide variety of complex borrower situations.  This is happening even as fundamental regulatory change is being introduced (e.g., RESPA) and loan modification programs are shifting beneath servicers’ feet.  

Meanwhile, the Treasury Department and the courts are pushing for faster loan modifications while investors who have interests in such loans are balking at the kinds of concessions necessary to make the needle move.  Thus, servicers find themselves between a rock and a hard place as they face the flood of modification requests.

Because this deluge happened suddenly and is still roiling the industry, there has not been time to automate many of the standard tasks involved in the loan modification process.  Indeed, compared to the origination side of the business, servicing automation - or workflow management - is relatively undeveloped .  This is certainly true in mortgage quality control, which is why Cogent can tout that ServicingQC is the only quality control system developed specifically for mortgage servicing. 

But as a recent piece in MortgageOrb confirms, it’s the case in default management workflow systems, too, and no doubt in other servicing sub-processes.

On the positive side, mortgage servicing is finally getting some attention.  With luck, we will see promising technology solutions at the MBA Servicing Conference, which is gathering this week in San Diego.  And given the pressure from inside and outside the industry, we should start to see some adoption of new solutions.

Currently, the biggest enemies of efficient workflow are paper and the telephone, as the MortgageOrb article reiterates.  Both are inefficient, hard to track and prone to error and both are legacies of the traditional workflow of mortgage lending and servicing.  Now that the light of day is shining on the servicing world, we can hope that new technology adoption will lead the way to the Promised Land of eMortgages.

Granted, most of the housing and mortgage industry news out there is deflating, perhaps even deflationary.  For example, see the recent announcement by Zillow that as many as one in five markets may be in store for a ‘double-dip’ in housing prices.  This just adds to the gloomy news about foreclosure volumes, unemployment and an anemic economic recovery.

Yet there are bright spots.  As Exhibit A, we cite the remarkable results that Mortgagebot achieved in the 2009 calendar year.  As reported in HousingWire:

“Wisconsin-based Mortgagebot, which develops Web-based software as a service (SAAS) for mortgage lenders, said it added 200 new clients in 2009, bringing its total client base to nearly 950 organizations. With the new clients came a 25% increase in revenue in 2009 compared to 2008; further boosted by a 25% increase in overall contract value for new sales.”

The movement to “eMortgages” (totally digital, paperless origination of loans) is a long term trend that will need to overcome many obstacles.  But the pieces are being built out today.  Mortgagebot provides a solution that automates and streamlines the online mortgage application process.  Other technology innovators are developing solutions for other aspects of the mortgage origination process.  In time, as the technologies are proven to be reliable, secure and compliant with regulations, we will have an end-to-end eMortgage process.

In the meantime, as mortgage technology companies offer solutions that perform cumbersome tasks more efficiently and reliably, lenders who wish to reduce costs and stay competitive will adopt those solutions.  And that will provide the impetus that mortgage technologists need to grow and thrive, in spite of the general pace of economic recovery. 

Image by Rutty 

Berkery Noyes, “the only middle-market investment bank with research and M&A transaction teams dedicated to the mortgage technology, regulatory and compliance market,” has just published its 2009 Recap and 2010 Predictions For the Mortgage Technology Market. 

Providing a view from 30,000 feet, the report lists a number of high-profile M&A transactions from 2009 and offers up a few trends in the mortgage technology space, including:

• accelerating vendor movement towards becoming a complete end-to-end solution provider
• more stringent lending guidelines and regulations increasing the need for compliance, fraud prevention and risk-mitigating technology solutions
• burden of ensuring proper compliance moves to the point of sale rather than merely at closing, and falls on all mortgage industry participants

In the context of these trends, the report states that market participants no longer see compliance and auditing solutions as “nice to have” - they have become “must have” solutions.

We couldn’t agree more.

It’s official.  Version 2.0 of CogentQC.NET has now been released.  You may have seen the news in Housingwire or MortgageOrb but if not, you can find the Cogent news release here. 

2009 was an unusual year for client IT departments (unless it’s actually “the new normal”, God forbid.)  After the mortgage crisis and economic meltdown, it seemed like IT staffing and budgets were reduced and lenders were stuck in neutral, reluctant to take any steps other than cost-cutting.  IT staff had too many projects to handle and consequently Cogent saw only a handful of clients upgrading to CogentQC.NET.

However, the end of 2009 saw an acceleration of activity.  We now have enough upgrade projects to take us through the first quarter, at least.  And as business gets back to normal, we have even begun to talk with clients about enhancements to their systems that will automate and optimize more of their business processes. 

It’s going to be a busy year.

Cogent clients who attended our October 28th Web Seminar, “What’s New in CogentQC.NET”, will have heard the announcement that Cogent is releasing Version 2.0 in January 2010.  For the rest of the world, this is our official announcement.

When it comes to versioniong, Cogent is more like Google than Microsoft. Microsoft releases a defined set of new functions on a particular date – like Windows 7 was released on Thursday, October 22 – and charges for the upgrade.  Google adds new functionality all the time behind the scenes; not only were they in beta for many years, but they still don’t have any version numbers on their search engine. Likewise, Cogent has been releasing features continuously without categorizing them into Version numbers - and without charging for upgrades.

Like most things Cogent, this is a soft release.  We’ve been on Version 1.x for 3.5 years now. We now see that the system, and the .NET/SQL Server platform as a whole, are stable. We also have several client upgrades under our belts and we have the conversion process down pretty well, including working with DTS data loads.

Look for a list of “official” Version 2.0 features shortly - but know that some early adopter clients already have some “2.0″ features.

Cogent Economics has been commended by Mortgage Technology Magazine for its lasting impact on the mortgage industry.   In announcing its annual Tech Awards at last week’s Mortgage Banker’s Association Annual Convention, the magazine’s editors cited Cogent for “pioneering the use of statistical sampling [in mortgage quality control] to replace the straight 10% random sample with a calculated statistical random sample, which could be 1% or less of a lender’s origination volume, resulting in a 90% reduction in costs.”  More information here.

Although Cogent’s QC Systems do a lot more than intelligently reduce sample sizes, it’s the statistical sampling methodology that industry veterans remember.   Over the years, Cogent has been a Mortgage Technology Top 25 Vendor and a winner of the magazine’s Fix-It Award, but it’s particularly gratifying to be recognized for long term contributions to the industry. 

This blog is part of our ongoing effort to continuously improve mortgage quality control.  Here, we’ll be talking about a lot more than just Cogent QC Systems.  We hope you’ll be part of the conversation.