Mortgage servicers have no choice but to open their kimonos to Freddie Mac’s MHA Compliance (MHA-C) division.  So when MHA-C offers to share its insights, as they did at the Mortgage Bankers Association’s National Servicing Conference last week in San Diego, there’s a rapt audience of servicers, most of whom are struggling to comply with HAMP programs.

Servicing Management magazine was there to capture the main points.  The presenters were quick to acknowledge the difficulty of setting up and complying with the program.  However, citing Sarbanes-Oxley as an appropriate benchmark for packaging HAMP modifications, the panel suggested that a lot of the loan packages they see seemed devoid of any due diligence or quality control.

So how do you deal with a constantly changing program that is known to be difficult to comply with but that has high documentation standards?

“The biggest takeaway I’d have for a servicer is to really understand the program, which is why I recommend having somebody in the organization who is the ‘internal expert,” says Vic O’Laughlen, vice president of servicer oversight for the division.  This becomes more important as the programs morph and spin off programs are introduced (like Home Affordable Foreclosure Alternatives (HAFA).)

As we all know, MHA is a work in progress.  The question is, will it ultimately be a successful work?

 

 

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For a clear, concise perspective on which parts of HAMP are and aren’t working, and why, take a look at this interview in HousingWire with Gagan Sharma, president and CEO of BSI Financial, “an outsourcing provider specializing in mortgage subservicing, default management, loss mitigation, due diligence, REO and quality control services to over 240 lenders and investors.”

Among the insights:

• Loan modifications will only work for a subset of distressed borrowers, as the Treasury Department admits.  Of the 7 million or so eligible, only 1.5 million are real candidates and with fewer than 800,000 trials in place, it’s doubtful that we will see 1.5 million permanent modifications.
• Even modified loans are in danger of re-default, for two main reasons: 1) many if not most HAMP borrowers are underwater and 2) unemployment will remain high for some time.
• The willingness to reduce principal may be the single biggest determinant of modification success. But owners of mortgages have different incentives in that regard.   Banks must recognize the loss immediately, which is not appealing.  Investors who bought loans at 40-to-50 cents on the dollar may be more willing.
• Short sales and deeds-in-lieu of foreclosure are good alternatives to HAMP (and non-HAMP) modifications.  Generally faster to process, these alternatives give borrowers an incentive to maintain the property and leave mortgage owners with better collateral.

If we’re going to solve the problems that HAMP was designed to solve – stabilizing the housing market and keeping borrowers in their homes – we need to look at the incentives built into the program.  The reality is that for most servicers, HAMP is not a money-making proposition.  It costs them more to set up and maintain a HAMP infrastructure (people, systems, processes) than the payback they can expect from the program.  There must be a better way.

 

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.

It’s good news that in some quarters, quality control is beginning to matter. But here’s the Economist to remind us that the job of risk manager “is said to have the risk profile of a short option position with unlimited downside and limited upside — something every good risk manager should avoid.”

Small wonder that talent is staying away in droves.  In sales-driven cultures – like mortgage banking – it’s frowned on to discourage transactions, without which money can’t be made.  The bias is to get the deal done.  So risk managers are always swimming against the current.

However, risk is currently the busiest area for financial recruiters, which means there is a lot of activity.  Chief risk officers are being appointed, risk committees and departments are being formed, and new regulations are announced with frequency.

But business practices adapt to new structures and find their way around them. (Like fraud, in some ways.)  Once the spotlight is off regulation and compliance, experience suggests that a new innovation will make it seem like “it’s different this time”.  And the Cassandras in risk management will be ignored anew.

So how does a risk manager survive the next bull market?  Hope that new incentives will be put in place to encourage the right behavior.  And show the ROI of risk management – or in the case of mortgage quality control professionals, show the return on quality (ROQ).  In future posts, we’ll try to help formulate that ROQ.

Apparently, in early 2007 – at the peak of the real estate bubble – the Mortgage Bankers Association (MBA) came to the “inescapable conclusion that owning [their]own building was the smartest long-term investment for the association.”  So with $75 million in financing, they purchased a new headquarters building.  Then on February 5, 2010, they announced that they had sold it for a little over $41 million.  Oops.

This is the sort of fiasco that the mortgage industry can dine out on for years.  But it’s just the latest irony that we’ve witnessed recently.  Remember the advocates of unbridled capitalism on Wall St. asking for government assistance so that they could continue to do “God’s work“?  Then paying out billions in bonuses with taxpayer money?  Irony verging on outrage.

But more ironic to mortgage quality professionals, and likely to have a larger impact, is another major story these days: the recall of millions of cars by Toyota due to quality issues.

Toyota?  Poor quality?  How could the company that virtually invented the quality revolution in manufacturing over the past 50 years be in this position?

As one article points out, it was a combination of things: the goal to be Number One in the world driving rapid expansion; increasingly complex products with multiple potential points of risk/failure; uninterrupted success leading to arrogance; a culture that discouraged bad news; and managerial sclerosis. (One might almost be talking about Wall Street).

It might seem like the compeuppance of a world leader in the quality movement would negate the value of a quality culture.  Yet this story may unfold to include other car manufacturers, too.  Everyone is trying to sell as many complex ‘world cars’ as they can, and each car shares components with other cars in manufacturers’ product lines. Will Toyota’s brand be the only one tarnished?  Probably not.  But Toyota will recover, while others may not.  And Toyota at least will re-learn a basic lesson: don’t rest on your laurels.