The loan servicing business can be quite complex given the different types of loans that are serviced, the performance level of such loans, the technology deployed, and the regulatory compliance requirements. Further, assets that have been securitized often have a set of investor requirements contained in a Pooling and Servicing Agreement (PSA). The PSA can also be very complex when it contains requirements for special servicers to be involved, “trigger events” to be identified and monitored, and monitoring for other financial performance. The loan servicing business appears “easy” on its surface, however, in our experience, many loan servicers have failed/suffered negative financial impact because they underestimated the unique aspects of servicing various types of loans. Residential mortgage loans can be the most challenging given the multitude of regulations, accounting for and executing activities for escrows, escrow advances, investor reporting, foreclosure advances, loan modification rules, etc.
Given the high profile that loan servicers currently have in the media and with regulators, every loan servicer should engage The Hilltop Companies to perform our proprietary Loss Mitigation Effectiveness Review. We combine the accounting, finance, servicing operations, investor knowledge, network, technology and credit analysis capabilities to perform our review. Most loan servicers do not have the breadth and depth of resources and multiple disciplines (from finance to operations to defaulted loan activities, etc.). Our proprietary Loss Mitigation Effectiveness process can be adjusted to be more or less comprehensive (example would be to expand to include compliance testing) and covers the following activities:
- Determine baseline compliance with standard loan servicing practices,
- Assess all aspects of the default servicing and loss mitigation processes – review the policies, walk through the operational processes, interview the key people executing such efforts
- Assess loss mitigation effectiveness – analyze and benchmark against other servicers with similar portfolios,
- Determine if the financial accounting for the loan loss risk and any repurchase and indemnification risks is appropriate,
- Assess regulatory compliance for loss mitigation activities – required workouts, modifications, including compliance testing for HAMP, HARP, and other Federal/State/Investor requirements for modifications or other resolution types,
- Assess the funding, reconciliation and recovery of all required advances – escrows, foreclosure, P&I, property preservation, etc.,
- Assess the recovery efforts for anti-repurchase efforts, insurance claims and investor reimbursements,
- Assess or “grade” the data quality/integrity. Data drives decisions and bad data drives bad decisions, and
- Assess the technology used in the loan default management area.
Our Loss Mitigation Effectiveness review program uses a “cradle to grave” approach of assessing the servicer’s operations in this area. We look at handling delinquent loans from point of collections through final resolution and assess whether the process can be improved and ensure that it is compliant with the various requirements. Looking at individual functions like the modification area cannot tell the “whole story” as to whether the loan was efficiently serviced. We combine all aspects and assess loss mitigation effectiveness to achieve the best possible outcome for the investor, loan servicer and borrower.
We can assess the overall delinquency level of the portfolio, understand the payment dynamics and loan characteristics by using our data analytics tools. From this analysis, we deploy our ALLL calculators, roll rate analysis, econometric models, loan performance assumptions to identify potential risk components of the portfolio and the related financial statement impact. Such modeling will assist in determining the component of the performing loan portfolio that is subject to credit risk, the possibility of becoming delinquent and the necessity for any allowance for loan losses. The purpose of reviewing the ALLL calculations is to determine the consistency of assumptions, accuracy of calculations and probabilities of loss used for allowance calculations. In simple terms – synchronizing the assumptions used in the ALLL with the loss mitigation NPV calculations and loss strategies is critical. We know that it also provides auditors with a significant “red flag” if there are differences between the calculations.
Our data analytics and credit modeling tools help us determine which non-performing loans can be “triaged” into different loss severity categories. Triaging the different loan severities allows the servicer to deploy resources to loans that are “salvageable” versus those that any amount of effort will not change the loss mitigation outcome (example – investor owned real estate that has been abandoned).