By Chuck Kimball

Dealing with the vast number of defaults that servicers face could be the spark that ignites mainstream "e" practices in the space.

For years we have heard numerous industry visionaries and thought leaders extol the benefits and virtues of the electronic mortgage. Most of the attention in going electronic has focused on the origination side of the business and how embracing electronic and paperless solutions can create a better, more transparent process. While the technology has existed for a number of years, mainstream adoption up to this point has been lackluster at best.

The times may be changing, but what may surprise many is that servicing may hold the key to driving e-adoption in 2010 and 2011. Traditionally, servicing has been thought of as less innovative than the origination side when it comes to exploring and implementing new technology. However, that is changing. In these tumultuous times, there is an enormous need within the servicing community for rapid and efficient loss mitigation solutions to assist with huge volumes of troubled mortgages. Nearly every major housing market in the U.S. is challenged with dealing effectively with nonperforming loans. Mortgage defaults continue to rise, credit requirements are tight and unemployment remains high. Therefore, the volume of distressed property is not likely to be decreasing in the foreseeable future.

The sheer number of defaults is putting extreme pressure on mortgage servicers whose technology is simply not able
to handle this type of volume. Servicers are feverously trying to work with troubled borrowers who are behind on their payments, unemployed, struggling to get by and ready to just throw the keys in and walk away. These underwater borrowers are looking for solutions which may include refinance, loan modification or deed-in-lieu of a short sale in an effort to avoid foreclosure. While these solutions could help servicers better handle these nonperforming loans, these transactions are quite complex.

Servicers often spend a great deal of time and energy locating and tracking down misplaced documents required to complete a solution. Adding to this pressure is the heightened regulatory scrutiny surrounding loss mitigation coupled with the associated risks and failure rate of current products, which creates a number of challenges for servicers and lenders.

In 2009, the Treasury Department introduced the Home Affordable Foreclosure Alternatives program to provide a viable option for homeowners who are unable to keep their homes through the existing Home Affordable Modification Program. The HAFA program took effect on April 5 (although some servicers may implement it sooner if they meet certain requirements) and sunsets on Dec. 31, 2012.

HAFA provides incentives in connection with a short sale or a deed-in-lieu of foreclosure used to avoid foreclosure on a loan eligible for modification under the HAMP program. Servicers participating in HAMP are also required to comply with HAFA.
The HAFA program is complex and includes many guidelines and forms that must be strictly adhered to for short sales and deeds-in-lieu of foreclosure. For instance, participating servicers are required to store all documents such as initiation letters, HAMP request modification and affidavit, trial docs, denial or approval letters for at least seven years.

Servicers need real-time access to these files throughout the process, as many borrowers may start with a loan modification or at least a trial modification and then will try to do a short sale if they are having difficulties with the loan modification. If there are no buyers or they can't close in general, then the DIL is the last option prior to foreclosing, but, even after a property has been liquidated and a borrower has filed for bankruptcy or foreclosure, the loan servicer can be audited at anytime.

As one can see, there are many sets of standardized documents that will require sets of automated "triggers" when the statuses change, which will then go to the next option and so on. With very specific timeframes detailed in HAFA's "advance terms and conditions," coupled with the specific state laws and timelines pertaining to foreclosures, an automated workflow is essential. Since servicers essentially have to re-underwrite the files, they'll also need to manage all income documents, bank statements, various HAMP and HAFA agreements (executed), hardship affidavits and multiple property valuations (as it may start with AVM or BPO but will need to get an appraisal ordered by the servicer/ lender if it becomes a short sale or a principal reduced loan mod).

Many of the servicers are left servicing loans that the now defunct organizations had originated; the message is clear as hopefully many will learn from their mistakes, especially when borrowers will now be released from any personal liability. What servicers are quickly finding out is that these requirements are far too complex to not use an automated platform that can handle this kind of workflow— automation that incorporates dynamic electronic document creation, electronic delivery and electronic submissions of supporting documents, electronic ordering and receipt of services with the culmination of electronic closings and investor delivery.

In addition to the complex nature of these transactions, servicers are challenged with huge volumes and the risk that is associated with potential errors that can occur while processing such a large number of transactions. There has been an exponential increase in the number of transactions that servicers are forced to handle. This is putting extreme pressure on archaic servicing systems that are not accustomed to handling this type of volume or transaction.

To make the situation even more challenging is the intense pressure from the current administration to support these products and to bring these new programs to market very quickly.

To make this happen, servicers are realizing that e-technologies provide the opportunity to better handle this significant volume in a faster, more cost effective and accurate manner. Servicers are not getting caught up in the theoretical debate of validity and usefulness of e-mortgages. Instead, due to the current market conditions, they are forced to implement the best possible solutions, which happen to be e-solutions. The return on investment is greater transparency, improved quality control, efficient staffing through automation, performing assets and less overall government intervention.

The current market conditions combined with advanced e-technologies has created the perfect storm to drive e-adoption. The next logical step now that mortgage servicers have been able to effectively realize the tangible benefits of going with various e-technologies is to apply these same solutions to other areas of their business. This, in essence, will drive e-adoption in 2010.

At the end of the day, due to the current market conditions, servicers are looking for the quickest and most effective solution available, which happens to be e-technologies. What is most surprising is that this is happening on the servicing side of the business.

Once these lenders and servicers successfully implement e-technologies on the backend to respond to the vast amounts of loan modifications and short sales, it will be just a matter of time until they implement these same technologies on the origination side.
It is hard to imagine, but servicers may indeed hold the key to e-adoption in 2010.