Reducing the expense of servicing delinquent loans is a priority for most lenders despite today's low delinquency rates for conventional mortgages.
Loans made in 1998 have the lowest incidence of delinquency of any first-year loans since 1993. According to Mortgage Information Corp., a San Francisco-based research group, the overall rate for seriously delinquent loans was 0.65% at the end of December 1998, down from 0.74% one year earlier.
While Mortgage Information attributed this performance to low unemployment and solid overall economic conditions, lenders said the use of technology was a mitigating factor as well. And the lenders believe the technology will be even more vital when delinquencies inevitably rise.
Most lenders use some software platform, proprietary or purchased, to help discern which borrowers are the most at risk and where money and time would best be spent to reduce costs.
The most prevalent scoring systems are Fannie Mae's Risk Profiler and Freddie Mac's Early Indicator. These systems are applied to loans in an attempt to predict a consumer's payment patterns and when and what kind of action should be taken.
Fannie Mae says it will pay all of the costs associated with a servicer's use of its program on mortgages owned or securitized by Fannie Mae. Freddie Mac has a one-time licensing fee, regardless of the number of loans scored, and Bank of America uses the Freddie's system for all of its loans except those sold to Fannie Mae.
"Fannie Mae prefers that we use their product on their portfolios, but we use the Freddie Mac system on everything else that isn't Fannie's," said Brian Shea, manager of Bank of America's Cypress, Calif., servicing center. "At the end of August, we'll have had these systems in place for 90 days and in that time, we were able to make 12,000 fewer calls a month. That is a 20% reduction in calls we make by scoring portfolios."
Mr. Shea said that the attrition or redeployment of 20% of the servicing center's staff was an immense savings. He agreed that delinquency rates had steadily improved because of the strong economy, but added that "technology has not caused any further deterioration in the rate either, that's for sure."
Mr. Shea said Bank of America was deciding whether to pursue designing a version of the secondary agencies' platforms, modified in-house, to deal with nonconforming loans on the bank's books.
"Since the Fannie/Freddie products are aimed at conforming models, decisions have to be made as to whether or not they are effective on the bank's nonconforming loans," Mr. Shea said. Since Bank of America has a national servicing portfolio of about 2.3 million loans, or $250 billion, Mr. Shea said it might be necessary to develop an internal system.
With lenders' investors paying incentives to get loss mitigations done on their portfolios, and given the revenue brought in from late charges and various penalties, it is unlikely that a well-run servicing department is operating at a loss. However, an appropriate technological platform could help lenders come out ahead in their collections.
For example, Robert Rosen, an executive vice president of loan servicing for Fleet Mortgage, said it was smartest to employ systems that allow the servicer to call only the highest-risk customers, thereby saving time and money by not calling those who are likely to pay.
"It is almost impossible to call every delinquent borrower with industry consolidation and the huge servicing portfolios out there," Mr. Rosen said.
He added that Fleet Mortgage, Columbia, S.C., uses a Fiserv system in addition to Strategy, an early version of Freddie Mac's Early Indicator.
Using a Fiserv system, a Fleet loan officer can automatically dial delinquent clients. Mr. Rosen explained that the software helps in situations when, "for example, you've just acquired some servicing at a discount because it has an unbelievably high delinquency ratio. You create a queue for those customers to be called for six months until the delinquencies are under control and then you can turn a profit on that purchase."
Mr. Rosen said another software program allows the lender to send out letters if phone queries do not result in payment. The warning letters get progressively harder on the borrower.
"You don't want to send out the same computer-generated letter because they will throw it right in the garbage," Mr. Rosen said. "All investors want to make sure you're dialing all of these delinquent accounts and the software shows that you've done it. So when they come to audit you, they see you're working their portfolio."
Mr. Rosen said that about three years ago, the bank found that it had a 30% to 35% cost savings on servicing loans as a result of the technology. He added that delinquency software was also useful in cases when a loan simply cannot be saved.
These systems allow lenders to work out alternatives to foreclosure, whereby borrowers could give over a deed in lieu of foreclosure; have reduced payoffs; negotiate a forbearance plan; or modify the loan's rate and/or terms.
Technology is also available to help servicers deal with foreclosures. Logs Financial Services Inc. is so far the dominant company in providing automated foreclosure services but is beginning to get competition from a new unit of First American Real Estate Information Services and others.
Among the clients of Logs are Homeside, Fleet, and Union Planters. It recently rolled out an Internet Web site that enhances its ability to traffic documents nationally.
Servicing delinquent subprime loans can require an entirely different plan of action for lenders, according to John Plum, director of residential servicing for Ocwen Financial Corp. The West Palm Beach, Fla., company specializes in servicing subprime loans.
"We don't do a lot of early-indicator type of work. We are all over these loans when they don't pay, regardless of what their propensity to pay might be," Mr. Plum said. "With subprime clientele, you can't let these people slide. People who have nonperforming loans are in the habit of not paying, so you have to be on them every minute of every day to train them out of the habit."
Though Mortgage Information said that delinquencies for subprime loans made in 1998 came down to 3.06% as of March 1999, from 3.26% for 1997 loans, Mr. Plum said the nature of the subprime borrower allowed for little flexibility.
"We are very quick to demand on borrowers when they go into default. We would never let a borrower go beyond 30 days without calling them," Mr. Plum said. But he added that Ocwen mitigates costs by using extensive data warehouses to examine historical payment patterns of borrowers. "If one of our customers is in the habit of making payments on the 10th of every month, we're not going to waste time calling them on the 5th."
Though the average size of a subprime loan is generally lower than that of a conforming loan, Mr. Plum said that the cost of servicing was higher.
Ocwen's typical loan is $65,000 to $70,000 and it charges about 50 basis point to service loans of that size. The usual prime loan servicing fee from Fannie Mae and Freddie Mac is 25 basis points for a fixed-rate loan and 37.5 for an adjustable-rate mortgage.
"It costs about double to service a subprime loan," Mr. Plum said. "But we've never viewed ourselves as low-cost providers. Performance comes at a price." ?