What is the Strategic Significance of Mortgage Loss Analysis?
Default servicing has always been challenging, and these days investors and insurers have particularly strict requirements associated with each of the different claim types. The most notorious are the FHA guidelines, which provide extensive penalties for non-compliance – our experience shows that servicers can incur up to $9,000in an average losses on these loans. Furthermore, according to the FHA’s Single-Family Loan Performance Trend Report, it takes an average of twelve months to convey a foreclosed property to the FHA. The combination of penalties and protracted delays in recouping expenses presents a significant risk on top of all the other concerns servicers must navigate when it comes to handling the liquidation of distressed properties.
As a result, the “Loss Analysis” function is generally defined as a final review of the case file from default through the final disposition of the investor claim, to ensure that all available funds have been recouped from either the guarantor (GSE) or insurer (FHA or MI carrier), as applicable, on the claim. The purpose of Loss Analysis is two-fold: (1) to recoup any reimbursable expenses that were missed during the initial claim filing; and (2) to provide a feedback loop to servicing managers to improve their internal processes and provisioning of third-party services on non-performing loans.
As data is gathered as part of a Loss Analysis initiative, servicers can identify patterns that, once remedied, can prevent future errors both in claims filing and further upstream in the default servicing process, thereby minimizing their risks of reconveyance on FHA loans and curtailments of servicing expense reimbursements on all loan types.
What’s the Issue?
Loss Analysis is hard – you’re essentially auditing the claim from start to finish, and many default resolutions take years, generating hundreds of supporting documents along the way. FHA home retention (incentive) claims and home disposition (foreclosure) claims are among the most scrutinized investor claims, and approximately six out of ten claims filings are found deficient due to either inappropriate depletion of escrow funds or claiming inappropriate expenditures, which in turn results in an assessment of monetary penalties by the Department of Housing and Urban Development (HUD).
Fulfilling the first goal of Loss Analysis – ensuring a full recovery on a claim – requires a review of what was paid and what wasn’t. In some cases, reimbursable items may have been intentionally omitted from the claim because proper documentation was missing at the time. For these items and for those that were inadvertently left out of the claim, a Supplemental Claim may be filed to recoup these expenses in whole or at least a portion thereof.
Unfortunately, in our experience, many reimbursable items still end up “falling through the cracks,” most often due to a lack of supporting documentation. While the third-party service was obviously performed and paid for by the servicer, the investor claim filing is defective as to these expenses without copies of the underlying invoices. Despite advances in imaging systems and paperless files, securing access to documentation continues to be the biggest challenge for servicers when it comes to investor claims, and this problem grows exponentially when there are service transfers during the life of the loan.
How Can Loss Analysis Mitigate Financial Risks at the Portfolio Level?
Unfortunately, many loan-level losses can be traced back to errors during the default servicing and investor claims filing processes. For example, missed deadlines during default resolution, i.e., the First Legal filing date, create curtailments that claims filers cannot overcome. In the meantime, missed reimbursements can also result from a lack of knowledge of reimbursable items by claims filers or from mistakes they make in identifying the appropriate automatic interest extensions. In addition to the resulting loan-level losses, these mistakes can mount quickly to generate significant losses at the portfolio level, hurting the servicer’s profitability and relationship with the underlying investor.
To counter this, servicers should work to develop a thorough understanding of actionable trends and patterns through a comprehensive loss analysis review. From this, a servicer can make appropriate changes to training guidelines or partner with a vendor with the expertise to effectively file FHA claims on time and within strict compliance guidelines.The data generated by this Loss Analysis work must then be put to work: first, by recovering any amounts that may be recouped from the investor, insurer, or responsible third-parties, and then by ensuring that training, processes and systems are improved to prevent the recurrence of the issues found to be the root causes of the losses. While investor claims generally – and FHA claims most notably – are notoriously difficult for servicers to manage successfully, a robust Loss Analysis program can remedy loan-level losses and help servicers solve systemic problems which cause financial and reputational risk. With claims volumes expected to rise in the years ahead due to economic forces and portfolio mix shifts, servicers should act now to leverage Loss Analysis programs to help them perform better on the non-performing portions of their portfolios.
About The Author
Denis Brosnan is the president and chief executive officer of Dallas-based DIMONT, provider of specialty insurance and loan administration services for the residential and commercial financial industries in the United States. Additional information is available at www.dimont.com.