A NEW ERA OF MORTGAGE SERVICING
Out of Crisis, Solutions


Except for the S&L crisis of the 1980s, the mortgage servicing ...
Today’s powerful new technology and process combines hard data with
                                      both comparative...
As a result, rather than depending on a hundred or so of the nation’s largest metro areas, any sort of
valuation product c...
By segmenting real estate markets in an intelligent way, the IAS 360 allows
                                      for bett...
CVMs—Conditioned Valuation Models

CVMs represent a new level of due diligence that optimize the efficiency of today’s int...
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A New Era in Mortgage Servicing: Out of Crisis, Solutions

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The report, “A New Era of Mortgage Servicing: Out of Crisis, Solutions” outlines the latest advancement in valuation technology that has emerged in response to the U.S. foreclosure crisis. Known as “intelligent granularity,” the IAS paper asserts this powerful new technology and process brings clarity to value estimates never thought possible.

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A New Era in Mortgage Servicing: Out of Crisis, Solutions

  1. 1. A NEW ERA OF MORTGAGE SERVICING Out of Crisis, Solutions Except for the S&L crisis of the 1980s, the mortgage servicing industry has never been under the spotlight it is now. The current HAMP and HAFA initiatives are by themselves bringing an unparalleled degree of scrutiny to this corner of the business, but the fact is, the industry’s been getting a good overhaul for the last year and a half for its role in the foreclosure crisis. And, rightly or wrongly, many of these changes are due. To its collective defense, much of the industry’s loan servicing technology was built to handle a far more stable and far less demanding world. The sudden reality of millions of delinquent transactions, each in need of individual, personalized attention, was, and is, staggering to say the least. As a result, the industry finds itself in sudden need of answers for the millions of questions flowing in daily from borrowers. Strategies resulting in homeowners staying in their homes are the key, and servicers without effective valuation capabilities are, and will remain, more than a little hampered. The good news is technology has emerged to address the situation, and some mortgage servicing companies are already making a meaningful difference to the industry, and ultimately, homeowners. *** THE NEXT GENERATION OF INTELLIGENCE Granularity With Meaning Lenders, investors, and servicers are keenly interested in transparency these days, and for good reason: they need as much actionable information they can get across the entire mortgage process. Fundamental to all of this, of course, is having a true assessment of the value of the collateral in order to mitigate risk. Indeed, adding transparency to this part of the mortgage business might be as important as the origination process itself while the nation struggles with a burgeoning foreclosure inventory. To their great credit, top-tier valuation providers—at arguably the most volatile time in the history of the U.S. housing market—have answered the call to action with a next-generation electronic valuation program. This new technology is not only providing ways to find the answers in today’s new servicing environment, in many cases it’s redefining the questions. Sounder decisions can be made on short sales, loan modifications and other workout scenarios from an informed perspective thanks to these transparent automated products. And the black box automated valuation model, a standby product of the last decade, is no longer viable.
  2. 2. Today’s powerful new technology and process combines hard data with both comparative and predictive analytics to bring a level of granularity What is the basis by which a REO never thought possible to value estimates. By clustering together like market plan can be qualified? Market Trend Lines present a neighborhoods the process creates a homogenous level of granularity— glimpse into the future of what can trend lines—that can be aggregated at larger geographies. The trend line, be expected to happen to real then, becomes the foundation for any kind of valuation work performed. estate values at the neighborhood And all the solutions built along the valuation supply serve a higher level. With an unprecedented level purpose, to mitigate risk. of detail, this information is more meaningful, allowing for better These new reports deliver truly powerful insights to industry professionals, recommendations on how a and they do so in a relatively inexpensive and nearly instantaneous fashion. property should be marketed. If Lenders and investors gain immediate insight in to the subject property’s trend values are declining in a neighborhood, the neighborhood, including detail on multiple available comparable sales, recommendation to sell a property usually twice as many as those shown on the primary appraisal. In “as-is” at a lower price could be addition, they can assess the neighborhood’s price ranges and perhaps made, while if neighborhood trend most importantly, the area’s valuation trending, shown in easily referenced values are increasing, the graphs rather than a list of numbers. A confidence score tied to the recommendation to repair and efficacy of the valuation methodology is often included too, offering take a longer time to sell could additional peace of mind. result in a higher realized gain on the property. Because of the volatility in the market, it is Electronic valuation technology that incorporates transparency has created increasingly important to have a comprehensive version of the next-generation AVM, complete with real-time, accurate information to extensive listing of properties in the area where notices of defaults have better manage market plans for been filed. Using one of these documents, an REO manager or loss real estate. mitigation specialist can get a feel for the realities of the subject property’s marketplace, right down to foreclosure sale specifics with proximity, room count, square footage, and other information. The technology can also combine with the ‘human touch’ to bring a broader variety of automated reports than clientele hungry for transparency ever thought possible. These reports include additional analysis of trends and forecasts, photographs and input on property condition, and other aspects that combine human and data resources to create a prompt and accurate picture of value. THE NEXT GENERATION OF SOLUTIONS A Critical Combination At A Critical Time Relying on raw computing power and proprietary algorithms, what’s known as ‘intelligent segmenting’ integrates multiple data sources, including census information, socioeconomic information, property information, and income information, to create homogenous segments for like neighborhoods. Trend lines, then, can be produced down to these very granular, yet homogenous, market segments. 2
  3. 3. As a result, rather than depending on a hundred or so of the nation’s largest metro areas, any sort of valuation product can incorporate hundreds of thousands of very small areas around the country. Why does that matter? Simple: Houses simply don't sell all that often, and even at the zip code level, the probability of any one property following the direction of the segment is pretty remote. Properties are going up and properties are going down in their own neighborhoods and in their own microeconomic environment. Intelligent segmenting enables users of the data to look into these The measurement of broker neighborhoods and make confident assumptions that any particular performance has long been difficult property is going to move along the trend line, or just as importantly has to achieve, but with the help of moved along the trend line. A reliable time machine, if you will, for property Market Trend Lines, the task is valuation. becoming much easier. Current market intelligence offers a way to To date, Integrated Asset Services’ IAS360 House Price Index represents the keep bro ker valuations in check. industry’s first and best effort toward rolling up the benefits of this next- Values presented by the bro ker can be compared against neighborhood generation trending methodology. With the ability to aggregate hundreds trends and a grading system can be of micro-geographies characterized by any number of scaled and weighted put into place to review broker social, economic, geographic and housing attribute dimensions, the performance on both the valuation IAS360 produces an unprecedented level of meaningful granularity. and the sale of properties. Trends can show when a broker has Whereas traditional HPIs have relied on paired sales methodology, which oversold or unde rsold a property by definition limits the number of transactions available to define a trend, based on the neighborhood values. the IAS360 was built on a modern platform that considers insured, non- The bro ker who consistently misses the mark on pricing based on the conforming, bank owned and conventional sales transactions separated by neighborhood trends, will score property type, and has since evolved to include REO and arms-length lower than the bro ker who is transactions. Simply put, the IAS360 fills critical gaps left by traditional pricing and selling within the HPIs, specifically accuracy, timeliness and more highly localized market Market Trend Lines. The ability to conditions. grade the overall long-term performance of the broker pool And, very importantly, the high-powered Integrated Asset Services allo ws visibility into which bro kers are the cream of the c rop and those platform can continually refresh trends as new data becomes available. that under-perform and should be The net result is a kind of accurate and useful insight in to local activity eliminated from the pool. that hardly seemed possible even a few years ago. This insight into market movement at a local level—this intelligent segmentation—should prove particularly powerful for mortgage bankers, traders, real estate professionals, and the general public. Above all, the IAS360’s combination of data and analytics will enable proactive organizations to rapidly optimize their risk mitigation programs, from monitoring performing loans to early detection of defaulting loans. By logical extension, the application of the trending methodologies would likely include identifying borrower risk, monitoring collateral value risk and market risk, contextualizing neighborhood value, and managing REO quality control. 3
  4. 4. By segmenting real estate markets in an intelligent way, the IAS 360 allows for better decision-making with regards to mitigating risk. That enhanced decisioning model is bound to change how the valuation industry has How can market intelligence be leveraged to support Broker Price operated for the last 20 years. Opinions? With the use of Market Trend Lines, which reflect a THE NEXT GENERATION OF PRODUCTS collection of scaled and weighted What’s Going On In The Neighborhood? social, economic, geographic and housing attribute dimensions to Since residential real estate markets are a local phenomenon and easily define trends under differing influenced by numerous market factors, few could argue the most highly market conditions, the BPO can be crossed checked against real time desired information in the servicing industry is knowledge of what’s going sources that have been filtered and on at the local level. In other words, what are the trend lines for each scrubbed. With a much mo re neighborhood. Armed with this intelligent granularity, decision-makers— granular look at a market segment, including regulators who now have a meaningful stake in the game—can Market Trend Lines provide a tool gain a far better sense of what to do about properties and borrowers for checking BPO values that within each market and in trending market segment. enable the user to projec t declining, stable and increasing The emergence of improving or stabilizing trend lines can, in fact, go as far markets and make more informed recommendations about a property as to effect regulation and/or policy about the mortgage industry itself. To value. The abili ty to be able to that end, regardless of what's going on with a borrower, regulators are review information provided by the trying to monitor and make decisions based on whether a property is broker beyond that of what is deteriorating or appreciating. Service providers within the industry would found on the BPO is key to knowing be smart to do the same. how to value a given asset more precisely. If the good news is that technology has emerged to help the general situation, the better news is that trending methodology can be used to help particular situations. By making best use of the three different data points that make up a trend line—history, current, and future—lenders, investors, and servicers can indeed determine both a strategic and tactical deal for any given asset in the marketplace. From a servicing perspective, the key is to best use this knowledge and information for an ongoing strategy, either with the borrower, with both the borrower and the property or just the property. From a complexity perspective, the attendant valuation work could be described as falling along a continuum from AVMs, to CVMs, to BPOs, to reconciliations. AVMs—Automated Valuation Models AVMs powered by intelligent granularity go a long way toward emulating the appraisal process. Built on trend lines that go all the way down to the neighborhood, next-generation AVMs are accurate, intuitive, and should be available in a matter of minutes. The net result is an accurate property valuation with full transparency. 4
  5. 5. CVMs—Conditioned Valuation Models CVMs represent a new level of due diligence that optimize the efficiency of today’s intelligent analytics with robust inspection data to produce a real-time view of subject condition, value, and market price trends. Its accuracy, deep intelligence, transparent data sources, and revolutionary analytics are critical points of difference between the CVM and traditional AVMs that offer bundled reports. The CVM is used predominantly for a more advanced valuation and should take into account the trending data in that area. BPOs—Broker Price Opinions Today’s advanced BPOs should include a comprehensive and detailed report outlining comparable real estate values as well as the condition of the neighborhood. Armed with robust trending methodology, a licensed Broker can prepare detailed, interactive valuation reports that reflect detailed transaction nuances that influence the market--trend lines for the market, trend lines for the neighborhood, and whether or not a property is following the trend line. How the comparable sales relate to the trend lines suggests if the property is listed too high or too low and if the valuation should reflect a stable or appreciating market. The next-generation BPO, then, turns from a purely subjective valuation to a moderately objective valuation on the basis of real market trends to determine if the logic base and the valuation and the comparable sales all coincide. Reconciliations The reconciliation process for property valuations assists with bottom line results in loss mitigation, foreclosure, short sale, clearing loan conditions, loan modifications, and in processing an REO. The process can also be utilized in the purchasing, transferring, or selling of loan pools, auctions, or any other due diligence that is required in a servicing environment. Given the importance, accurately determining whether or not the property has followed the market, lagged the market, or is ahead of the market is critical in reconciliation work. Only a process that includes neighborhood trend lines can make that determination. *** Taken together, all of this trend-based information is driving a variety of changes in the industry. More than that, intelligent granularity is bringing new levels of clarity, accountability, and transparency to a process that needs to be done properly. The stakes are very high when it comes to valuation risk, and the pursuit for better understanding will lead to a more stable and productive mortgage lending industry. 5

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