Editor's Note: This feature originally appeared in the August issue of DS News.
Markets routinely experience ups and downs, and most lenders are prepared to weather these slight fluctuations in the market climate. However, when the financial crisis of 2008 hit, many had never experienced something of its magnitude, and many were caught unprepared. During the recession, the mortgage industry experienced an unprecedented level of defaults, which was, in some instances, exacerbated by poor or nonexistent default-management processes, followed almost immediately by a number of increased regulations. This combination crippled many lenders beyond repair and placed the entire industry under severe scrutiny.
Strong default management is vital to the success of any lending institution, especially when it comes to real estate-based lending. It has always been an important part of the business, but lenders truly started to understand its necessity in the wake of the financial crisis of 2008.
For those lenders who made it through intact, the recession served as a significant wake-up call. It became clear that there had to be more they could do to anticipate risks in order to effectively protect their assets and guard against a similar crisis in the future. Unfortunately, accomplishing this goal while keeping up with new regulations has resulted in inefficient processes, disparate technologies, and high maintenance costs. So, how can lenders successfully take a long-term approach to effective default management? The first step of the answer lies in how lenders choose to assess the health of the loan portfolio.
ASSESSING CURRENT RISK
The loan portfolio is generally the largest asset and the leading source of revenue for a lender. As such, it is one of the greatest sources of risk to a lender’s business. Loan-portfolio management is the process by which risks inherent in the credit process are managed and controlled. To assess the health of the loan portfolio, lenders must consider how much risk the files had when they first originated and how much risk they present currently.
In the past, this assessment involved running soft credit on the portfolio, as well as using an electronic evaluation such as an automated valuation model (AVM). An AVM is the most basic valuation and also the quickest. It provides the lender with instant results since it uses a combination of mathematical modeling and an appropriate third-party database. It is definitely an attractive option when a lender needs information fast or when there is nothing unique about the property or location. However, an AVM does not take into account the property’s physical condition or unusual factors and therefore, may not reflect reality.
As we now know, when running soft credit with an AVM as the only assessment process, many risks were easily overlooked. Fortunately, technology is evolving every day at a rapid pace, and the tools that help lenders gauge and anticipate risk are evolving as well.
A FASTER, MORE-ACCURATE APPROACH
The best tool today to help lenders accurately assess the health of the loan portfolio and effectively manage default risks is the instant property report. This technology provides property value, ownership information, liens, tax status, judgements, and more in real time. It instantly collects data from various sources and provides the information to the lender in a comprehensive package, allowing him or her to evaluate any risks and get back to the borrower much faster.
Traditionally, lenders received this information from third parties who manually pulled information from the internet, transposed it to a report, and then delivered the package to the lender. This physical transport of data from one document to another, or the “stare-and-compare” approach, significantly increases the risk of human error.
In addition, lenders were expected to consider the following information surrounding the property before making a loan: value, flood zone status, owner(s), and whether or not there was any current interest on the property. Lenders would usually pay a professional—in some cases, several—to complete research on each property, including appraising the property, reading county records, and obtaining deed history. This obviously requires a considerable amount of money and typically takes seven to 10 business days.
The old method of using multiple, disjointed third parties often resulted in overlapping or missed procedures, high coordination efforts, and the absence of a unified view of the portfolio. It also took much longer than what technology is capable of today. Lenders, like everyone in today’s world, want immediate results. They want property information delivered to them instantly in order to get money into the borrower’s hands as fast as possible. Not surprisingly, there is a direct correlation between the time it takes the borrower to receive his or her money and the chances the lender has to close the loan. The longer the money is sitting without being delivered to the borrower, the higher the probability that the borrower will choose to go through another lender.
Now, lenders can implement reporting software that instantly takes care of this entire process on their behalf and provides all the information they need through one source. This eliminates the investment of a significant amount of money, time, and confusion for the lender, so they can focus more on their core competencies.
FORTIFYING WITH FINTECH
This brings us to the final step in the quest to strengthen default-management processes—partnering with a capable fintech provider.
To keep pace with the evolving technological advancements in the industry, lenders must focus on forging strategic partnerships with fintech providers who offer customizable solutions by amalgamating key data across all lending channels. Data aggregator providers use specialized software to provide lenders with access to a host of both local and national real estate service providers via the web or through direct integration into various loan-origination systems. They also encompass data provided by the courthouse or credit repositories.
This solution acts as a bridge between a lender’s loan origination system (LOS) and the aggregator’s software, allowing the technology to seamlessly integrate into any LOS while providing connections to various vendors outside of the software.
An all-in-one vendor/data aggregator effectively guides lenders to the best course of action with appropriate vendors and can arm them with key information they need to better understand vendor performance. The best aggregators can also provide all-in-one solutions to vendor reporting so they can understand exactly how vendors are performing and where they might be able to introduce new vendor partnerships to add even more value for their customers.
Using all of this data in the right way can help shield lenders from precipitous market shifts. The process is much faster, ensures accurate information, and provides the lender with one concise report in a timely and compliant manner.
It is also important to note that all lenders are not created equal. Each one is unique with different risks associated to him or her. For instance, a lender in a flood-prone area of Florida has very different risks than a lender in the mountains of North Carolina. Because of this, lenders benefit from the agility offered through a data aggregator partnership that tailors information based on lender size and scope so they can make the most appropriate, informed decisions involving their specific loan portfolios.
Engaging with a provider who offers customizable solutions and serves as an effective data aggregator is the best way to enhance default-management processes and anticipate risks. The provider holds and handles all crucial information that drives the default-management process so that lenders can avoid lengthy wait times, stare-and-compare errors, and confusion coming from managing several third-party vendors who each offer niche data points at once.
PREPARING FOR THE NEXT DOWNTURN
Lenders must be well-prepared for a market downturn, because another recession will inevitably happen at some point in the future. According to a recent Forbes article, “Predicting the precise time of the next recession is not possible, but the consensus among economists is that we are due: the 11-year economic expansion is one of the longest in U.S. history.”
Right now, ask yourself, “Am I doing enough?” and “Is there technology out there that can help me do more?” If the answer to the first question is “no,” the answer to the second question is a resounding "yes."