Can Quicken Loans do for mortgage modifications what it did on the front end for originations via Rocket Mortgage?
During a lively panel session presented during the Mortgage Bankers Association’s (MBA) annual National Mortgage Servicing Conference & Expo 2017 in Dallas, Michael S. Malloy, vice president of servicing for Quicken Loans, told a packed room that he has directed his team to figure out a way to get the loan modification approval process down to just minutes.
“The vision I have – and what I’ve asked my team to figure out – is how can we take a [borrower] and use the integration of data and information from third-party sources – to plug into a model that would meet the needs of any investor – and give that [borrower] a decision on a modification or other solution, while they’re on the phone with our team member, that would be safe and sustainable for the investor and would meet [agency] requirements,” Malloy told the crowd. “It’s possible. We do it on the front end with Rocket Mortgage. And we can do it together, as an industry, on the back end.”
The session, dubbed “The Future Of Loss Mitigation,” essentially covered the recent evolution of loss mitigation, from the inception of the Home Affordable Modification Program (HAMP) in 2009, through its sunsetting on Dec. 31, 2016, to the development of Fannie Mae and Freddie Mac’s Flex Modification program, a HAMP replacement, and the recent efforts of the MBA and industry stakeholders to develop the One Mod program, which aims to standardize the loan modification framework industry-wide.
Moderated by Pete Mills, senior vice president, residential policy and member engagement, for the MBA, the session also included panelists Ivery W. Himes, director of the Office for Single Family Asset Management in the U.S. Department of Housing and Urban Development; Erik Schmitt, managing director for JPMorgan Chase; and Prasant K. Sar, supervisory policy analyst, servicing policy and asset management for the Federal Housing Finance Agency.
All of the panelists agreed that standardizing the mortgage modification process is the key to holding down costs while at the same time eliminating risk from the process, and thus is the future of default servicing. They were also in agreement that the key to standardizing the modification process – just as with originations – is to utilize technology and, in particular, automation, including automated employment, income and asset verification as well as automated underwriting. Using a mix of technologies and database integration, it will be possible to not only standardize the loan modification process, but make it much simpler for borrowers, as well.
When asked what lessons the mortgage servicing industry learned from HAMP, Malloy characterized the program as one of the first efforts to try to standardize the modification process.
“When we went through the crisis, it was the Wild West,” Malloy said. “Some [servicers] did loan mods – some didn’t – because the underlying securities prevented them. So, there were all kinds of ideas and thoughts [about how to do loan mods]. So, when the Treasury got the industry together and came up with [HAMP], it was a way to … all work together and arrive at what a loan modification should look like … to say, ‘Here’s how it can be appropriately done, as a matter of securities law.’ Sure, there were a lot of bumps along the way – if I say ‘supplemental directives,’ every servicer in the room gets a shiver up and down their spine, right? But it standardized the industry and created a template – and, built on top of it were a lot of proprietary programs. So, it did move the industry forward, in a time of uncertainty.”
Malloy said the main lesson learned from HAMP is “that simplicity is genius.”
“We learned that asking a borrower for 14 documents when they’re already in trouble is only going to make things harder,” he said. “We learned that when a modification only delivers a slight reduction in payment that it’s not going to resonate the borrower and it’s going to be a challenge.”
He further added that a borrower “must feel like a loan mod is a lifeline and not just them being asked for a stack of paper.”
Himes said the main lesson servicers learned from HAMP is that they “must provide quality communications to borrowers once they are in default” and also that “early intervention is really important.”
“You have to connect with the borrower and get them to trust you, so that they are willing fill out that application, tell you about their situation and, more than anything, that they will call you back,” Himes told the group.
Servicers also learned that they “must be able to understand the other things that are going on in a borrowers life – that they could be worried about other things beyond losing their home,” she said.
Himes emphasized that simplicity in the application package is critically important.
“We must have a simple application package – something that he borrower can really understand,” she said. “We need standard terms – and a new form application.”
Another lesson learned from HAMP, she said, “is the significance of working with our housing counseling partners, because a lot of time [the borrower] does not trust us [their servicer] – but they might trust someone who they feel is on the outside of the industry – someone who can help the borrower understand the terminology, the options and what we need from them to help them calculate a sustainable payment.”
Sar, speaking from the investors perspective, said “one of the big takeaways from the crisis is that government can be impactful.” He said the development of HAMP over time resulted in standardization of the loan mod process and, as a result, “servicers are now much more uniform in how they solicit borrowers.”
The main downside of the program, from an investors perspective, he said, was that it further complicated the loss mitigation landscape, because it meant that two types of HAMP loans were in play, in addition to all the proprietary loan mods.
“With the HAMP standard and streamlined [programs], there were multiple loss mitigation products – and that made for a more complex compliance review,” Prasat said. “To conduct a compliance review was really challenging for servicers, really changing for the government and really changing for Fannie and Freddie.
“And that lesson is what has led us [to where we are now], which is trying to develop a more simplified product,” he said. “We believe that all stakeholders have their individual interests – but we all have the same goal: For servicers, investors, borrowers and the government, it is all about sustainability; getting borrowers into the right solution.”
Another lesson learned from HAMP, the panelists said, was that borrower debt-to income (DTI) is not as important of factor in bringing loans back to re-performing status. Rather, the percentage by which a borrower’s monthly payment is reduced is more important. Thus, using DTI as a determinant for eligibility is flawed, as it leads to borrowers getting approved for mods that simply do not reduce their monthly payment enough.
This was underscored when Malloy said Quicken Loans in January had implemented Fannie Mae and Freddie Mac’s Flexible Modification program, a HAMP replacement that does not rely on DTI for underwriting and which aims to reduce borrowers’ monthly payments by an average of 20%. He said so far his company has processed hundreds of Flex Mods and that, of those, “we’ve had an 80% approval rate and an average payment reduction of 23%.”
Schmitt added that recent research shows that DTI “does not make a material difference” in whether a loan becomes re-performing, rather, “What makes a difference in performance is the amount of the reduction.”
Meanwhile, the MBA continues to refine its One Mod program, which, as explained in a recent white paper, is based on four key tenets: “Accessibility, affordability, sustainability and transparency.”
“Accessibility: Make it easier for borrowers to get into the door – simplify the doc set,” Malloy said. “Affordability: Aim for payment reduction. Solve for DTI, yes, but know that performance is directly related to the amount of payment reduction. If you do that, then you’ll have a lot fewer documents than [if you are] calculating DTI.
“Sustainability: If you can reduce payment and get more people in the door, you can shoot for a lower default rate. You need a product that can flex up and down,” he continued. “And Transparency: Client service – being able to explain to folks on the phone, ‘If you can give me these two or three things, I can help you.’”
“That transparency – and the ability to market – is critical,” he said.