The challenges and uncertainty in the mortgage market and the volatility in the U.S. economy continue to keep lenders and servicers under tremendous pressure. The government bailout plan was signed into law, but how it will work is still months away from being decided. Financial institutions may eventually get some relief from troubled assets, but in the meantime, origination volumes remain anemic, and default rates continue to climb.
To help stem losses, lenders and servicers are redeploying origination employees to assist with loss mitigation and loan modification efforts, but they must also juggle new regulatory and investor requirements, continuously update training strategies and reevaluate their credit policies almost daily. Certainly, the mortgage industry today is significantly different than it was just a short while ago, and the full impact of the bailout concerning the way lenders and servicers do business is still unknown.
Financial institutions are faced with having to do more with fewer resources. Consequently, most are taking a new look at everything, from their internal processes and procedures to the technology they use and the way they deploy their employees. No rock will be left unturned in their efforts to gain efficiencies, reduce costs or boost productivity.
Tax management is a process that is receiving some of this scrutiny today, because savvy lenders and servicers recognize there are important gains to be realized in this area. Institutions are reevaluating the tax management models they currently use in addition to exploring tax management technology solutions that will allow them to maximize efficiencies across the board.
Tax services technology has evolved significantly in the past several years to help lenders and servicers more efficiently manage the challenges they face today. Newer technology not only facilitates greater workflow efficiency in the tax management process but also integrates multiple systems to enable automated tax data reporting throughout the loan life cycle. This improves productivity and drives greater efficiency in niches that range from origination to secondary marketing and foreclosure.
Lenders and servicers can leverage valuable tax data and benefit from advanced technology regardless of which tax management model they choose. To find the ideal solution, they should analyze each model as well as the technology solution that is best aligned with their organizational capabilities and business objectives.
Tax management approaches
When it comes to tax management models, there is no one-size-fits-all scenario. Lenders and servicers must carefully evaluate how much of the tax process they want to manage in-house and how much they want to outsource.
Of course, internal resources and tax-specific competencies are the critical elements that financial institutions must consider when determining the model that will best meet their needs. In addition, lenders and servicers must consider how best to reduce their overall cost structure while achieving the benefits that are most important to their operations.
With in-house tax management in place, lenders and servicers perform all tax-related services for their portfolio. As compensation, some institutions retain the tax service fees collected at closing. While retaining the tax service fees can bolster revenue, managing tax services in-house will increase resource requirements, including full-time equivalent (FTE) costs, training, management responsibilities, data and technology investments. It should be noted that in-house tax management will heighten the execution risk to lenders and servicers for tax processing, thereby increasing the risk of penalties for incorrect or late tax payments.
On the other end of the spectrum, some lenders and servicers opt for an outsourcing tax management model. Employing this model will allows for all tax-related activities and functions to be assumed by an external tax service provider. Allowing a tax service provider to manage all aspects of tax management enables lenders and servicers to reduce their internal FTE costs. However, when an outsourcing tax management model is chosen, typically financial institutions retain very little or none of the fee collected for tax services.
Most often, lenders and servicers choose a standard tax management model where they keep some tax functions in-house and outsource the remainder. In this model, most institutions outsource tax data procurement to insure they obtain accurate and timely information from the agencies. The tax service provider assumes the execution risk of reporting tax information and remitting the lender or servicer's payments to the appropriate tax collection agencies.
Any of these tax management approaches can offer benefits to the lender and servicer, depending on their individual goals and objectives.
Technology enhancements can significantly benefit any tax management model. The lender or servicer should leverage technology wherever possible to gain efficiencies and keep costs to a minimum. The tax service provider should also be able to offer technology solutions to the lender and servicer that reduce costs and enhance their origination and servicing operations.
Room for improvement
Lenders and servicers that choose to manage tax functions in-house are well served to seek out an advanced tax management technology solution that adds efficiencies to their overall servicing operations. This technology solution should easily integrate their tax service provider with the lender or servicer's existing servicing and/or process workflow systems.
Lenders and servicers should expect these interfaces to provide automated auditing, real-time exception processing and fully integrated workflow management tools. With these types of technology solutions, lenders and servicers can reduce overall servicing costs, while providing a highly efficient method for performing tax-related services.
When deciding upon a technology solution to boost the efficiency of in-house tax management processes, lenders and servicers should also look for a solution that offers maximum flexibility. The most flexible solutions will accommodate a wide range of scenarios, allowing lenders and servicers to perform any function internally or obtain services and data from any desired resource.
Financial institutions should also have high expectations as to what technology can deliver. They should be able to utilize one convenient dashboard to simplify the overall process. At a glance, lenders and servicers should be able to view work queues pertaining to processor production, tax provider input, past-due bills and audit exceptions for loans that are either escrowed or non-escrowed for taxes. They should also have instant access to current payments, approval workflow, missing bill and mass exception resolutions, as well as any associated notes.
In addition to deploying tax management technology to create greater servicing efficiencies, lenders and servicers should expect their tax service providers to leverage their extensive tax databases to provide solutions for tax-related issues that occur throughout the mortgage life cycle.
For example, tax management technology can improve efficiency and accuracy during the origination process by automatically delivering up-to-date tax data upon request and enabling lenders to enhance the integrity of their tax data at closing.
Tax management technology can also be used to quickly identify any tax liabilities or liens that may be associated with a property as lenders and servicers perform their daily operations like determining borrower eligibility for loan modifications, performing due diligence on prospective loan pools for purchase or enhancing loss mitigation efforts on defaulted properties.
Since it is abundantly clear that the tax service approach of the past is no longer adequate for the servicing demands of today's market, financial institutions must make sure their tax service providers have adapted their operations to provide timely and accurate solutions to all aspects of a lender and servicer's operations.
Lastly, lenders and servicers need to select a tax management technology solution that is user-friendly and easy to plug into existing systems. In today's market, there is no time for lengthy integrations and training sessions. Lenders and servicers need a solution that can be quickly integrated with their existing platforms across the lending process.
Lenders and servicers need to reduce operating costs whenever and wherever possible without compromising the quality of their service. Looking at everyday processes like tax management is a great place to start.
As lenders and servicers implement tax management models and technology that create efficiencies and reduce operational costs across the mortgage life cycle, they can certainly infuse a positive result into an environment full of downside challenges.
In today's market, any solution that will improve performance during the short term, as well as for the long term, should be utilized by each financial institution to its fullest potential.
Bill McCreary is president of LPS Property Tax Solutions. He can be contacted at (904) 854-5100.