Taking a “Big Picture” Approach to Default Management

Making Smarter Servicing Decisions with Predictive Data

By Jon Davis, Managing Director, LPS Applied Analytics

To guide default management strategy, mortgage servicers need to have an informed understanding of a default property’s value. With the right expertise, assessing current value is relatively easy to accomplish. But equally as important – given the extended timelines associated with foreclosures and REO sales – is being able to predict what the valuation will be at the future REO sale date.

Servicers gather quite a good deal of information as part of their day-to-day operations. Though much of this information is relevant to determining value, it’s also limited in some regards and falls short of providing the big picture analysis required to make the most effective default management decisions.

As REO inventories continue to rise nationwide at the same time property values are dropping in various areas across the country, it’s more important than ever that servicers have access to the most current, accurate, in-depth data available, as well as the ability to make sense of what it all means.

From the very first sign of default through the REO disposition process, servicers need up-to-date, detailed default/foreclosure/REO timeline information that may impact a particular property value. The time between default and an REO sale can vary greatly from market to market across the nation.

Since those timelines can stretch from 60 days to over a year or more, servicers need to employ predictive methodology to most effectively estimate the time it will take, better understand what specific default property values will be when the properties can be sold and have an informed view of the options available for a given property.

Understanding the Impact

That being the case, it’s important that servicers thoroughly understand – up front – the factors that can affect default property valuation at the point in time when the subject properties can be off-loaded. Proactive portfolio monitoring can help servicers gauge future value based on a variety of data that can impact valuation, and therefore engage in more informed decision-making.

If, for example, predictive data shows that carrying costs and declining values will significantly eat into a future sale price of a property, it may make more sense to pursue a short sale and take a smaller loss earlier. On the other hand, if area values are expected to trend upward, it may make more sense to pursue the traditional foreclosure path to resolution or a much less aggressive short sale.

The servicer will therefore want a clear picture of the listing and default environments around the subject property. If the environment is trending toward longer timelines for REO disposition, that will obviously be an area at which the servicing organization will want to look more closely. It’s also essential that the servicer understand past and future valuation trends, and be able to forecast REO discount rates according to the subject property area’s particular timeline.

Ancillary carrying costs can significantly impact the ultimate default loss, making it imperative that servicers have a solid grasp on what it will cost to maintain a property throughout the default/foreclosure process, as well as any expenses they will incur at the point of sale. Fees paid during eviction, tax payments, property preservation costs, insurance and broker commissions are just some of the many costs to be taken into account when determining future value.

Obviously, values and costs can change at varying points in the timeline, making differing strategies more or less attractive at different times. For servicers to be sure they’re basing their default management decisions on the most consistent, accurate and up-to-date data, they must employ portfolio monitoring for all at-risk or defaulted loans.

Smarter Decisions, Better Outcomes

Ultimately, having a better understanding of future default property values will enable servicers to better evaluate the options available to them. Being able to place the property within a forward-looking context can reveal the best option for a particular scenario.

For example, perhaps market conditions are such that it makes more sense for the servicing organization to adjust its loss mitigation strategy and work out an arrangement to keep the borrower in the property. Or perhaps property values are in decline, or ancillary costs too high and a short sale is the best option, to take a loss up front and avoid higher losses further along the timeline. Or maybe it’s best to proceed with foreclosure, given a shorter timeline in a particular area or an attractive market.

The point is, the options are many, and a clear and fully formed picture of the property’s true value across the default/foreclosure/REO timeline enables the servicer to make more intelligent and informed decisions. Servicers who have access to accurate predictive data and can therefore more effectively choose the best option for an individual default property significantly reduce their risk exposure and minimize default losses. It’s a matter of having all of the necessary information to make the most informed decisions.