The September issue of Mortgage Banking includes an article with DRI's president, Duke Olrich, regarding the latest modules for The Default Solution:

Saving loans with servicing technology

by Duke Olrich

We have learned many lessons in this unprecedented mortgage market with regard to servicing loans. We have learned that you can't make loans to people who lack the capacity to pay them back and expect them to do so. We have learned that the more equity a borrower has in the property, the more likely he or she is to make good on the obligation. And we have learned that servicing loans passively is a pretty good way to end up with a lot of foreclosures.

It has been painful, as learning experiences go, but the lessons gained will serve the industry well for a long time to come. We are servicing loans now more in the traditional nonprime fashion, which is to say that we are proactive in our approach, looking for indications of potential defaults. The lender that services by waiting for loans to become seriously delinquent before taking any meaningful action is destined to become a statistic, and not in a good way. The future belongs to those who monitor their portfolios carefully, look for warning signs and handle borrower inquiries with experience and positive action. The days of sending out a polite letter at 30 days' late, another letter at 60 days and a phone call two weeks after that are gone with the wind--relics of the unlamented lending era just past.

Fortunately, servicing technology has made a lot of advances that suit the new era, and more improvements are on the horizon. The result is an evolving servicing partner--a technology resource that helps servicing associates do far more than previously possible. Modern mortgage servicing technology can truly empower customer-contact people to save transactions from going to foreclosure and ultimately winding up in the real estate-owned (REO) pool. Consumer groups and grandstanding elected officials still believe lenders want to see loans go bad so they can reap unconscionable profits; perhaps the current crisis will finally dispel that gross misconception. No one wants loans to stay current more than a lender that owns servicing rights, and no one is more motivated to keep borrowers in their homes. In the past, however, the technology just wasn't there to help them the way it is today. A good thing it is here, too: States are starting to require direct customer contact before beginning foreclosure.

In California, "The Governator" just signed into law SB 1137, a bill that forces lenders to talk to borrowers and try to work out a solution before taking the property back. Some have suggested that cost-cutting in the good times left many servicers without the infrastructure and capacity to handle the bad times, and that makes eminent sense. Regardless, this legislation defines the requirement in California. More states are expected to follow suit, and its passage illustrates that help is needed in the servicing ranks simply because the avalanche of delinquencies has buried servicers, and they need help in digging themselves out. There has been an 81 percent increase since Memorial Day 2007 in the foreclosure rate in this state, with about 72,000 foreclosure filings in May of this year alone.

Some lenders have stripped the ranks of the origination team members and turned them into servicing specialists instead of just laying them off to reduce costs in a down market. That's not a bad strategy, when you consider that they are familiar with dealing with borrowers on loan terms and payments. It certainly beats trying to find experienced loan-servicing people at the moment, as they are scarce in the extreme. The key to making the most of this or any other strategy aimed at keeping borrowers in their homes is the technology, something we call a lossmitigation decisioning platform (LMDP). This is a new approach for those of us in servicing automation, and it is a moving target in the sense that it is rapidly being improved. But the important thing is that the technology is here, and it works. In the hands of a reasonably skilled loan counselor, LMDP can make a meaningful, tangible difference in the servicing effort's performance.

Like most great ideas, it is a simple one: Preset some parameters that the lender can live with, and allow loan modifications and payment plans to be pre-approved at the counselor level. Execution is also simple. Scripts are made available to loan counselors as they contact delinquent borrowers, taking a lot of variables and guesswork out of the equation and allowing relative newcomers (such as the redeployed loan department) to handle these cases--and lots of them. The platform, in fact, permits a 50 percent to 75 percent increase in loans per counselor, with a marked increase in success rate. Armed with the scripts and a few questions, the counselor establishes whether it is the borrower's desire to remain in the home. Obviously, not all borrowers intend to do so--especially when negative equity is lurking--even if the borrower can afford to make payments. For the mainstream delinquent borrower, however, the answer is usually affirmative that they would like to remain in their home. The economic modeling component of the LMDP goes into action at that point, presenting a series of questions on the monitor for the counselor to ask.

There are typically two basic alternatives to be explored when the borrower desires to remain in the home: a payment plan or a loan modification.

With the payment-plan alternative, the counselor's questions are geared to determining a realistic payment amount that can be sustained over a viable period of time. The system calculates the payment against the presets from the investor's requirements and guidelines, yielding a payment scenario the counselor then presents to the borrower, right on the spot. For example, a plan with reduced payments naturally creates a shortfall every month. If the loan is with Freddie Mac or Fannie Mae, the system knows what their requirements are for making up the shortfall--usually involving a modest down payment and the rest paid back in six or so months. It would be great if these sorts of plans worked with regularity; but, of course, life is anything but that simple.

If a payment plan won't work, there may be a chance for a loan modification. The economic modeling engine on the LMDP knows this, and quickly comes up with an alternative solution that is consistent with the lender's and investor's preset parameters. The counselor reviews the alternative, and within minutes can present the borrower with the loan-modification proposal--usually in the same phone conversation. For those of us who have been around long enough to remember the days when savings-and-loans were the kings of conventional lending, a time when loan modifications took days or weeks of loan committee red tape, this is a truly wondrous thing. Loans can be modified and foreclosure averted within minutes, thanks to the technology.

More is on the way. Improvements expected later this year and in early 2009 include better workflow to enable more efficient task management, automated hands-off ordering of outside services and alerts for human intervention, when needed. Web-based functionality is increasing all the time in these systems and will result in improved deployment to counselors, both internal and outsourced, no matter where they are located. Training and familiarization are simple now and becoming even simpler, thanks to improved user-interface designs. Overall, servicing solutions are becoming better, cheaper and faster, and are producing significant, measurable results.

Saving loans with servicing technology is not only getting easier to do, it is evolving from a simple phone call into a meaningful, productive counseling session that makes real decisions in real time. This is exactly the sort of technology the industry needs in order to save as many loans as possible, and to provide immediate help for those who want their loans to be saved.

Duke Olrich is founder, president and chief executive officer of DRI Management Systems Inc., Newport Beach. California. a provider of technology solutions for default management. He can be reached at duke.olrich@dridefault.com.