The Economics of Loan Mod Technology Under the Obama Plan

ByFred Melgaard, EVP, DRI Management

Default management technology has always been a great idea, but never as good an idea as it is today. Under the Obama Plan, and more precisely, the Treasury Department’s Making Home Affordable Program, the government is going to cover more than the costs associated with making loan modifications and provide incentives to keep borrowers paying over the years. So not only is the government interested in helping you make modifications to loans that are already delinquent (or are current but may be at risk), it is going to make it worth your while in a big way. Lenders and servicers can make it an even bigger opportunity by using technologies available to help them do more loan modifications with fewer resources, human and otherwise.

Default management technology has become faster, better, smarter and cheaper in recent years. For loan servicers, default management technology has become a true “force multiplier,” enabling the existing staff to be many times more productive with complex tasks like modifying loans. This capability is very timely, given the current crisis in mortgage defaults, but with the Treasury’s plan in place, default management technology provides an unprecedented opportunity to reap an economic benefit, as well.

Servicing shops not using the technology are highly disadvantaged at the moment. While it is possible for small servicers to handle loan modifications without default management technology, the process is cumbersome, time consuming and expensive. Scripting tools and automated decisioning rules are available in the latest technology to interview, analyze and select the best loan modification strategies for each individual borrower’s case, preloaded with lender and investor guidelines and parameters, enabling loan servicing associates to create loan modifications and payment plans on a single phone call. Without the enhancements, much is left to chance, to phone calls with investors, to meetings with managers and to all the rest of the efficiency killing realities of today’s loan servicing industry. The technology also deals with other outside influences that tend to hamper loan modification efforts, such as getting documents in the hands of borrowers for execution. The typical process requires printing, courier services and time, which is the main enemy. Studies have shown that the faster the loan modification agreement is executed, the better the chances for success, and the technology can electronically create and send the agreement for electronic signing, using the capabilities of e-document services. The modification agreement actually arrives online while your servicing associate is still on the phone with the borrower, and they walk the recipient through a “click to sign” process for instant execution. Productivity for each associate reaches new heights in amazingly short order.

Importantly, default management technology does not replace a mortgage servicing system, but augments it. Virtually any mainstream servicing system can be enhanced, and training time is minimized, as the technology is created to be intuitive and easy to use. If servicers could even find qualified people to fill the thousands of openings currently required to deal with the crushing demand, there simply isn’t time to hire, train and equip the additional staff to meet the demands of the present economically, much less the short-term future. How many cases a loan mod specialist can handle using the typical servicing system, spreadsheets and analog tools under the status quo is up for debate. Most will probably agree it is somewhere around 50 or so per person per month. Compare that to a servicing system enhanced with the loan mod capabilities of default management technology, and you will be startled to see productivity of 150 cases per person per month. Improvements of 300% are not unusual.

This does not happen without some cost, of course. Fortunately, the cost of employing default management technology is remarkably small for an operation of reasonable size. The precise number is dependent on a number of variables, naturally, but the chances are good you spent more on today’s lunch at a fast food place than the ultimate cost per case of using the technology discussed here. Maybe a bit less if you had the value meal.

Things get really interesting when you consider the incentives of the Obama Plan. Specifics of the Treasury Department’s guidelines can be readily found on their website at Modification Program Guidelines, but the basics are as follows:

• Servicers will receive an up-front Servicer Incentive Payment of $1,000 for each eligible modification meeting guidelines established under the initiative.
• Servicers will also receive Pay for Success payments –as long as the borrower stays in the program – of up to $1,000 each year for up to three years.
• One-time bonus incentive payments of $1,500 to lender/investors and $500 to servicers will be provided for modifications made while a borrower is still current on mortgage payments.

Applying a little math to these numbers really dimensions the size of the opportunity for servicers and lenders alike. For 1,000 modified delinquent loans, the initial benefit is $1 million, with the potential for $3 million more. Without the technology, it would require the efforts of about 20 people to handle 1,000 cases. With the technology, the same number of cases can be handled with six or seven specialists. Plugging in your company’s cost per FTE times 20 will give you a number to match up against that million dollars in the opportunity. For each 1,000 loans, chances are good the difference is somewhere around $950,000 without the technology versus around $300,000 in expenses with the technology, or around $500,000. Not a trivial number in exchange for that fast food lunch, and that is only per thousand delinquent loans involved. Factoring in the Pay for Success amounts improve the potential exponentially.

How many loans are you expecting to modify this year? Tens of thousands and up is the answer for many servicers. Default management technology could mean an additional $500,000 or more per thousand, and that can go a long way toward healing the wounds of our national financial institutions. It is a lesson in economics to study and learn well.