New 2022 data standards could head off foreclosure errors in transfers

The restart of foreclosures is intensifying challenges involved in ensuring correct and compliant information is received when mortgages or related cash-flows transfer, but one such hurdle could be eliminated soon.

Protocols aimed at ensuring nothing is lost in translation when information about billing, late payments and related processing moves to a new system are set for comment and subsequent release in 2022, according to the Mortgage Industry Standards Maintenance Organization.

“These transactions sometimes cause confusion among borrowers about when their next payment is due and things of that nature. Standards would help clear that up,” said Seth Appleton, president of MISMO, in an interview.

That’s important because risks for mortgage firms and borrowers are elevated when loans are distressed and servicing transfers are rising. While government relief has reduced the number of seriously delinquent loans, it’s still nearly four times its pre-pandemic level, and the additional pre-conditions being set on foreclosures introduce new compliance sensitivities.

“We need to pay attention to the technology aspect of this or the borrowers are going to be really at risk. Foreclosures will end up being filed on people when they shouldn’t be if the industry is not careful,” said Jane Mason, CEO of servicing technology vendor Clarifire, in an interview

At the same time, recent mortgage servicing rights transaction activity like Ocwen’s agreement to buy $48 billion in MSRs from AmeriHome and a more than $7 billion portfolio put up for bid in April indicate an increased interest in certain types of transfers, some of which could involve relatively large volumes of loans.

“I’d contend right now that there are more lenders out there with [mortgage servicing rights] portfolios of size compared to recent history,” said Mike Vough, product manager for MSR valuation at Black Knight, in an interview. “Given the increase in the amount of lenders with substantive MSR portfolios who may not have been this invested in servicing before the pandemic, this could lead to more participants willing to be involved.”

To be sure, some servicers expect rates could eventually rise in ways that encourage retention, quelling bulk sales. However, peak periods of foreclosure are anticipated next year, according to a recent Moody’s Investors Service report, and that could prompt some players lacking experience with related processes to sell.

Currently, a lot of time is spent validating data in transfers in order to head off servicing systems errors, and problems arise if information is not received or potentially incorrectly acted upon in a transfer. Such mistakes can haunt mortgage companies and borrowers for years, particularly if they are foreclosure-related. So having servicing standards similar to the ones already available for some functions in origination could perhaps most importantly decrease that validation work.

“We need to have better data sets in general, so every loan can be analyzed by computers instead of eyes,” said Mid America Mortgage President and CEO Jeff Bode, a MISMO board member.

Validation is particularly important for data related to processes where borrowers had forborne payments due to pandemic hardships, Mason said. New rules require mortgage companies to make best efforts to reach out to these consumers before they proceed with foreclosures. Related information about all this needs to be tracked and transferred correctly and systemically, she noted.

“All these things are new, and servicers may otherwise have to use workarounds to get that information out of the system and transfer it, so having standardized data formats that enable quick and automated validation will be huge,” said Mason.

While the standards will help systems speak the same language when conveying data and reduce tasks associated with validation, they don’t address all the remaining bottlenecks or risks in the transfer process.

One remaining challenge, for example, is that companies have been slow to adopt technology that accommodates standards and more advanced exchanges of data like SMART (secure, manageable, archivable, retrievable and transferable) documents for servicing. That means they still work largely with electronically imaged and static versions of paperwork, said Dave Parker, chief product officer at LoanLogics.

Data has to be extracted from static documents, and when the MISMO standards become available and adopted it will be possible to exchange it more easily between systems from there, said Parker, whose company was recently acquired by Sun Capital Partners.

“I need to recognize the documents. I need to classify the documents. I need to map those document types to my taxonomy. I need to upload those and all of that has to happen relatively fast, or else you have interruptions to customer experience,” he said.

Immutable electronic ledgers also need to be combined with data and procedural protocols to make distressed servicing transfers more bulletproof against the kind of problems that emerged during the Great Recession, said Brent Chandler, CEO of FormFree. FormFree facilitates borrower-permissioned access to personal financial data used by mortgage companies for loan analysis when rights to loan cash-flows change hands.

“Once we have that payload of ‘truth’ data, which we're focused on, then how are we moving that through the rest of the infrastructure? I think that's where we see the hooks for the industry leveraging data standards such as MISMO,” he said.