Portfolio Cleansing – An Ounce of Prevention is Worth a Pound of Cure

By Mark Stevens Mortgage Finance, Risk Management

The mortgage servicing industry landscape is shifting. Over the past decade, the industry has experienced growth from two primary sources. The first, and more traditional source, is organic growth through new loan originations. The second method, which has become increasingly more common, is growth through either loan portfolio or company acquisitions. This shift is happening because of the increased willingness of private investors to invest in servicing and the government sponsored enterprises’ focus on reducing their footprint. This can cause problems for servicers in instances where loans are acquired with unknown, pre-existing property tax delinquencies missed in the due diligence phase.

What risks are incurred through the acquisition of a loan portfolio?

Under the second method mentioned above (growth through acquisitions), loan portfolios change hands, where one party acquires a set of loans while the other transfers ownership. With this exchange, there is an element of risk transfer for the new servicer after acquiring the new loan portfolio. Some of these risks include:

  • Minimum due diligence on a new loan population incurred from the previous servicer
  • “Pre-existing” conditions (e.g. tax sale critical items) within the loan portfolio that can lead to unrecoverable or lost properties, or large penalty/interest payments
  • Borrower dissatisfaction and erosion of borrower confidence
  • Limited time to collect or recover loss from the prior servicer

What is portfolio cleansing?

The challenge for the portfolio buyer is to identify the “high-risk” loans at the time of the ownership change so they can mitigate these operating risks. To resolve this industry challenge, a new approach has been identified to address these concerns— portfolio cleansing. Under the new approach, tools are provided to support servicers’ needs. This includes:

  • Pinpointing high-risk accounts based on loan history and attributes
  • Identifying and resolving ownership and delinquency issues at the time of the portfolio onboarding
  • Remedying existing delinquent property taxes, thereby improving the borrower experience
  • Reducing the risk of unrecoverable properties and decreasing penalty and interest accrued
  • Securing quicker delinquency payments to recover loss from the prior servicer

What does the portfolio cleansing process look like? 

Upon the transfer of loans, a comprehensive property tax dataset is used to identify if there were any known delinquencies on the accounts at the last time the tax records were updated. At that point, potential delinquencies can have taxes procured and paid so the accounts are proactively remedied. This approach helps portfolio buyers get paid sooner rather than waiting for the borrower inquiry to respond or until the next tax cycle.

To illustrate the power of the approach, CoreLogic tracked the results of a national prime lender use case for the portfolio cleansing methodology. Click here to learn more about the expected benefits and return on investment for the lender.

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