An Ounce of Prevention is Worth a Pound of Cure
Portfolio cleansing is a methodology that helps portfolio buyers identify the “high-risk” loans at the time of a portfolio or company ownership change. To illustrate the power of the approach, CoreLogic tracked the results of a national prime lender use case.
During 2018, four large prime portfolio acquisitions, totaling over 200,000 accounts, were run through the process. Here are the results from an investment and savings perspective:
Phase I (100% of acquired loans) – Perform a high-level risk assessment on 100% of the acquired loans based on loan history
Phase II (4% of acquired loans) – Validate the acquired loans against the delinquency database (the test case national lender had this population identified as a starting point)
Phase III (0.3% of acquired loans) – Obtain delinquent payoff amounts
Phase IV (0.15% of acquired loans) – Remedy existing delinquencies found
Across the entire acquired loan population, the total investment cost was less than $50,000 in procurement fees, and targeted a population that represents just 0.15% of accounts with the highest risk.
Component I – After calculating when taxes for the agencies with delinquencies would come due, CoreLogic estimated approximately a four-month period where the delinquencies would have continued to exist, accruing additional penalty and interest charges. Using the average monthly agency late penalty rate of 2%, the four-month compounded penalty/loss exposure was approximately $41,100.
Component II – CoreLogic utilized a state level matrix which documents the most likely time before an original property tax delinquency results in a loss of collateral. This matrix relies on existing state statutes around property taxes as well as local agency procures. Below is a breakdown of the severity of delinquencies flagged.
|Category||Count of Properties||Unpaid Principle Balance (UPB)||Estimated Likelihood of Lost Collateral||Estimated Savings from Reduced Loss Exposure|
|24 + Months Severely Delinquent||11||$2,421,895||20% (1 in 5)||$484,378.94|
|12 – 24 Months Severely Delinquent||18||$3,884,149||10% (1 in 10)||$388,414.90|
|0 – 12 Months Severely Delinquent||11||$2,756,704||2% (1 in 50)||$55,134.08|
Knowing the product costs and expected benefits from this national lender test case, CoreLogic was able to estimate the return on investment (ROI). In this case, the lender incurred less than $50,000 on more than four large acquisitions. However, they saved an estimated $969,000 in loss and penalty/interest exposure, while managing the borrower experience from the initial time of loan onboarding. In this test case, the client had begun the cleansing process in phase II of investment, as this was a transfer where high-risk accounts were known. Even if this lender had not started the phase II process and had to order data on the entire acquisition population (i.e. phase I), they still would have had an estimated ROI of around 19.6%.
With the new servicing landscape, including frequent acquisitions and service releases, a portfolio cleansing process offers both buyers and sellers a way to mitigate losses and tax sale exposure, while also building trust with the borrower.