As the jobless rate continues to rise in response to the recession, servicers are reminded that income and mortgage default levels are inexorably linked. According to NeighborWorks America, nearly 50 percent of mortgage default is income-related. Thirty percent of borrowers cited a reduction in income, and 19 percent a loss of income, as primary reasons for falling behind on their mortgage. Without transparency into a borrower’s current employment and income status, lenders and servicers are unable to proactively reach out to troubled borrowers and offer loan workout options. Insight into current borrower employment and income information enables servicers to make early contact with distressed borrowers, which is essential in successfully executing loan modifications.
Through the recently created “Making Home Affordable Act,” the federal government is planning to help up to 9 million homeowners currently at risk of default. In April 2009, HOPE NOW members and the industry at large modified 127,000 mortgages and completed 143,000 re-payment plans totaling 270,000 interventions, “the largest number in any month” since the alliance started to compile data.
In response to such programs, servicers need better insight into borrower financials in order to manage the level of predicted loan defaults for the remainder of this year. Rather than taking on the significant burden of additional staff, servicers should consider looking to efficient and automated data providers that can verify income and employment instantly and more cost-effectively. And, rather than taking on additional risk with loan modifications, servicers should better position themselves to manage risk through data and information by using providers that offer a deeper insight into the borrower’s employment and income situation, from data sources such as employer payroll or IRS tax transcripts (Form 4506-T).
Historically, the Government Sponsored Enterprises required lenders to obtain a credit score and verbal Verification Of Employment (VOE) to complete a borrower’s loan application. Many lenders were forced to dedicate call center staff to manually contact employers or work directly with the IRS to attempt to verify employment status for the borrower – an inefficient, expensive, and inconsistent process. Compounded upon this, some lenders and servicers managed loan data across multiple business units and service centers, with differing information being provided.
Unfortunately, when unable to reach the employer to verify income and employment, many loan officers chose to rely on the credit score as the sole indicator of a borrower’s financial health and risk. Today, lenders are no longer willing to base lending decisions on the credit score alone – they want an in-depth review of all information on a consumer’s credit file. In addition to credit information, lenders require transparency into other credit bureau information including real-time employment and income verification to predict future loan performance and delinquency.
Help Is On the Way!
Engaging a third-party for proof of documentation provides servicers with a strategic option to effectively streamline their existing workflow when it comes to employment and income verification, while simultaneously improving the quality of data on which lending decisions are made. Specific information servicers can access through a single, secure, third-party provider include: the borrower’s current place of employment, employment status (active or not), the longevity of employment, job title and salary (including pay rate, YTD income, past two years income). Armed with insight, servicers can determine the best course of action for each individual borrower and thereby improve the performance of their portfolio.
Additionally, a compliant and complete third-party provider can provide great comfort to investors, who wants know a lender is tapping the most accurate source of borrower employment and income for greater transparency into borrower financial health. And, through greater data transparency, investors and lenders can improve analytics on a significant percentage of their portfolios to more effectively identify undervalued securities and improve the accuracy of loan-level delinquency, default, and prepayment predictions. Loan-level updated borrower information used in combination with powerful analytics gives investors the information needed to differentiate the “good deals” from the “bad deals” and better correlate risk with default rates.
Servicers tend to focus on debt-to-income ratios in performing loan modifications, but loan modifications have changed the debt-to-income requirements. How can servicers calculate debt-to-income ratio without an accurate view of the income portion? Servicers that rely on the stated income from a borrower’s loan application to calculate debt-to-income, in an economy where salary reductions and unemployment numbers are continuing to rise are simply exposing themselves to greater risk.
There are several viable solutions available today. Outsourcing employment and income verification to a trusted third-party allows servicers to focus on their core competencies of evaluating and modifying loans. Streamlining this step enables servicers to process more loan modifications in a timelier manner, which puts us on the path to a housing recovery.
