Paradatec’s Neil Fraser: For Servicers, Pandemic-Related Challenges Are Just Beginning
Neil Fraser is Director of U.S. Operations for Paradatec, Cincinnati, Ohio, a provider of AI-based document classification and data extraction technology for mortgage loan processing. He manages all of Paradatec’s operations and has grown the company every year since its incorporation in 2002. He is responsible for the company’s growth and profitability as well as developing long-term operational strategies and overseeing staff. He has a background in computer security and has managed teams developing software and firmware for the power generation and aerospace industries.
MBA NEWSLINK: By all accounts, 2021 is turning out to be a pivotal year for mortgage servicers. What sort of challenges do servicers face in the months ahead?
NEIL FRASER: There is little doubt that mortgage servicers are headed toward choppy waters. Low rates have been the gift that keeps on giving, but signs that the Fed will end its bond-buying program and start hiking rates next year likely means the refi party is coming to an end. More importantly, servicers are facing an unknown number of borrowers who will be exiting forbearance plans and looking for help, probably well into next year.
This means servicing costs are likely to grow at a time when they are already at an all-time high. In an International Banker article last September, MBA Chief Economist Michael Fratantoni wrote that the cost of servicing loans has grown as much as three times since the last financial crisis, while the cost of servicing non-performing loans has grown by four to five times. Managing those costs is going to be a major hurdle for servicers going forward.
NEWSLINK: What does the post-pandemic landscape look like for servicers?
FRASER: The landscape is still evolving. As of mid-June, some two million borrowers were still in some type of forbearance plan, and roughly half are expected to expire sometime this year. Just recently, however, the CFPB announced plans to give borrowers on forbearance plans until 2022 to resume payments. The agency also has plans to prohibit servicers from pursuing foreclosures until next year. The only thing we know for sure is that servicers will need to shift their focus from managing forbearance requests to loan workouts, which will likely create additional pressures on their staff and operations. I’ve read reports that servicers and sub-servicers are already struggling with engaging borrowers and providing them with workout options.
Compliance is going to be huge for servicers this year, too. The CFPB has made it clear it will be monitoring whether servicers discriminate against certain applicants when determining whether they qualify for loss mitigation options. It will also be tracking how well they communicate with borrowers. Many borrowers have already complained that their forbearance plans were mishandled or that they had trouble getting a live person on the phone for help. Meanwhile, the CFPB’s proposed debt collection rules, expected to go in effect next January, will bring even more pressure on servicers. Each of these challenges makes servicing more costly, which is why we’re seeing more servicers look toward technology to save money.
NEWSLINK: What do you think is going to happen with foreclosures? Are we headed for another crisis?
FRASER: I really don’t think so. Home values are soaring in most major markets, so you would think that borrowers who are still facing a loss of income or financial insecurity would simply sell their homes and walk away. Then again, some of our clients and partners are expecting a big ramp-up in foreclosures as the government pulls away from forgiveness plans.
The data doesn’t tell us a whole lot. The MBA recently reported that servicers’ forbearance portfolio volume dropped by two basis points to 3.91%, which is an encouraging sign. On the other hand, ATTOM Data Solutions recently reported that foreclosures are actually increasing year-over-year and rose 9% in the first quarter of 2021, even with federal moratoriums in place. The federal moratoriums were just extended another month, but one can only wonder what will happen when they end. Even if we don’t see a massive wave of foreclosures, servicers will almost certainly be dealing with some kind of increase in defaults and delinquencies and will need to find ways to cut costs.
NEWSLINK: What can servicers do to lower costs?
FRASER: The most effective way to lower costs is to automate the mundane, manual work that eats up time and staff resources, so servicers can focus on what they’re supposed to do—serve borrowers and help keep them in their homes.
For example, any significant increase in defaults or foreclosures, or both, will likely be followed by an increase in MSR transfers, which has historically been a very labor-intensive process. Having to manually index and audit loans while onboarding creates additional delays and inaccuracies, which bogs down the process even more. Automated document processing technology has been proven to be particularly helpful in the loan onboarding process, which can typically take weeks or even months. Using AI-based text analysis and machine learning tools, it’s possible for servicers to ingest as many as 2,000 loans in as little as three hours. When done manually, that process often takes as long as three weeks.
NEWSLINK: How can servicers stay compliant with regulators and still control costs?
FRASER: To meet the CFPB’s proposed debt collection rules and show that they are doing everything they can to help borrowers, it’s very important that servicers keep accurate data and records. The same AI-based text analysis tools can be used to perform exceptionally fast loan audits and validate loan terms. We’re talking milliseconds per page, which allows servicers to audit 25,000 loans in a couple of days. They can also extract 100% of the information trapped in static documents and convert it into data with almost 100% accuracy. With the right technology, servicers can also process documents with amazing speed, even when documents are inconsistently named or have been improperly indexed.
The latest automation offerings work with any kind of document, too, whether it’s unstructured or a document a lender has never seen before. Servicers can even automatically audit data from previous servicers against incoming loan documents.
It’s really in every servicer’s best interest to take maximum advantage of these kinds of technologies so they can spend the bulk of their energy for helping borrowers. No matter what kind of market we find ourselves in, that’s always a recipe for success.
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