MORTGAGE COLLATERAL DOCUMENT MANAGEMENT

Transcription

1 BEST PRACTICES AND RISKS IN MORTGAGE COLLATERAL DOCUMENT MANAGEMENT Presented by 1

2 TABLE OF CONTENTS Executive Summary...3 Market Landscape: A Fragmented Ecosystem of Servicers and Document Custodians...4 Figure 1. In-House vs. Third-Party Custodian Usage...4 Top Challenges in Services and Custodians Own Words...5 Figure 2. Services Top Challenges when Working with Custodians...5 Figure 3. Custodians Top Challenges when Working with Services...6 The Collateral Management Cycle: Illuminating Best Practices and Pinpointing Areas to Improve...7 Figure 4. Where Servicers Think Documents Are Most at Risk of Misplacement...7 Figure 5. Collateral Storage While at the Servicer...8 Figure 6. Servicers Reasons for Document Retrieval...9 Recap and Recommendations

3 EXECUTIVE SUMMARY The nation s home loan system is underpinned by hundreds of millions of collateral documents. Keeping them safe, knowing where they are, and making sure they re accessible is a complex and arduous task, yet vital for the system s functioning. The most severe strains on firms responsible for managing collateral documents may have eased as the foreclosure crisis and buyback demands have subsided, but there is little room for error. Legal and regulatory pressure is unrelenting, and cyclical challenges persist as massive volumes of mortgage servicing rights (MSRs) change hands. Keeping up with loan sales and servicing transfers is one of the biggest document management challenges in the mortgage industry today and collateral management is no exception. Indeed, many servicers have new portfolios of loans for which they may have never viewed the collateral. To assess current practices and risks in mortgage collateral document management, the research unit of SourceMedia the publisher of National Mortgage News conducted an online survey of mortgage servicing and document custodian executives on behalf of Iron Mountain in October The survey sample includes 132 respondents with authority over document management processes at their firms, as well as senior executives at both large and small servicers. The survey maps out interconnections in the servicing and custodian ecosystem to determine how many custodians a typical servicer works with and vice versa. The survey also examines the collateral document chain step-by-step: at the servicer, at the custodian and the traffic between the two, illuminating best practices and pinpointing lapses where they are prevalent. The survey results underscore strengths in certain areas: servicers are being proactive in pulling collateral back from custodians early in the default process to prepare for modifications and foreclosure proceedings. This means servicers are holding greater volumes of collateral for longer periods of time and taking unnecessary risks if in-house protocols fall short of industry best practice. Responses also identify lapses at custodians, where lost documents still occur, highlighting the importance of working with custodians with a strong tracking and management infrastructure. The survey also provides valuable benchmarks for the pace of adoption of electronic collateral and digital solutions that can simplify processes, reduce access points and minimize errors. Document custodians form a bridge between mortgage servicers and Government Sponsored Enterprises (GSEs) or investors, who rely on custodians to physically safeguard and certify the loan pools that they purchase, guarantee or securitize. GSEs and investors mandate the use of document custodians and may even specify which custodian is selected. 3

4 Among the survey s key findings: Mortgage collateral documents are managed and safeguarded by an intricate and fragmented ecosystem of servicers and custodians. Servicers typically work with multiple third-party document custodians frequently more than 10 compounding the complexity of caring for collateral documents. Servicers assessments of challenges in working with custodians are mirrored by custodians own perceptions of the challenges they experience when carrying out their responsibilities, and suggest weaknesses in key areas. A significant number of respondents reported difficulties in ensuring documents are transferred according to service level agreements (SLAs) when general requests are made or loans or servicing is sold. Costly failures can occur across the document chain, although executives say that breakdowns are distributed unevenly. Nearly 60% of servicers believe collateral documents are most at risk of being misplaced internally or in transit to custodians. Both servicers and custodians anticipate continued adoption of enotes, reducing the volume of paper collateral managed which should help drive workflow efficiency. Many servicers are taking inappropriate risks in how they handle documents, from failing to store them appropriately to failing to properly restrict access. Moreover, servicers are exposing more documents to such risks because they are either holding on to them for too long post-close, or because they are pulling higher volumes back from custodians for proactive review. Most servicers continue to encounter some level of lost documents at the custodian, and costs associated with such incidents can range as high as $50,000. While servicers recognize the need to safeguard loan collateral during its active life, many appear to mishandle it once the lien is released by destroying it immediately, at least seven years too soon. MARKET LANDSCAPE: A FRAGMENTED ECOSYSTEM OF SERVICERS AND DOCUMENT CUSTODIANS For any mortgage that a bank does not own outright, the investor or guarantor typically requires that the mortgage collateral documents be safeguarded by an approved document custodian to ensure that their investment is appropriately certified and protected. While the selection of the custodian may be at the servicer s discretion, the investor can also mandate the use of a specific custodian. This results in a complex, interconnected network of servicers and custodians managing collateral documents which can be further complicated as loan and servicing portfolios are sold. By nature of this complexity, it is rare that a servicer has the opportunity to concentrate their collateral management with a single document custodian (Figure 1). In fact, the vast majority of servicers hire third-party providers to perform at least a portion of their custodial services: about half use a combination of outside custodians and inhouse units, another quarter use outside custodians alone and the final quarter use in-house units alone. FIGURE 1. In-House vs. Third-Party Custodian Usage Q. Which of the following describes how your company handles mortgage document custodial services? Select one choice. Both 21% 26% 53% Use only our in-house document custodian Use only third-party document custodian n = 93 (Servicers) Source: Mortgage Collateral Servicing/Custodian Survey, SourceMedia Research

5 62% of servicers say that ensuring collateral files are conveyed in a timely manner during loan sales and servicing transfers is challenging to extremely challenging. By definition, a document custodian must be a regulated financial entity. Therefore, many large bank servicers have both the qualifications and the incentive to establish in-house units. Indeed, just 13% of mortgage companies that service loans totaling $20 billion or more in unpaid principal balances rely on outside custodians alone. Nevertheless, custodial duties at most large servicers remain divided among different custodians. Like their smaller peers, just a quarter of large mortgage companies use in-house custodians alone, meaning that the rest, or about 63%, use both their in-house custodian and outside firms. Further, servicers frequently juggle relationships with many different document custodians. Among the vast majority that engage third-party custodians, only about 25% are able to consolidate their business with a single custodian, while nearly a third work with more than 10 custodians. The connections running in the other direction from custodian to servicer are similarly complex. About half (54%) of the custodians in the survey say they perform work only for affiliated mortgage companies, and most of the rest perform work for both affiliated and unaffiliated servicers. Among those that provide third-party services, 61% work with 11 to 30 servicers and another 11% support more than 30 servicers. TOP CHALLENGES IN SERVICERS AND CUSTODIANS OWN WORDS Safeguarding the hundreds of millions of mortgage collateral documents that underpin the home loan system ensuring they are accurate, protecting them throughout the life of the loan, transferring them when loans or servicing are sold, retrieving them to conduct foreclosures or release liens when mortgages are paid off, dealing with borrowers and meeting regulatory requirements is an understandably difficult job. The results of asking servicers to rate the intensity of the challenges they face when working with custodians show that they continue to struggle with essential and routine tasks. About 62% say that ensuring collateral files are conveyed in a timely manner during loan sales and servicing transfers is challenging to extremely challenging. About 61% say the same about quickly and reliably obtaining documents according to SLAs. Nearly 55% say that establishing clear, real-time online tracking of collateral documents is challenging to extremely challenging. The majority also report difficulties with custodians when interacting with customer service and account management functions and when working to certify loan pools (Figure 2). FIGURE 2. Servicers Top Challenges when Working with Custodians Q. When thinking about challenges in working with document custodians, how would you rate the challenges of each of the following? Rate each on a 7-point scale where 1 is Not at all challenging and 7 is Extremely challenging. (Chart shows % rating 5, 6 or 7.) Ensuring collateral files are transferred in timely manner during loan sales and MSR transfers 62% Ability to quickly and reliably obtain documents according to established SLA Ensuring custodian meets contractual SLAs 57% 61% Online visibility into where my collateral documents are at all times Customer service and account management support 55% 52% Participating in the loan certification process with custodian Obtaining competitive pricing 51% 51% n = Variable (Servicers, excluding don t know responses) Source: Mortgage Collateral Servicing/Custodian Survey, SourceMedia Research

6 In open-ended remarks about challenges when working with custodians, servicing executives tend to raise issues like speed and consistency of delivery times, accuracy and quality control, lapses in communication, compliance and regulatory issues, and even basic matters of trust and security. It s always a hassle to get in touch with custodians to get information in a timely manner, one respondent says. Another executive says, No one custodian follows the same procedures as another. It requires constant monitoring. Even one executive who expresses overall satisfaction with the substance of custodian interactions say that the process is expensive and a nuisance. Custodial executives assessment of challenges in performing their duties mirror servicer responses (Figure 2). Ranking near the top, about 62% say managing loan sales and servicing transfers is challenging to extremely challenging identical to the proportion of servicers who say the same about their loan sale and servicing transfer interactions with custodians. Nearly 58% of custodian executives acknowledge that meeting SLA standards is challenging to extremely challenging when volumes peak. Most respondents also acknowledge strains while certifying loans and tracking individual documents. However, custodians say their biggest challenge is keeping up with guidelines set by the GSEs and investors (Figure 3). With document retrieval problems ranking near the top of both servicers and custodians lists of challenges, servicers also reported that the ability to quickly and reliably deliver documents according to SLAs is the attribute they value the most when selecting custodians. That means there is a growth opportunity to attract business for custodians that invest heavily in tools and systems to improve their document visibility and access. FIGURE 3. Custodians Top Challenges when Working with Servicers Q. How would you rate the challenges of each of the following for your company in providing mortgage document custody services? Rate each on a 7-point scale where 1 is Not at all challenging and 7 is Extremely challenging. (Chart shows % rating of 5, 6 or 7.) Keeping up with GSE and investor guidelines 74% Managing loan sales and MSR transfers Completing inventory audits Managing to SLAs during volume peaks 59% 58% 62% Managing the certification process with servicers 56% GSE and regulatory audits Document/file-level tracking Confirming documents reinstated are same as those previously released Locating documents within a file Third-party shipping Tracking files retrievals and ensuring they are return within alloted timeframe 46% 56% 56% 56% 54% 54% n = Variable (Custodians, excluding don t know responses) Source: Mortgage Collateral Servicing/Custodian Survey, SourceMedia Research

7 THE COLLATERAL MANAGEMENT CYCLE: ILLUMINATING BEST PRACTICES AND PINPOINTING AREAS TO IMPROVE Examining the collateral management cycle step-by-step sheds light on both best practices and prevalent lapses, and where they occur. Servicer and custodian executives were asked questions that cover three basic stages: when documents are held by servicers, when they are held by custodians and the flow of documents between the two. Costly failures such as lost documents, the most basic and vexing breakdown in the system can occur across the document chain, although executives feel that instances are distributed unevenly. Nearly 60% of servicers believe collateral documents are most at risk of being misplaced internally or in transit to custodians. Nearly one-third feel that documents are at highest risk of being lost at custodians and another 12% cited law firms (Figure 4). Survey results also underscore areas where operations can be made more efficient and reliable by adopting digital technology, such as in the process of verifying documents. FIGURE 4. Where Servicers Think Documents Are Most at Risk of Misplacement Q. In your opinion, where do you think collateral documents are most at risk of being misplaced? Select one choice. 12% At their own institution or in transit to a custodian At the custodian 30% 58% At the law firm n = 93 (Servicers) Source: Mortgage Collateral Servicing/Custodian Survey, SourceMedia Research 2015 CORE PROTOCOLS, CONTROLS AND INFRASTRUCTURE AT THE SERVICER Responses to questions on how collateral documents are handled by servicers suggest that many are taking inappropriate risks, from holding on to them for too long to failing to protect them sufficiently while they are in their possession. Only about 50% of servicers meet the industry best practice of conveying collateral to custodians in less than 48 hours. Whereas one-third of all servicers report that they typically hold collateral documents for three to nine business days and another 12% report holding the documents for 10 days or more. Understandably, servicers that use only an in-house custodian appear to have greater success meeting the standard: 67% report that they typically convey documents to their custodian affiliates in two business days or less. Many servicers are not applying the same safety protocols internally that they and their investors mandate from document custodians - whether upfront prior to sending collateral to the custodian or after retrieving the loan from the custodian for interim access needs. Roughly 38% of servicing executives say access to their collateral documents is not restricted to a specific list of people, and 53% report that the document location is not tracked through operations from the time they are received. In fact, nearly a fifth say anyone in the document processing center can access collateral documents before they are transferred to custodians. Failing to sufficiently restrict access and monitor where documents are at all times multiplies the chances of document loss. 7

8 In-line with industry best practices, about 44% of servicers say they store collateral documents in internal firesecure vaults before transmitting them to custodians, and another 33% say they use fire-proof filing cabinets. However, about a fifth simply store collateral documents in general records rooms (Figure 5). FIGURE 5. Collateral Storage While at the Servicer Q. Which of the following storage methods are used by your company to store mortgage collateral documents prior to transferring them to the document custodian? Select one choice. 1% 22% 33% 44% Internal fire-secure document vault Fire-proof filing cabinets General records or file room Other n = 93 (Servicers) Source: Mortgage Collateral Servicing/Custodian Survey, SourceMedia Research 2015 CONFRONTING THE DIGITAL SHIFT Mortgage documentation has become increasingly electronic and where the documents are not native electronic, lenders and servicers rely on imaging to enable electronic workflow. For example, about four in five servicers that use unaffiliated custodians report that they create electronic images of collateral documents before sending them to custodians. This is a new practice for many however, with nearly 30% implementing imaging at some point in the last 2 to 3 years, and 10% in the last 12 to 24 months. Many would argue that collateral documents should no longer be executed in paper with wet signatures. Yet, despite the development of new technology over the past decade to facilitate esignature and evaulting of electronically executed collateral documentation (e.g. enotes ), adoption has been slow and paper remains the norm, perhaps reflecting a generational preference for wet signature. In fact, 48% of servicers indicate that their overall portfolio contains 20% or fewer enotes with nearly a quarter of all servicers stating that they had no enotes at all in That said, nearly all respondents anticipate that they will begin to encounter more enotes with their 2016 originations. This will represent more of a process change for smaller servicers who typically have encountered a much smaller volume of electronic collateral. Just 9% of mortgage companies that service loans with balances of $20 billion or more report that they have not encountered an enote already, compared with 27% of smaller servicers. Meanwhile 27% of large servicers say enotes account for half or more of their portfolios, compared with just 21% of smaller servicers. While the digitization of documents continues to increase, electronic workflow in this area is not as widespread. Many servicers including large ones have yet to broadly leverage digital images or software to support their data validation efforts. In fact, just 7% report automating the process fully and over 40% say that anywhere from 50% to 100% of their data validation work is still completed manually by comparing two or more physical documents to verify consistency of information. This is an area where there is considerable room to streamline operations and gain efficiencies. 8

9 AT THE DOCUMENT CUSTODIAN: LOST DOCUMENTS AND SLA DEFICIENCIES As noted earlier, when servicers are asked what attributes they most value in custodians, their responses map closely to the findings outlined while describing challenges in their custodian relationships (Figure 2): servicers want the ability to quickly and reliably obtain documents according to contractual standards established in service-level agreements. Yet 51% of servicers report that custodians lost an average of 10 or more collateral documents per year and 21% say that more than 30 are lost each year. While the median cost of a lost collateral document reported by servicers is just $141, estimates range widely to as much as $50,000 per incident. As demonstrated by the wide range reported by executives, the dollarcost of a lost document can be hard to quantify. In open-ended responses, survey participants say that damage from lost documents includes reputational harm, fees to compensate investors for delays and the possibility of putting foreclosure proceedings at risk. Responses to questions about the frequency with which custodians missed basic contractual SLAs were similar: more than 46% of servicers report more than 11 incidents and 14% report more than 30 incidents per year. The estimated median cost per incident is just $100, but range as high as $15, % report more than 11 missed contractual SLAs per year, and 14% report more than 30 incidents per year. SERVICERS 51% report that custodians lost an average of 10 or more collateral documents per year. While the median cost is just $141, estimates range to as much as $50,000 per incident. 41% are performing at least a portion of the loan certification process off of an electronic copy of the physical collateral. CUSTODIANS 69% report performing collateral inventory audits quarterly and 26% perform audits bi-annually. Despite this frequency of missed SLAs and lost documents, custodial executives indicate behaviors that should help minimize both. While not a uniform requirement, a common best practice for document custodians is to perform routine inventory audits in order to proactively monitor and minimize the potential for lost documents. As confirmation of this best practice, custodians report that they perform collateral inventory audits at least annually, and 69% stating they do so quarterly and 26% bi-annually. Further, custodians indicate that they are beginning to integrate electronic processes into their workflow, which can help minimize incidents of lost documents. More than 40% of custodians report that they are conducting at least a portion of their certification process using internally certified images of the collateral document, minimizing internal access to the physical document. 9

10 ACCESSING DOCUMENTS: RISK EXPOSURE FROM HIGHER VOLUMES AND MISSTEPS AT LIEN RELEASE Survey responses show that servicers are routinely retrieving collateral documents, yet less than a third are for lien release (Figure 6), implying that the vast majority of retrievals pertain to active loans, further underscoring the need for strong in-house storage practices. FIGURE 6. Servicers Reasons for Document Retrieval Q. What percent of the time does your company retrieve collateral documents from the custodian for each of the following reasons? Allocate 100 percentage points across all reasons to indicate the time collateral documents are retrieved for each reason. (Chart shows mean % allocation.) 31% 26% 25% 18% 1% 43% of the documents that servicers retrieve from custodians are for loans at risk of foreclosure - either to ensure quick access or to perform proactive document validation. 60% of servicers typically destroy original collateral documents immediately following lien-release; a violation of stipulated retention requirements. Lien release Transfer documents to an attorney where original docs are required Perform proactive documents validation for loans at risk of foreclosure Ensure quick access to the physical file in case of foreclosure Other n = 80 (Servicers, excluding don t know responses) Source: Mortgage Collateral Servicing/Custodian Study, SourceMedia Research 2015 Indeed, some 60% to 70% of servicers report pulling collateral documents back from custodians into their own facilities daily or weekly. Servicers say that 43% of documents called back from custodians are retrieved to perform document validation for loans at risk of foreclosure, or to stage them in case they are needed quickly to carry out a foreclosure. The traffic is driven in part by SLA concerns: servicers have little timing flexibility when a collateral document is delivered too late. Also, due to all the recent servicing transfers and loan sales, servicers may have limited visibility into the collateral documents they ve acquired and are retrieving them to perform proactive due diligence. Several servicers also report collateral missteps at lien release. Nearly 60% say they frequently or sometimes destroy collateral documents immediately after retrieving them from custodians, which violates standard retention requirements that stipulate retaining the collateral records 7 to 8 years post lien-release. More than 75% say they frequently or sometimes retrieve documents and store them in-house. It would appear that servicers and custodians alike are doing a better job leveraging electronic delivery mechanisms where possible. On average, servicers believe that only 36% of their retrievals are delivered in paper via courier as compared to 47% via electronic means such as , portal or efax still another 17% rely upon paper fax delivery. 10

11 RECAP AND RECOMMENDATIONS Over the past decade, mortgage documents have become increasingly electronic thanks to the development of better electronic forms, workflow tools, and the more widespread adoption of imaging technology. The main exception has been in the area of original collateral which remains a predominantly paper-based section of the loan file. While servicers and document custodians continue to make progress in terms of the adoption of enotes, imaging and workflow, paper and its associated challenges persist. With that comes complexity safeguarding, validating and transferring the vital mortgage collateral documents that underpin the home loan system is an understandably difficult job. This survey highlighted several positive trends within the collateral management space that should help both parties manage through this complexity. While the role of the document custodian is to carefully safeguard the physical and electronic collateral of investor-owned or securitized mortgages, custodians are not always in possession of the collateral. Servicers are storing collateral documents on-site for longer periods of time either through proactive retrievals to facilitate potential foreclosure processing or by holding on to collateral documents for too long post-close, often failing to meet the industry best practice of two business days or less. Yet many servicers have not implemented measures to ensure that collateral is as safe in-house as it is while stored under investor-mandated standards at the document custodian. For example, servicers are failing to sufficiently restrict document access, track documents continuously while in their possession or store them in appropriately secure facilities. Such lapses increase the likelihood of lost documents and delays, and indeed a majority of servicers believe collateral documents are most at risk of being misplaced internally or in transit to custodians. Further, a majority of servicers say they sometimes destroy collateral upon lien release, in violation of standard retention requirements that range from seven to eight years depending on the state. Servicers should improve their practices by: Delivering collateral documents to custodians more quickly to reduce the amount of time they are housed on-site. Using appropriate storage protocols while collateral documents are in-house, and strengthening access and tracking controls. Ensuring that inactive collateral retrieved from the document custodian is safeguarded for the appropriate retention period prior to disposition. For their part, document custodians appear to be taking positive steps to improve their document management through routine inventory audits and further limiting access to original collateral documents via certification off of an electronic copy of the original. However, servicers state that lost documentation at the custodian continues to occur and that missed SLAs are a real challenge. Custodians should improve their practices by: Implementing protocols that reduce access to collateral documents and the possibility of losing them such as using electronic images in the certification process or more frequent audit controls. Using flex-staffing to meet SLAs during peak volumes. Adopting robust document management practices and systems to improve document visibility and access. While paper and paper-based processes are fundamental to collateral document management, both custodians and servicers can benefit from better implementation of electronic workflow where possible. Servicers should also seek help from specialists when managing documents onsite, and look for custodians that are investing in the best protocols. By doing so, servicers and custodians can enhance access, reduce risk, and better address regulatory and retention requirements. 11

12 METHODOLOGY In October 2014, SourceMedia Research surveyed 132 mortgage executives online about their views on priorities, challenges and practices in mortgage collateral document management. Respondents were drawn from subscribers to National Mortgage News, and were screened for their involvement in the area of mortgage servicing or document custodian. The target audience is segmented by residential mortgage servicing companies and mortgage document custodians. ABOUT IRON MOUNTAIN Iron Mountain has over sixty years of experience in servicing the needs of banking customers. Today, Iron Mountain works with 48 out of 50 of the top U.S. banks, building superior records retention programs, imaging delivery systems and efficient records and information management programs. Whether adapting security protocols to better protect business records or delivering innovative information governance and workflow solutions, Iron Mountain can help financial services organizations to gain efficiencies while meeting the everchanging needs of today s stringent regulatory environment. FOR MORE INFORMATION: ABOUT SOURCEMEDIA SourceMedia Research provides full custom B2B research solutions for marketers, agencies and other targeting business sectors such as accounting, banking, payments, mortgage, insurance, HR/employee benefits and wealth management. SourceMedia Research is a unit of SourceMedia Inc., whose B2B media brands include National Mortgage News, Accounting Today, Financial Planning, American Banker, The Bond Buyer and Employee Benefit News. 12