In the light of the crisis, the mortgage industry has been under tremendous pressure to manage its business in a more data-driven manner. There are both operational as well as regulatory imperatives to understand the borrower better, maintain procedural controls, and improve transparency.
However, mortgage servicers have struggled with these requirements primarily due to following reasons:
- Servicers work with a number of loan originators and investors, and have to aggregate the disparate information received from each, and
- Servicers lack the ability to collect, process and report such information efficiently, granularly and effectively.
As a result, servicers are struggling to keep up with the reporting and disclosure requirements of regulators.
New regulations (like those of the Customer Financial Protection Bureau) that are aimed to protect the interests of the borrower, have exacerbated these challenges for the servicers. Mortgage servicers now need to review their current servicing standards and practices, particularly those in the areas of Non-performing loans, foreclosure practices, and loss mitigation practices.
The following five areas, in particular, are the most challenging for servicers:
- Complaints management
- Debt collection
- Escrow and Taxes
Meeting the Mortgage Information Challenge
The core components of information management strategy which would address the current challenges are as shown below:
Design Critical KPIs: It is important to initiate the information strategy design by asking ‘What do we really care for? Which metrics are super critical to measure and monitor? What is the frequency with which we want to see these metrics? Who would consume these metrics?’ This would set the stage for assessing the investment needed in data infrastructure and the sources of data that need to be ‘tied together’.
Invest in Data Aggregation Infrastructure: It is critical to establish upfront the entire sources of truth (including but not restricted to servicing platforms) for the designed KPIs. The data flow architecture has to then ensure that all these sources are being ‘tied together’ in the data warehouse appropriately, regularly, and with appropriate ETL (Extraction, Transformation and Loading) processes. Lastly, the infrastructure needs a robust data governance mechanism built-in at various stages of aggregation too.
Develop Robust Data Governance: The data governance mechanisms need to be put in multiple layers within the infrastructure, in a structured manner. It involves building the business rules for data quality testing (real time as well as batch mode runs within the infrastructure), allocating clear data stewardship across different data sources, creating data quality metrics, tracking and publishing data quality reports, creating appropriate governance councils, and performing periodic data quality audits.
Develop Cockpits for Monitoring: This involves creating a comprehensive reporting module which publishes the KPIs in a manner that is easy to consume and act upon.
We believe the reporting needs to be thought out at the following 5 levels: Strategic dashboards for executive management, regulatory compliance, operations effectiveness, financial reports and investor reporting. In addition, we recommend leveraging smart visualization tools like Tableau, MSTR etc. to see the trends, patterns and metrics in an ‘easy-to-consume’ manner. These tools can enable much better communication with regulators given the ease of consumption and clear visualization of KPI trends / patterns (see figure).
Figure: Critical KPIs should be combined with powerful visualization to create “cockpits” for monitoring
We believe that, with the current regulatory pressures, mortgage servicing industry is ripe for disruption. The way servicers have managed data in the past, handled inflexibilities of servicing platforms, and created reporting infrastructure, is all bound to be over-hauled; especially for the large servicers. Fundamentally, the regulators are asking the servicers to do the basic stuff in the right manner. The regulations will make mortgage business management more data driven and borrower-centric.