According to the Mortgage Bankers Association’s National Delinquency Survey, mortgage delinquency rates have decreased to the lowest levels in almost a decade. The decrease in delinquency rates and the increased cost of servicing have shifted the industry’s focus to risk management and fiscal accountability.
This may be the best climate for servicers to re-evaluate their understanding and utilization of their primary partner in achieving risk mitigation – investor reporting. Despite its significance, the role of investor reporting is largely unknown or misunderstood.
Why does investor reporting matter, and why should it be a primary partner in a servicer’s risk mitigation activities? When properly utilized, the investor reporting group within any servicing organization is the focal point for risk mitigation and oversight of the servicing process. To ensure accurate reporting and remittance, an investor reporting department should have a fundamental grasp of contract interpretation, payment processing, foreclosure, claims, general accounting and loss mitigation concepts and of how they translate to individual investor requirements, while also meeting corporate objectives. The reporting group’s understanding of the financial implications of the different remittance types and their loss exposure ramifications, as well as the appropriate advance management and recovery methods for the loan population, is why it is positioned to aid servicers in avoiding expensive and potentially financially crippling relationships.
Investor reporting facilitates risk management by providing process and financial management oversight and fiscal risk mitigation. For the risk-aware servicing shop, the investor reporting group is essentially the “last line of defense” and litmus test for the organization’s operational effectiveness.
The nature of investor reporting requires all aspects of the servicing process to funnel through the monthly reporting and provide a panoramic view of process efficiency for both performing and nonperforming metrics. As anomalies or potential issues are identified, investor reporting performs due diligence to review, research and coordinate the resolution of the issues and underlying causes with the applicable lines of business. This group ensures that the appropriate regulatory and investor compliance requirements are met.
As servicers invest in the purchase of mortgage servicing rights (MSRs) to alleviate the spiraling cost of servicing, both bank and non-bank servicers are actively looking for ways to diminish their financial exposure and may undervalue investor reporting as an integral partner in the process. Although bank servicers have the advantage of deposits and a lower cost of capital, non-bank servicers often have a cost of capital rate significantly higher than their bank counterparts. This disparity is exacerbated when advance requirements are factored in.
A well-versed investor reporting group can help solve for the best reporting type and advance recovery mechanism to help alleviate these costs. Additionally, proper monitoring and management of the advance mechanism helps optimize cost by ensuring that the organization maintains razor-sharp margins on its advance requirements.
These are just a few of the areas where a risk-astute operation can leverage its investor reporting department as a partner in risk management and mitigation of financial exposure. Such an operation would also be positioned to address the more recent government-sponsored enterprise (GSE) changes to investor reporting focused on enabling a more uniform and simpler reporting approach that provides transparency into low-level loan details to support heightened risk awareness.
The creation of the Federal Housing Finance Agency (FHFA) and its conservatorship of the GSEs make it advantageous for investors and servicers to have uniform requirements and interfaces in the sale and administration of loans. To facilitate this, the FHFA is collaborating with Fannie Mae and Freddie Mac to create the Common Securitization Platform and Single Security.
Fannie Mae reporting
Fannie Mae initiated the evolution by overhauling its 40-year investor reporting requirements in a move that has had servicers and technology providers collaborating for the past two years to comply. An implementation date of February 2017 and the volume of participants have necessitated the need for service providers to perform surrogate testing on behalf of their clients. Despite their execution and operational complexities, the focal points of the Fannie Mae changes and their implications can be summarized as follows:
For loan reporting, the major change is going from pool-level “aggregate” to loan-level reporting. Fannie Mae encourages daily reporting of loan-level transactional activity. Loan activity reporting is now due on the 22nd calendar day or previous business day and month-end.
A moratorium on loan sales during the month of February 2017 will help facilitate a smooth transition.
It is necessary to note, especially in scheduled pools, that although Fannie Mae has assumed the responsibility of balancing the “pool,” the servicer still bears the onus of assessing loan-level test-of-expected and pool-to-security metrics. These ensure that the principal balances sold to the security or “pool” aligns with the actual activity and principal balances in the deal. It is the servicer’s responsibility to take the necessary measures to research and resolve any discrepancies and bring the balances in line.
Additionally, the Fannie Mae requirements bring into question the fate of Fannie Mae securities in subservicing relationships in which the subservicing agreement and servicing are facilitated as a “private” investor reported to a master servicer. Do the multiple reporting requirements also apply to them? If so, this may necessitate a change to either the existing servicing agreement to facilitate the subservicer’s ability to report directly to Fannie Mae and account for the additional operational costs or the master servicer’s reacquisition of the MSRs in order to comply.
Freddie Mac reporting
As Fannie Mae leads the charge in investor reporting changes, Freddie Mac is not far behind, as it continues to measure the energy around the proposed changes. The theme of uniformity to industry standards prompted speculation around the depth of changes that Freddie Mac would implement. The industry wondered if the Freddie Mac changes would align with industry standards and whether they would involve what would be a seismic shift in existing Freddie Mac policy, such as a change from schedule/actual to schedule/schedule, mid-month to end-of-month reporting, and daily to once-a-month payoff remittance.
These prompted concerns around how scheduled balances would be determined – Freddie’s expectations around the remittance of “delinquent” principal by servicers on previously “actual” balances – and the effects of these changes on existing MSR valuations, as the additional advance requirements were not previously priced into the deal.
The speculations may have subliminally influenced Freddie Mac, as its current position, although momentous, is not as drastic as anticipated. The major highlights for Freddie Mac are as follows:
The major change is that the reporting cycle and borrower activity period will be a calendar month cutoff. Freddie strongly encourages daily reporting of loan-level transactional activity. “All in” reporting is due on the determination date of the 15th or next business day. Adjustments or corrections are to be reported through the first business day of the subsequent month.
As far as forecasted interest goes, Freddie Mac will require servicers to provide updated scheduled interest calculations or “forecasts” with every principal transaction cycle, or adjustment.
The principal remittance cycle remains a mid-month. The payoff reporting and remittance remains unchanged.
Freddie Mac’s new requirements also mean a single remittance type – i.e., the elimination of the accelerated remittance cycle (ARC), super ARC, “first Tuesday” reporting, etc.
Further, the due date of last paid installment is now driven by investor reporting, not electronic default reporting (EDR), as this will eliminate the disconnect between the month-end EDR reporting and the mid-month investor reporting.
What’s more, servicers will have more time during the month to research and resolve edits.
In reality, the Freddie Mac proposal suggests more of a “simulated“ industry standard month-end reporting and remittance cycle. Freddie Mac’s requirements still retain their “uniqueness” in the industry. There is an apparent misalignment between the reporting and remittance – the former being driven by the calendar month and the latter remaining mid-month. Simplicity supports the alignment of reporting and remittance to the same cycle. However, in retaining a schedule/actual format, Freddie Mac is working to keep the principal and interest payments reported and remitted within the same period.
One of the factors to consider is the ability of Fannie Mae, the service providers and servicers to effectively execute the Fannie Mae changes. The level of execution will determine the necessity of a “cleanup” and the requisite amount of time needed to facilitate it.
The outcome of the Fannie Mae initiative is pivotal, as lessons learned will be leveraged by Freddie Mac in its initiative.
Not to be forgotten, Ginnie Mae has expressed interest in the ongoing investor reporting changes, if only currently as an avid spectator.
All of these factors require servicers to ask themselves the following questions:
Are you investing in the appropriate risk optimization strategy?
Are you optimally engaging and utilizing all of your risk mitigation partners?
And, most importantly, is your investor reporting group positioned to meet your strategic risk and growth objectives?
Ona Ngnoumen is vice president of investor reporting for mortgage lender BB&T. She can be reached at firstname.lastname@example.org. (Note: The opinions expressed in this article are those of the author, and they do not reflect in any way those of BB&T Mortgage.)