New research by dv01, a loan data agent (LDA) providing securitization
reporting and analytics on consumer unsecured, mortgage, small business, and
student loans, says the pandemic has revealed serious weaknesses in the
reporting structure for mortgages. The company found significant numbers of unreported
loan modifications and says it was these types of reporting errors during the global
financial crisis (GFC) which led to an increase in price volatility when those
errors were later corrected.

A new white paper says that, in stark contrast to the GFC,
consumer loan performance across asset classes has remained relatively strong. Dv01
has released bi-weekly reports of both loan performance and the relief efforts by
issuers and servicers to aid borrowers but has found significant irregularities
and inconsistencies across the multiple parties involved in the mortgage
process. Even four months into the pandemic there are numerous cases of
underreported or entirely omitted
modification behavior. Data report quality
varies across deals and even between reporting parties within a single deal and
there appear to be significant differences between online lending and that of
the mortgage industry.

In online lending, issuers primarily service loans in-house
and service only its own loans. By its nature online lending is technology
driven and the data has fewer intermediaries. In contrast, in mortgage lending issuers
and servicers are entirely different entities, so the relationships can be
misaligned in terms of investor transparency. Furthermore, servicers generally
handing loan portfolios from a multitude of issuers and loan types, thus issuers
have less ability to control servicer reporting standards. Additionally, there
can be multiple servicers per securitization, each with a different approach to
reporting and capturing modifications.

In every securitization, trustees are the ultimate fiduciary
and aggregate data from every party involved to create investor reports. There
may also be a master servicer that aggregates data in multi-serviced deals, who
reports to the trustee and reporting among trustees has been equally
inconsistent. There are also third-party data providers that are not directly
part of a securitization but communicate with all these entities individually. Thus,
there are multiple opportunities for errors or inconsistency in reporting and
data quality. Dv01 says, to date it has not observed these communication chains
yield cleansed, validated, consistent, and standardized reporting for investors
and stakeholders. Even more concerning, because they were so prominent in
non-agency securitizations after the GFC, most of these entities may have been
reporting or underreporting modifications for over a decade.

The company says that in its review of the initial months of
COVID-19 performance across mortgages, they noted low levels of modification or
hardship relief
in both the standard reporting data from raw data providers and
various trustee reports. This seemed at odds with the modifications and relief
efforts in online lending markets and those available to GSE borrowers with the
same servicers. There were also substantial differences in new modifications
between securitizations and within a securitization with different servicers. Even
within a particular deal, they observed similar variances across servicers. There
was also behavior indicating modifications were occurring but were not properly
reported, such as one deal with no modifications reported but with loans where
balances were increasing each month.

The irregularities prompted dv01 to look at a single
securitization from a prominent non-QM issuer. It engaged four individual
servicers, the master servicer, and the trustee to reconcile discrepancies in
the July 2020 distribution.

Out of more than 900 active loans, dv01 confirmed that 233
are in some form of active modification, representing nearly 30 percent of the
outstanding collateral based on outstanding balances. The trustee reported only
41 modified loans and the Master Servicer reported 74. A supplement provided by
the trustee lists 261 loan IDs that are impacted by COVID-19 but makes no
distinction as to whether these loans have been modified, or if the borrower
has simply indicated hardship. In some instances, counterparties are treating a
small population of either completed or cancelled modifications in different
ways, resulting in slightly overstated counts.

When consulting other third-party providers, the results are
even more troubling.
 One counterparty reported a single modification as of
July’s distribution date. Dv01 observed significant discrepancies between each
reporting party in this chain, as well as some inconsistencies across multiple
data sources within a single counterparty, resulting in an understatement of
over 150 loans that should be classified as active modifications.

The research indicates that this inconsistency increases
investor uncertainty
and delays sector recovery. Given the differences between
those loans with modifications and those with borrowers who simply fall
delinquent, it is apparent that modifications indicate a borrower’s successful
effort to avoid defaulting. Furthermore, clear modification activity allows
stakeholders to reconcile servicer advance behavior and ultimately determine
cash collection and distribution activity, as well as potential losses or
interruptions related to repaying advances. Lastly, when the remaining
reporting platforms eventually properly incorporate these factors and correct
the inaccuracies, the impacted securitizations will have substantial moves in
pricing and volatility, and the movement will magnify the longer the errors
remain outstanding.

Dv01 concludes that the current mortgage reporting
architecture is fragmented, outdated, and inefficient, and COVID-19 is further
exposing the faulty reporting system. For investors to gain confidence in the
health of the mortgage market and the broader economy, the industry needs a
more modern and innovative approach to reporting modifications. This will involve
alignment, advocacy, and accountability across all industry participants, and
an entity overseeing and coordinating these efforts in every securitization.

By Jann Swanson , dated 2020-08-10 16:17:59

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Courtesy of Mortgage News Daily

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