Reverse Mortgage Post Closing Activities

Friday, 09 July 2010 08:04

I.    Post Closing Overview

The goal of post closing is to 'perfect' the collateral.  This means:

•    Closing documents are reviewed for correctness;
•    Collateral is reviewed for completeness and sent to the investor;
•    The loan is set-up correctly to service;
•    The secondary system has the correct loan data;
•    Trailing recorded documents and the final title are received and correct; and
•    The loan must be insured if for an agency origination.

The objective is to identify exceptions and have an effective, efficient, and timely process to correct exceptions.

Post closing isn't glamorous; it is not a profit center.  However, if handled correctly, it can reduce risk, reduce costs, and ensure that loans are completed correctly. 

Mortgage lenders have always focused on front end systems and processes, from the application to funding.  This is understandable since this is how they get paid.  As a result, post closing activities have normally been neglected to date and internal solutions are mostly ad hoc.

In today’s mortgage environment, secondary markets are reluctant to purchase loans for whole loan sales and security pools.  The secondary market investors will regain confidence when (among other things) they are provided with assurance that loans are originated according to industry, lender and investor guidelines.  Performing these post closing activities are critical to a lender's survival in order to reduce risks, losses and costs.


II.    Defining Reverse Mortgage Post Closing Activities

Most companies take a narrow look at post closing activities and therefore a fragmented approach in addressing them effectively and efficiently.  Instead, a more holistic approach to looking at all these activities should be taken and then you can determine the proper approach to coordinate them.

Post closing is a document review and a data review.  Post closing tasks should start at closing document preparation, before the documents are executed.  It is easier to prevent a problem than to fix a problem. 

In breaking down these post closing activities from a reverse mortgage lender’s perspective, we have the following:

•    Closing – A review should begin when the closing documents are prepared and before the borrower executes them.  This review will verify that the closing documents are correct and that all underwriting conditions are completed.  This is more than a closing doc review done by title agencies.  Catching errors at this point, rather than after signing can save a lot of time.  Often, these errors are not even found before key documents are already recorded.

•    Funding – This includes funding review for table funded loans and pre-funding reviews for lenders buying loans from wholesalers.  This review ensures the closing documents are executed properly and that no changes that do not agree with the LOS are made.

•    Delivering Collateral – This process entails delivering collateral documents to the custodian.  The funding review should include a complete review of the collateral documents.  Post closing exception activities also must include resolving exceptions identified by a custodian.  

•    Servicing Boarding – This process verifies the data transferred to the servicing system.  This is a document-to-data review.

•    Selling to Secondary Markets – This process verifies the data on the secondary market transfer data file.  This is a document-to-data review.

•    IMIP Payment – The Initial Mortgage Insurance Premium for a reverse mortgage HECM loan is paid by 15 calendar days.  This process reviews the Payment Plan and closing documents to IACS to ensure the correct amount of IMIP is paid to HUD.  IMIP shortage is automatically drawn by HUD, but overage takes time to collect from HUD.    

•    Final HUD1 Review – This review balances the Initial Loan Amount and performs a fee tolerance of the closing costs.  Additionally, this review should address RESPA GFE, APR and TILA regulations.

•    Government Insuring – Reverse mortgage insurance processing entails pre-endorsement review for submission by 60 calendar days and post-technical reviews conducted by FHA and VA.  Government insuring validates that the required credit and closing documents included in the case binder are completely in compliance with agency regulations.  This process includes reviewing the case binder documents, retrieving and/or correcting documents, and submitting for insuring.  The lender must also complete HUD's electronic case binder - FHA Connection data input. 
Even if a loan is pre-endorsement insured by HUD, the servicer may not be able to assign the loan to HUD if there are document or data errors when HUD reviews the documents for assignment. 

HUD issues Notices of Return (NORs) if the HUD case binder submitted to the HUD Home Ownership Center does not pass the pre-endorsement review.  NOR case binders need to be managed to determine if processing, underwriting, closing, funding or post closing changes are required. 

•    Trailing Document Management – For a HECM loan, the 1st mortgage to Lender and the 2nd Mortgage to HUD must be recorded; a conventional reverse mortgage only has a 1st lien that must be recorded.  If it is a purchased loan, a recorded assignment is also required.  A final title policy is required to ensure adequate title insurance and that the lender is in first lien position.  A document review should be performed on these documents to ensure they were recorded correctly and that the final title policy correctly covers the lender's interest.

•    Compliance Reviews – An approved HECM lender is required to have a Quality Control program implemented, according to HUD guidelines.  This review should be designed to identify control or process weaknesses.

•    Due Diligence – This involves document review for portfolio sales and servicing transfers.  Due diligence is critical to reduce portfolio risk and potential additional default servicing costs.  Due diligence entails making sure that documents are correct, and that loans were processed, closed and serviced correctly.  


III.    Approach Needed

A lender needs to be able to develop processes, train people, and have a system that tracks and reports on all of the post closing activities, especially exceptions.  Additionally, they need to keep current on regulatory requirements.  Companies can perform these activities internally or outsource some or all of the activities.  For internal processing, a system with review requirements and workflow is essential to reduce risk and additional cost.  This could also reduce the need for outsourcing - trailing document management and government insuring are the two predominate post closing tasks that are outsourced. 

Regardless of which approach is used, the key focus should be based on cost-benefit analysis and reducing risk (timely resolution, accurate compliance resolution, etc.).

Internal Post Closing Solution
Often, if there is a very small volume of loans for post closing activities, companies handle these functions by employing a few key knowledgable people.  However, this process is usually done on a loan-by-loan or Error-Code by Error-Code basis off of inadequate technology platforms.  The problem comes when volume increases and there are no adequate process or technology solutions, which causes both costs and backlogs to increase.  The key resolution for this type of post closing model is to purchase/build a software solution, which builds expert knowledge and efficient processes into the system. This could include features like:
•    Being queue driven for better workflow and allocating of resources;
•    Handling exceptions on a contact basis for reduced workload;
•    Providing an automating review process (OCR);
•    Providing blast faxing and/or email capabilities;
•    Providing good tracking capabilities (by exception, status, shipping, etc.); and
•    Providing, reporting capabilities by project, metrics, error code, contact source, etc.

Outsourcing Post Closing Solutions
Many lenders will choose to outsource their post closing activities.  This is usually done because they have inadequate systems, processes, and lack of internal resources; therefore the decision is based on a cost benefit analysis approach indicating that outsourcing is their best answer.  Considerations should also include:
•    Working with a company which completes post closing activities timely (government insuring within 60 days);
•    Keeping on track of regulatory/investor updates;
•    Providing feedback to the lender regarding error codes by type and source, so they can be corrected in the front end before loans close, and/or to work with different settlement service vendors if too many corrections are needed after the fact; and
•    Providing ad-hoc reporting capabilities to the lender to track progress and issues.

Hybrid Post Closing Solution
In many ways, a hybrid post closing solution could be the ideal solution for most medium or larger lenders.  This provides the flexibility to the lender to do certain post closing tasks internally and outsource some tasks as needed.  The benefits include:
•    A better cost-benefit analysis model;
•    A true capacity planning approach;
•    Relying on external expertise when needed; and
•    Breaking up tasks within the workflow so the lender can perform some of the tasks and the outsourced company can perform other tasks. An example of this would be in a process government insuring the outsourced company could perform the review process, while the lender could perform the exception-clearing activities in order to take advantage of the lenders’ relationship with their settlement service vendors.  Also, some of these exceptions could be cleared internally.

There are many other additional benefits to this type of an approach. However, the key factor this is based on is the ability for the lender and outsources company to be able to work off of the same technology platform, which is itself based on:
•    A workflow process which is queue driven, so work can be done at multiple locations (allows leveraging experience from anywhere);
•    Allowing for all post closing functions (government insuring, trailing documents, etc.) to be performed on one platform, rather than having multiple applications addressing different activities;
•    Having a system, which automates most of the work.  The system should know the process and queue the work to be completed, including automated review and automated contact to reduce FTE resource requirements;
•    Providing flexible task assignment at several levels and alerts for staff to escalate issues;
•    Allowing for quick customization (regulatory changes, investor requirements, customer specific needs);
•    Handling exception clearing issues by contact source rather than individual loans/error-codes in order to reduce FTE resources;
•    Real time metrics, reporting and cost tracking capabilities; and
•    Built-in accuracy (programmed business rules, automated cross-checks, consistent documented process).
   
A lender needs to determine if they have good processes, adequate resources and the proper technology platform in order to perform their post closing  activities effectively, efficiently and timely. Based on this analysis, they can then conclude which approach should be used to best reduce risk, reduce costs, and ensure that their loans are completed correctly.