Since the financial crisis in 2008, data transparency has proven to be the basis for secure, stable and responsible financial markets. Democratized access to reliable loan-level data and reporting tools can really mean the difference between allocating immense amounts of capital to carefully identified return flows or poorly identified pitfalls – and the consequences of these can be enormous.
Twelve years later and during a new crisis in the form of a global pandemic, many expected that the young and untested online consumer credit market would fail to meet these best practices and that the long-established mortgage markets would have learned their lesson. The evidence suggests the opposite.
Research on online consumer credit and mortgage loan performance shows that the former benefit from a highly digitized reporting, documentation and communication infrastructure with fewer intermediaries, while the latter suffer from a highly fragmented process in which multiple service providers record and report payment interruptions differently. This in turn leads to significant discrepancies between data providers and trust reports. Without a common reporting standard or consistent communication between servicers, the current reporting framework for mortgages presents opportunities for misrepresentation and inaccuracy in data reporting.
At the onset of the pandemic, mortgage credit performance misreporting was widespread, adding to investor uncertainty and delaying the sector's recovery in times of crisis.
For example, loan modifications – any deferral or forbearance options offered to borrowers to temporarily suspend loan payments – are a crucial indicator of a borrower's successful efforts to prevent permanent defaults, as empirical evidence of recurrence has shown. However, stakeholders have not been able to reliably determine which borrowers should pay their loans because a significant portion of the modified loans are marked as short-term. This then exposes investors to securitisations that can be retrospectively corrected, leading to sometimes alarming price volatility after a purchase has already been made based on previous reports.
Much of the early post-COVID-19 efforts also focused on tracking down change data that was overall missing. There was little correspondence between various service providers and trustees and actual loan performance; Some borrowers who failed to pay their mortgage were still classified as current.
Common examples of underreporting included cases where no changes were reported but loan balances remained unchanged or increased from month to month, and discrepancies in total modified loans between multiple service providers.
Although some problematic securitisations remain after nearly eight months of COVID-19 reporting cycles, the frequency of completely underreported changes has decreased for the entire mortgage industry. In addition, some data providers have provided additional data and information on COVID-19-related changes. However, reporting a change is only the first step towards achieving the data transparency required by the industry. Data providers must provide additional information about the start date, duration, and expected end date for the change.
Data in particular has been a stubborn problem and there is little transparency as to whether the start of a change relates to when the borrower first missed a payment, when they reached out to the servicers to request a change, or when this change was granted. Specifically, dv01 found evidence that no change dates were specified, and sometimes all three, with little agreement between. Once the changes are complete, additional data is required about the expected loan payment schedule: How are missed payments handled, do borrowers' planned payments change, and loan term extended? All of this information is critical to properly understanding change performance. So far the relevant data has been provided inconsistently and only sparsely.
Ideally, the information should be consistently passed from each servicer to the master servicer and then to the trustee, who ultimately passes the information on to investors and other third-party providers. However, this is not the case when you consider counterparties. The quality of data reporting varies by business and even between reporting parties within a single business.
In order for investors to have confidence in the health of the mortgage market and the wider economy, the industry needs a more modern and innovative approach to reporting changes. To do this, we need alignment, advocacy and accountability of all industry participants, as well as a unit to monitor and coordinate these efforts with each securitization.
Of course, the industry also needs to improve its ability to use modern technology to resolve inefficient reporting workflows. While data insights are the most valuable commodity in the world today, they are only as good as the tools that can be used to access and identify them. More work needs to be done to streamline processes that improve the timeliness and accuracy of reporting, combat manual data entry errors, and facilitate procedural industry standards that mortgage markets can more easily agree on.