Loan Defaults The New Fraud Dream

1
Loan Defaults The New Fraud Dream

• Setting the Stage Defining the Fraud
• Lisa Binkley EVP Ops Products
• Rapid Reporting
• Underwriting The Loan Modification Process
• Kurt Lofrano VP Credit Risk/Quality Assurance
• Wells Fargo Home Mortgage

2
Before

• Originations
• Stated doc/No Income
• Credit score driver
• No assets
• Prime
• Non Prime
• High DTI
• High LTV

• Modifications
• Little or none
• Defaults
• Manageable numbers
• Process managed by Customer Service and
  Collections personnel

3
After

• Originations
• All full doc
• Letters of explanation
• Asset position
• Credit scores greater than 700
• Income verification through IRS
• HVCC
• ID Theft Red Flag rules

• Defaults/Modifications
• No verifications
• Relying on the borrower
• Landslide numbers
• Personnel limitations
• High number of re-defaults
• Waiting for guidance
• HAMP
• 500,000 modifications by Nov

4
Delinquency Stats

• 9.24 - seasonally adjusted through June 30, 2009
• 30 days excluding foreclosures (MBA)
• 7.80 - through Mar. 31, 2009 reporting Banks
• 30 days excluding foreclosures (OCC-OTS Metrics
  Report)
• 2.80 - through Mar. 31, 2009
• 30-59 days (OTS)
• 5.22 - through Q1
• 60 days (TransUnion)
• 5.90 - through July 31, 2009
• 60 days (HOPE NOW)

5
Different fraud types today

• Loan Originations
• Employment
• Length
• Type
• Income
• Type
• Assets
• Not theirs
• Undocumented
• Shared funds
• Unseasoned funds
• Bailouts

• Defaults/Mods
• Employment
• Job Loss
• Type
• Income
• Declining
• Unemployed
• Type
• Assets
• None
• Undocumented
• Transferred/Hidden
• Short Sales
• Non arms length
• Fraud for profit

6
Continuum? Have we seen this before????
7
Underwriting Loan Modifications

• Assessing vs. Collecting
• Traditional skill set of workout specialists
• Skill set needed today
• Consumer finance model
• Overall assessment of situation required,
  long-term, short-term, asset position, property
  value, credit profile
• Assessment of income
• Verification of current income level
• Verification of last years income
• Independent validation of income
• Differences between origination assessment and
  modification assessment
• Origination - minimum income needed
• Modification accurate income needed
• Origination based on past history, PL to
  support
• Modification based on current level, past
  years income used to support

8
QA of Loan Modifications

• Traditional QA of servicing and loss mitigation
• Generally compliance focused
• In addition to traditional compliance needs
• QA of income assessment
• QA of qualifying ratios
• Can the borrower afford the modification
• Did the modification make sense?
• Borrower?
• Servicer?
• Investor?
• Consistent and documented loss mitigation
  policies
• Consistent and documented QA test scripts
• Partnership with credit policy, servicing,
  underwriting and quality assurance

9
Default/Mod Process Flow
Borrower defaults 15, 30, 45 days
Workout specialist initiates and pre-approves the
modification based on self professed information
and promised documentation
Receive paperwork perform income, employment,
collateral and asset verifications
If good
If bad
Bucket loans into risk categories
How bad is it? Offer other options to the
borrower or foreclose
Meets guidelines
Within tolerance
Outside tolerance
Loss Mitigation Options
Underwriter Review
Jr. Underwriter Review
10
Standard Practices

• Loan modifications require a level of assessment
  consistent with underwriting
• Try creating triage teams between collections and
  work out specialist
• Workout specialists are the equivalent to a
  consumer loan specialist or loan processor.
• Define when to start trial mod? Stated
  information. For modification to go to trial, we
  need this information
• Paperwork is returned
• Verifications performed
• Results of verifications create the underwriting
  process flows based on tolerances by organization
• Less skilled when the loan meets guidelines
• More skilled when loan does not meet guidelines

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Exceptions to Modification

• Need to be discussed and process developed
• Defining imminent default
• What are the parameters?
• Declining values
• Where is the least loss?
• Foreclosure or short sale or decreasing the loan
  amount?