COVID-19 has exposed the cracks in mortgage modification reporting

The COVID-19 pandemic has exposed numerous faults in the reporting of mortgage modifications, with “numerous cases of underreported or entirely omitted modification behavior” – the kind of reporting errors that led to problems in the aftermath of the 2008 financial crisis, according to a consumer lending data-analytics firm.

dv01, which provides loan-level consumer lending analytics for the mortgage industry, recently issued a white paper detailing what it called an “outdated reporting structure for mortgages.”

“Throughout the pandemic, we have observed significant irregularities and inconsistencies in reporting across multiple parties involved in the process,” dv01 said. “Despite nearly four months of reporting cycles, 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.”

The study found that common misreporting included instances where no modifications were reported but loan balances increased month over month, as well as discrepancies in the total number of modified loans reported between multiple servicers. The firm also highlighted a deal by “a prominent non-QM issuer” in which it was able to identify 233 loan modifications, while the master servicer reported only 74 and the trustee reported only 41.

“It was these types of reporting errors that created information asymmetries during the [2008 Global Financial Crisis], which led to an increase in price volatility when previously reported numbers were later corrected,” dv01 said.

The firm compared the traditional mortgage space to the world of online lending, where it said misreporting errors are less common.

“In online lending, issuers predominantly service loans in-house and servicing is dedicated solely to the issuer’s loans,” dvo1 said. “As a relatively new asset class, the online lending sector, by its nature, is technology driven – reporting documentation and communication is fully digital – and the data has less intermediaries.

“… The relationships and chain of reporting is very different in the mortgage world,” the firm said. “Issuers and servicers are entirely different entities, so the relationships are not always clearly aligned in terms of investor transparency. Furthermore, servicers are tasked with loan portfolios from a multitude of issuers and loan types, from agencies to non-QM to RPL. Issuers therefore have less ability to direct servicing reporting standards. Additionally, there can be multiple servicers per securitization, each with a different approach to reporting and capturing modifications.”

Because there are so many links in these communication chains, there are more opportunities for error, dv01 said.

“To date, we have not observed these communication chains yield cleansed, validated, consistent, and standardized reporting for investors and stakeholders,” the firm said. “Even more concerning, most of these entities have been reporting or underreporting modifications for over a decade because they were so prominent in non-agency securitizations after the GFC.”

The firm pushed for a more streamlined mortgage-modification reporting system.

“The current mortgage reporting architecture is fragmented, outdated, and inefficient, and COVID-19 is further exposing the faulty reporting system,” dv01 said. “In order 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 how we report modifications. To accomplish this, we need alignment, advocacy, and accountability across all industry participants, and an entity overseeing and coordinating these efforts in every securitization.”