Using Data To Optimize CWCOT Outcomes

In 2016, nearly one in five newly originated loans were Federal Housing Administration (FHA) loans. Although these loans led to an increase in home sales, they also comprised more than 34 percent of loans that were delinquent over 30 days, or nearly 8 million in outstanding FHA loans. 

Fortunately, there’s a way to tackle this problem: the Claims Without Conveyance of Title (CWCOT) program. In 1987, the FHA developed CWCOT, which allows third parties to bid on homes at foreclosure sales for less than the total debt owned on the properties, causing sales to close at a faster rate. 

To accomplish FHA's objectives, the CWCOT program provided the servicer with two primary claim channels: 
1. Sale at foreclosure auction (or shortly thereafter as a so-called "second chance" auction) 
2. Conveyance to the Department of Housing and Urban Development (HUD).

As more homes are being bought earlier in the auction process, servicers may want to consider developing CWCOT solutions that use strong data to optimize positive outcomes. The trick to successfully making this happen is to mitigate risk by zeroing in on a solid strategy.

The struggles of servicers when it comes to CWCOT

Before CWCOT entered the scene, servicers could only rehabilitate a home and convey it to HUD or forego a hefty mortgage insurance claim payment in order to hold onto the property. The CWCOT program, which allowed third parties to bid on homes, was an exciting new option.

With the program, however, came the big job of collecting data on all of the new sales. This data is used to assess the timeline of sales, vendor costs and reconveyance risks of conveying versus auctioning a home. Collecting so much data raises a number of questions: What technology platforms should be used to contain and access the data? What additional value can be drawn from analyzing the data across the CWCOT value chain? Most importantly, exactly how much data should be collected?

The good enough “waterfall resolution” strategy

Knowing how much data to collect can be confusing, especially since it is being collected at the asset, mortgage, market and vendor levels. Collect too much data, for example, and servicers may feel overwhelmed. 

Yet collecting too little data also doesn’t allow servicers to navigate through the CWCOT process with integrity. In fact, without enough data, servicers are forced to cobble together suboptimal solutions. Altisource calls these solutions “waterfall resolution strategies.” This means that rather than stick to a single solution that has been proven to work, servicers try one option on for size at a time. If the option fails, the servicer will then attempt innumerable other strategies—a cascade of them, in fact—to try to find the right fit. Unfortunately, this can add to the timeline of an auction and increase costs. 

Outcomes of waterfall resolution strategies nearly always fall into the “good enough” zone. Unfortunately, in the world of CWCOT, the Jim Collins quote rings true: “Good is the enemy of great.” Not only do these strategies tack on unnecessary steps for servicers, but they add even more data to sort through.

From good enough to data-driven CWCOT solutions

Rather than try one solution after another, servicers should instead focus only on a single, holistic solution that works. To do this, servicers need: 
1) To tap into a vendor pool that allows them to coordinate with other partners in the CWCOT value chain on strategic and technological levels. This helps all systems work together to produce data that is accurate.
2) A technology platform, whether built internally or created by a third-party, that can handle the aforementioned vendor integration. This ensures that the data can then be put to action through an appropriate framework.
3) Industry-leading marketing and auction capabilities within real estate marketing. This means that calculated risks taken while optimizing the CWCOT program still produce strong results for servicers and buyers alike.

Let’s take a closer look at each of these factors.

1. Servicers coordinate seamlessly with other vendors

CWCOT programs rely on a pool of vendors that impact everything from evaluating whether a property requires repairs to determining an appropriate marketing strategy. Each vendor presents new data that impacts other vendors, yet information asymmetries in which vendors remain unaware of each others’ actions and insights are extremely common.

These asymmetries can erode the quality of a CWCOT program or lead to delays and associated penalties.

Servicers who integrate all vendors’ data into a centralized, holistic system allow information to seamlessly flow between service providers and vendors, leading to greater insights, faster timelines and lower costs. 

2. Technology powers data-driven vendor integrations

To integrate vendors, servicers must build or purchase a third-party technology platform capable of collecting actionable data.

It’s next to impossible for servicers to handle work within the CWCOT space without the use of strong data collection and analysis technology. For most servicers, technology is used for simple document storage and workflow tasking. These limited technical capabilities mean most servicers are unprepared to search, curate and synthesize the sophisticated data CWCOT programs demand.

The consequences for servicers that do not possess adequate technology include financial penalties, including increased risks when FHA loans’ default rates increase. Well-designed technology helps servicers avoid errors and ensures compliance.

3. Partners deliver effective auction and marketing strategies 

Auction and marketing strategies are essential to a CWCOT program’s success. An effective auction vendor must use data to produce accurate risk assessment models, forecast costs and profits and deliver a clear decision tree that suggests appropriate action.

A strong auction partner can engage an online user base through its existing presence. Good auction partners also tend to have a dedicated marketing team with expertise in search engine optimization and marketing, as well as digital marketing resources including email marketing capabilities, a social media presence and mastery of paid advertising strategy.

Final Thoughts

To learn more about how to optimize your CWCOT program for your business, including data-driven, automated decision trees, assessing technology partners and enhancing operational controls for better asset exposure and revenue generation, download Altisource’s white paper: New Opportunities for Servicers to Optimize CWCOT Disposition Strategies.