Last Line of Defense: Claims Management
The teams that oversee the various aspects of pre- and post-foreclosure sale claim production strive toward a single ultimate end goal—to maximize the retrieval of all eligible claim proceeds. They coordinate to secure qualified principal balance deficiencies and default-related servicer advances while maintaining adherence with investor/insurer guidelines. The layered and complex task of claims management relies on continuous oversight, tight production monitoring across numerous functional areas, and reliable quality-assurance measurements. Cross-functional coordination and continuous efficiency are critical to the success of this last line of defense.
Navigating the Field: It Takes a Team
Claims management requires more than just one-star player. It does not fall under the scope of one particular position or team. Instead, the expansive activities that directly impact the claims environment generally include property maintenance and preservation, vendor management, eviction, claim preparation, quality assurance, loss analysis, inventory pipeline monitoring, exposure projecting, and corporate advance reconciliation, which includes all post-default recoverable and non-recoverable servicer advances.
In order to maximize returns, servicers are charged with successfully navigating dozens of discrete claims-related activities and processes across numerous teams. Failing to do so can lead to diminished qualified claims proceeds and an increased potential for claim-filing inaccuracies. The ultimate payment of reimbursable investor/ insurer claims truly does represent the last line of defense from a financial perspective, so it is imperative that the mechanics of milestone activity oversight, intermittent activity coordination, and inventory pipeline monitoring are tightly managed. Once the claims process runs its course, loans are liquidated and resultant losses or gains are booked.
Focusing on the Goal
The migration of the loan cycle, from the time of initial default through the final claim filing stage, can span several months or even years. Even when there are no upstream delays or intervening circumstances, corporate servicer advances—in connection with various attorney/ legal services, routine property inspections, and property securing and maintenance—are inherently part of the claims world even if the underlying activities occur outside of the typical realm of claims. If ‘advance ownership’ falls outside of claims, line-item allowable-claim thresholds, which vary depending on the investor or insurer, should be accurately captured at the time of service to ensure the team can reliably estimate upstream line-item advance recoverability through the downstream claims process. The continuous monitoring of line-item allowable-claim threshold rules, reconciliation of per-advance invoices, and the timely recording of trends in areas of monitoring opportunities will result in reliable financial-position estimates long before ultimate loan liquidation.
In addition to corporate servicer advance reconciliation, maintaining timely default oversight actions, including foreclosure initiation, default reporting, and post-default inspections, reduces the potential for delayed claim submissions and mitigates missed claims opportunities.
The Offense: The Importance of Anticipation
Additional processes can be implemented to maximize claim-proceeds retrieval and decrease operational inefficiencies and pressures. One process strategy is to take an offensive stance on claims preparation by preparing claims prior to applicable the foreclosure or third-party sale. In general, these termination events represent claim-submission deadline-trigger dates, so the sooner claims can be built for submission, the better. Completing claim preparations before expected claim-termination events both minimizes the likelihood of missing claim-filing deadlines and reduces downstream production pressure given wider preparation timelines.
Another strategy is competitive foreclosure/ post-foreclosure sale efforts, which can reduce operational claims-monitoring costs, decrease claim-submission volumes, mitigate financial exposure and holding risks, and accelerate the retrieval of expected claim proceeds.
Full Speed Ahead
In the post-foreclosure sale/post-termination event world, time is of the essence when it comes to asset liquidation and claim submission. Delays in property conveyances for FHA loans and reimbursable expense-claim submissions heighten potential downstream operational and financial risks. Property-preservation expenses relative to FHA-insured assets, for example, cannot be claimed from HUD if the expenses are incurred more than 30 days after foreclosure sale dates (or dates of possession, extended milestones). Moreover, delayed property liquidations present supplemental risk factors, such as code-violation assessments, hazard-claim damages, and various title impediments—none of which are reimbursable.
Aside from the potential inability to claim certain expense types due to unapproved upstream activity delays, debenture interest on FHA-insured assets may not be fully earned. While unearned debenture interest can’t always be avoided due to uncontrollable delays that do not qualify for insurer approval, the severity of lost debenture interest can be mitigated. Effective oversight of various pre-claim events, including first legal, foreclosure due diligence, default reporting, evictions, conveyance, and claim submission, will decrease missed reimbursement opportunities and increase levels of earned debenture interest.
Bolstering the Defense Line
The unknown can be very expensive. Investor and insurer reimbursement levels vary relative to extended lapses and uncontrollable events. Servicers can take several steps to maximize reimbursable-claim opportunities and decrease operational and financial risks for general FHA insured assets:
- Accurately identify property damages at the time of vacancy, separating those repairs that are covered through hazard policies from those that are reimbursable from the insurer.
- Request and receive repair bids in a timely manner.
- File hazard insurance claims for those damages not covered by the insurer.
- Submit and monitor over-allowable and extension requests as necessary.
- Develop a transparent partnership with property-preservation firms.
- Board properties that are not impacted by surchargeable damages or mortgagee neglect, nor subject to insurer indemnification for competitive-auction efforts.
- Manage to dual conveyance and third-party sale outcomes:
- Conduct financial analysis around corporate contributions.
- Submit and monitor extension requests as necessary.
- Conduct quality-assurance reviews prior to claim submissions.
- Trend and report missed claim opportunities and third-party losses.
Keeping an Eye on the Ball
Successfully managing a pipeline of hundreds or thousands of accounts pending ultimate retrieval of claim proceeds requires continual routine inventory-reporting methods. To fully understand operational impacts and projected financial losses and gains, fluid claim-eligibility volume and account aging should be fully transparent. The ability to report holistic and segmented views of various claim phases across all claim types allows servicers to understand short- and long-term staff scaling needs and anticipated financial impacts.
Tight pipeline reporting also identifies production-efficiency opportunities around those pre-claim stages where delays may exist. The various processes within the claims environment—including property maintenance and preservation, vendor management, eviction, corporate advance and invoice reconciliation, third-party sales coordination, claim preparation, quality assurance, loss analysis, and future loss projection activities—often run concurrently at some level. However, active-volume levels within each of the claims oversight and production teams tend to fluctuate. As a result, effective and continuous progress may require cross-functional training to ensure the ability to scale up or down across more than one functional process.
Knowing When to Pass the Ball
Servicers with internal structures that are not built for internal scale may be better suited to outsource certain task-driven, highly specialized, analytical, and/or quality-assurance components. Since the claims process represents the end of the line, the last line of defense, financially, it makes a lot of sense to facilitate independent performance and structural reviews across key functional activities. On a related note, from a regulatory perspective, claim errors, including claiming unallowable expenses, overclaiming allowable expenses, and providing inadequate support of claimable expenses, can result in potential sanctions and/or significant monetary fines as investors and insurers often extrapolate audit findings across full production populations through the production timeline audit scope.
Accuracy, Efficiency, and Transparency in the Last Line of Defense
Finally, robust quality-assurance measures developed to manage performance levels/SLAs of third-party vendor partners and internal processing activities promote the ultimate retrieval of qualified reimbursable claim proceeds. Quality assurance and throughput measurements quickly isolate corrective action targets across key functional segments.
The full scope of claims management, including various encompassing cross-functional areas, can be a challenging space for servicers to navigate given the breadth and overlapping nature of various claims-related operational and oversight activities. Therefore, the methods used to routinely monitor overall performance at all operational levels are key to maintaining accuracy, operational efficiency, and financial exposure transparency.
About Author: Kelly Conley
Kelly Conley is Founder and Principal of KAC Advisory, providing de-risking strategies and process-optimization solutions to mortgageservicing partners within the distressed-property disposition and investor claims spaces. Conley has nearly 20 years’ combined leadership, credit risk, repurchase mitigation, property preservation, and alternative asset-disposition expertise across the mortgage lending and servicing sectors. Prior to launching KAC Advisory, Conley was FVP of Investor Claims for Flagstar Bank, an $18 billion community bank with a servicing/subservicing platform of $104 billion.
Editor’s Note: This feature originally appeared in the August issue of DSNews