Tag: investor accounting

Loan Modifications – The Investor Reporting Perspective 

Understanding the Journey from Borrower to Servicer to Investor 

Loan modifications are not just about adjusting payment terms for a struggling borrower. Behind the scenes, they trigger a cascade of implications for servicers, investors, and the accounting teams responsible for transparent reporting. From the outside, it may look like a simple change, but for teams like investor reporting, investor accounting, and compliance, it’s a detailed, multi-step process that requires accuracy in loan data, cash flow tracking, and investor remittances. 

In this post, we’ll break down the loan modification journey from borrower to investor and focus on how these changes are captured, accounted for, and reported in investor portfolios. 

1. The Borrower’s Request: Where the Journey Starts 

When a borrower experiences financial hardship (job loss, medical expenses, market downturns), they often seek a loan modification as an alternative to delinquency or foreclosure. 

Common modification strategies include: 

  • Extending the loan term to reduce monthly payments 
  • Reducing the interest rate for affordability 
  • Changing amortization schedules 

For the borrower, the immediate impact is affordability. But for servicers and investors, there is lot more work after modification is approved. 

2. The Servicer’s Role: Implementing and Tracking Modifications 

The servicer acts as the bridge between borrower and investor. Once a modification is approved, servicers must: 

  • Update loan systems to reflect new terms (balance, maturity date, payment schedule). 
  • Re-amortize cash flows to ensure new principal/interest splits are calculated correctly. 
  • Classify the loan status (e.g., modified, performing, or still troubled debt). 
  • Report modifications according to investor and regulatory requirements. 

Servicers are also accountable for reconciling modified payments against investor reporting templates such as: 

  • Investor remittance reports (showing actual collections vs. expected cash flows). 
  • Loan-level disclosures (especially in securitized pools, where transparency is critical). 

3. How It Works in Investor Reporting Terms 

Here’s how data and cash flows move once a modification is finalized: 

Step 1 – Servicing System Update 

  • Loan master record updated with new terms. 
  • Amortization and escrow recalculated. 

Step 2 – Investor Reporting Extract 

  • Loan appears in the monthly/periodic investor reporting file with new P&I amounts and statuses. 
  • Event codes for modification included (e.g., GSE Loan Activity Reports). 

Step 3 – Remittance Adjustments 

  • For Scheduled/Scheduled servicing → remittance based on new scheduled P&I. 
  • For Actual/Actual servicing → remittance reflects actual borrower collections, now based on new terms. 

Step 4 – Accounting Impact 

  • Old accrual schedules reversed. 
  • New accruals posted based on modified rate. 
  • Modification fees tracked separately. 

Step 5 – Compliance & Audit 

  • Investor reporting teams ensure files meet investor-specific guidelines. 
  • Any mismatches between servicer data and investor acceptance are reconciled. 

For Investor Reporting, accuracy in these updates is critical. The wrong rate, date, or balance can cause reporting rejections or financial discrepancies. 

How Reporting Actually Works 

Investor reporting teams finally receive the modification file, which contains data related to fields such as: 

Original Term Modified Term 
Due Date Modified Due Date 
Interest Rate Modified Interest Rate 
Maturity Date Modified Maturity Date 
P&I Payment Modified P&I Payment 
Principal Balance Modified Principal Balance 
Principal Reduction Amount Capitalized Amount Total 

Additional data includes modification codes, descriptions, notes, and effective dates. 

Based on this file, reporting is done as follows: 

  • File Submissions → Servicers submit loan-level data files to investors, including terms, balances, delinquency status, and modification events. 
  • Event Coding → Special codes (modification effective date, trial payment, capitalized arrears) must be mapped correctly in the reporting file; otherwise, submissions are rejected. 
  • Cash & Data Alignment → Investor accounting teams reconcile accounts while reporting teams transmit loan data and remit funds to investors. Both must align perfectly to avoid exceptions. 

Challenges & Difficulties 

  1. Cross-Functional Teams → Coordination is required across customer care, loss mitigation, underwriting, investor reporting, accounting, legal, compliance, and servicing operations. 
  1. Data Rejections → If new loan terms don’t align with investor rules (e.g., GNMA pooling restrictions), reports can reject. 
  1. Effective Reconciliation → Remitted cash vs. reported loan data must tie out to the penny — even minor mismatches trigger exception management. 

4. The Investor’s View 

For investors (Fannie Mae, Freddie Mac, GNMA, or private), modifications preserve asset value and help avoid foreclosure losses — but only if reporting is precise and timely. 

They focus on: 

  • Updated Loan Terms → Rate, term, P&I, UPB, deferred amounts 
  • Effective Dates → Modification date drives accrual changes and remittance calculations 
  • Delinquency Reset → In some cases, the loan is considered current post-modification 
  • Pool & Compliance Checks → For GNMA, a loan may need to be repooled or bought out before modification 

Closing Thoughts 

The journey of a loan modification doesn’t stop at making a borrower’s payment affordable. For investors, it’s about reliable reporting, accurate accounting, and transparent disclosures. 

Servicers play the crucial role of translating borrower-level relief into portfolio-level data that informs investment decisions. 

Loan modifications prove that mortgage servicing is more than just collecting payments — it’s about managing relationships between borrowers, servicers, and investors. For Investor Reporting professionals, it’s a reminder that every data field tells part of the loan’s journey, and accuracy at each stage ensures smooth operations for everyone involved. 

How Prepayment, Delinquency, and Default Affect Your Mortgage Investments

If you’re investing in mortgage-backed securities (MBS) or analyzing loan performance, you’ve likely encountered the terms prepayment, delinquency, and default. They’re more than industry jargon—they directly impact your returns. 

Let’s break down what they mean and how they affect your investments. 

First, What Are Mortgage-Backed Securities (MBS) 

A mortgage-backed security is a type of investment where you earn income from mortgage payments made by homeowners. Imagine you invest in a pool of home loans. Every time a homeowner pays their mortgage, you receive a part of that payment. Sounds great, right? 

But what happens if borrowers pay early, miss payments, or stop paying altogether? 

That’s where prepayment, delinquency, and default come in. 

1. What is Prepayment? 

Prepayment happens when a borrower pays off their loan early, that is before the full-term ends. 

Why Do Borrowers Prepay? 

  • They refinance their mortgage for a lower interest rate 
  • They sell their home 
  • They make extra payments to reduce debt faster 

How Does Prepayment Impact Investors? 

  • Lost future interest payments (which are the main source of income for investors) 
  • Reinvestment risk: The investor may have to reinvest at a lower interest rate 

Example: Imagine Investor “A” places $100,000 into a pool of MBS expecting 6% annual returns: 

  • Year 1: 15% of borrowers prepay. Returns dip because those loans stop generating interest. 
  • In short: Prepayment reduces the total return on investment. 

2. What is Delinquency? 

Delinquency occurs when a borrower misses a scheduled mortgage payment. 

Common Causes: 

  • Job loss or income reduction 
  • Unexpected expenses or emergencies 
  • Poor financial management 

Delinquency is usually measured in days past due (30, 60, 90 days, etc.). 

How Does Delinquency Impact Investors? 

  • Uncertainty in cash flow 
  • Increased loan servicing costs (collection efforts, legal actions) 
  • Risk signal: The longer the delinquency, the higher the chance of default 

Example: Imagine Investor A places $100,000 into a pool of MBS expecting 6% annual returns: 

  • Year 2: 10% of loans become delinquent. Irregular payments begin to reduce monthly income. 

Delinquency is like a warning light for investors, it tells them a borrower might default soon. 

3. What is Default? 

Default means the borrower has failed to meet their mortgage obligation for a long period (typically over 90 days) and is unlikely to repay the loan. 

What Happens After Default? 

  • The loan becomes “non-performing” 
  • Lenders may start foreclosure 
  • Property may be sold to recover losses 

How Does Default Impact Investors? 

  • Significant loss of expected income 
  • Reduced principal recovery (sale of foreclosed property may not cover full loan amount) 
  • Higher risk perception among investors 

Example: Imagine Investor A places $100,000 into a pool of MBS expecting 6% annual returns: 

  • Year 3: 5% of loans default. The investor loses a portion of the principal as foreclosure drags on. 

Default directly reduces investor returns and affects portfolio performance. 

Even in a diversified MBS, the actual return ends up being lower than expected. 

Simple Example 

Imagine you invest in a pool of 100 mortgages: 

ScenarioBorrowersEffect on You
Prepayment20 borrowers pay early You get your money back faster, but lose future interest 
Delinquency10 borrowers are 60 days late Your income becomes uncertain
Default5 borrowers stop paying completely You lose some of your investment

Combined Impact on MBS Investors 

All three events affect cash flow, risk, and investment returns. 

Factor Impact on Cash Flow Risk Level Investor Concern 
Prepayment Decreases future income Medium Reinvestment risk 
Delinquency Delays income High May turn into default 
Default Cuts income and capital Very High Loss of investment 

How Do Investors Manage These Risks? 

Investors use several strategies: 

  • Credit scoring & risk models to select better loans 
  • Diversification (invest in many loans, not just one type) 
  • Insurance or guarantees (like Fannie Mae/Freddie Mac-backed loans) 
  • Monitoring KPIs: Like Prepayment Rate, Delinquency Rate, and Default Rate 

Real-World Applications 

If you work in mortgage analytics, loan servicing, or as a business analyst, understanding these terms helps you: 

  • Analyze portfolio performance 
  • Build dashboards (e.g., in Power BI) 
  • Design risk prediction models (e.g., in Python) 
  • Communicate better with stakeholders and investors 

Summary Table 

Term Meaning Investor Impact 
Prepayment Early repayment of loan Lower returns, faster capital recovery 
Delinquency Missed payments (30+ days) Irregular cash flow, warning sign 
Default Failure to repay (often >90 days) Loss of principal and income 

Final Takeaway: Prepayment, delinquency, and default are the core risks in mortgage investing. Understanding how they impact your cash flow and portfolio performance gives you the edge—whether you’re managing MBS, analyzing loans, or building predictive models.

Reinventing Investor Reporting: How Automation Solves Servicer Headaches

Investor reporting has always been one of the most complex and high-stakes tasks for mortgage servicers. Between multiple investor formats, strict timelines, and ever-evolving compliance rules, the pressure to “get it right” has never been higher. 
 
But here’s the truth: manual reporting processes just can’t keep up anymore. 

The Legacy Pain Points 

  • Manual data aggregation from servicing platforms 
  • Excel-based validations and reconciliations 
  • High error rates and rework cycles 
  • Stressful compliance audits with limited transparency 
  • Inability to scale as portfolios grow 

Enter Automation 

Investor reporting is being redefined by automation—and it’s a game changer. 

  • System Integration: APIs and ETL tools consolidate data across servicing systems, LOS platforms, and investor portals. 
  • Real-Time Validations: Custom rule engines flag issues before submissions, reducing investor kickbacks. 
  • Dynamic Templates: Investor-specific formats are pre-built and updated automatically to meet GSE and private investor standards. 
  • Audit Trails Built-In: Every action is logged, tracked, and easily auditable—hello, stress-free compliance. 
  • Scalability: Grow your portfolio without growing your team. Automation adapts with you. 

Automation in Action: Two Real-World Examples 

Example 1: Changing the Delinquency calculation formula 

Suppose there’s a formula to calculate the delinquency category for investors. If you decide to tweak this formula you’d traditionally have to: 

  • Open each investor template manually 
  • Update the formula one by one 
  • Validate the logic separately for each investor 

This process could take hours—or even days—depending on the number of investors. 

With automation? 

Make the change once. 
Click. 
And the update applies instantly across all relevant investor templates, and you can produce as number of bills this change affects. Simple, fast, and consistent. 

Example 2: Trial Balance Validation 

Suppose you need to validate trial balances across multiple investor reports. Traditionally, you would have to: 

  • Open each report individually 
  • Perform a manual calculation to verify difference between balances and collection are correct 
  • Flag and review any mismatches one by one 

This process is tedious and time-consuming—especially across large portfolios. 

With automation? 

  • Run the calculation in bulk 
  • If the result is 0, the trial balance passes 
  • If not, the system flags the error instantly 

No more manual digging. Automation identifies discrepancies across all investors in minutes, saving hours of work and reducing the risk of oversight. 

Why It Matters

Mortgage servicers who embrace automation are not just gaining speed; they’re building resilience in their operations. 

Key Benefits:

  • Faster close cycles – Close deals quicker without the bottleneck of manual data entry. 
  • Improved accuracy – Minimize errors that arise from manual processing. 
  • Happier investors – Increase investor satisfaction by submitting accurate reports on time. 
  • Lower operating costs – Reduce costs related to manual work and overhead. 
  • More time for strategic work – Free up resources for higher-value activities instead of repetitive tasks. 

Final Thought 

If your investor reporting still runs on spreadsheets, now’s the time to rethink. 
Automation isn’t the future—it’s already here. 

Sources & References 
  • Mortgage Bankers Association (MBA): www.mba.org 
  • Fannie Mae Servicing Guide: https://servicing-guide.fanniemae.com 
  • Freddie Mac Investor Reporting: https://guide.freddiemac.com/app/guide/section/8102 
  • CoreLogic: www.corelogic.com 

Winning the Race to Go-Live: Your Software Implementation Dream Team

When you think of implementing new technology, you probably think of your IT team as the primary stakeholders. But we’ve found that the most successful implementations are spearheaded by operational leaders; after all, their teams will be the ones actually using the new system on a daily basis. 

So who’s making the draft? Every organization is unique. As you consider whom to invite to your implementation team, think about the key functions of the group:

  • Maintain focus on the organization’s strategic goals, and how the new technology helps achieve those goals.
  • Effectively communicate those goals to key stakeholders, and eventually to end users.
  • Minimize downtime

The MVPs of Your Implementation Team

The ideal implementation team usually includes these members from your organization, from start to finish:

  • Executive sponsor: A leader with decision-making power, who is both engaged and available to participate in the implementation. The executive sponsor understands your organization’s strategic vision and how this technology furthers that vision. Moreover, the executive sponsor effectively communicates that vision to the rest of the implementation team.

    The exact role or title of the executive sponsor often varies; we’ve worked closely with CEOs, CFOs, and EVPs of Investor Reporting, for example. However, it is helpful if the executive sponsor has a working knowledge of the business processes we’ll be transforming.

    Pro tip: The executive sponsor doesn’t step away once the ink is dry on the contract! The sponsor’s continued engagement with the implementation demonstrates that the project is strategically important and translates into a greater sense of accountability for the rest of the team.

  • Operational champion: The “doer,” who owns the business process related to the new technology, your operational champion ensures that the executive sponsor’s strategic vision comes to fruition. The best champions ensure that the project has sufficient resources; act as strong, enthusiastic project leaders; and serve as liaisons between the technology vendor and the internal team.

    While the operational champion may lead certain project-management components of the implementation, such as setting the overall timeline, this is not a project management role. The operational champion takes guidance from the executive sponsor to set metrics for success and consistently communicates those with the implementation team.

    Pro tip: The operational champion must take a stand! As the expert in the business process, this person should have well-informed opinions and insights that will make the implementation more efficient. 

  • Project manager: Project owner who manages all the timelines, milestones, and tasks associated with the implementation. This person supports the project by coordinating internally (something a vendor can only do on a limited basis) and unifies the project for the organization. This helps balance out the operational focus that sets the initial direction for the project.

    Pro tip: Ideally the project manager has a working understanding of the relevant business processes or has expertise in implementing new technology. Perhaps most importantly, the project manager knows whom to engage—and when—to achieve the implementation goals.

  • SME Super Users: Process owners who embrace the new technology and commit to learning it inside and out. The key here is that your Super Users learn the technology alongside the implementation team so they a) retain and transfer knowledge post-implementation; and b) promote self-sufficiency post-implementation, which includes training new users in the application.

    The most effective Super Users are not only intimately familiar with day-to-day business operations and tactical requirements, but they’re also early adopters. That is, they’re enthusiastic about mastering new technology and willing to work through bugs and challenges. The best Super Users are also trusted influencers who can support training and upskilling for end users. 

    Pro tip: Consider standout business analysts for the Super User role. Key characteristics include fluency in the relevant business processes and a commitment to continuous improvement.

The Implementation “Special Team” Members

In addition to your core implementation team, you’ll need to bring in secondary stakeholders at various times to support very specific activities. Think of them as your implementation “special teams.”

  • IT representative: When you partner with a technology vendor, most of the IT “heavy lifting” (programming, API development, etc) is done for you, so your IT team won’t need to invest substantially in the implementation. However, you will need them toward the beginning of the implementation because they play a role in data security or vendor due diligence, for example. Later, the role is reduced to more tactical items, like setting up SSO or establishing FTP connections. Plan to keep an IT representative in the loop until all these items have been addressed. 
  • Data gatekeepers: Generally more than one group touches your data. One may address data security, while another oversees data transmission, and a third group understands the business context. All these people should have an awareness (if not active involvement)—but remember that too many cooks overwhelm the kitchen.

    Pro tip: Timing matters! Your data gatekeepers should ensure that you have all the data you need, in the correct format, and in the proper time frame. For example, wire information might refresh daily while other data comes through on a monthly basis.
  • Training leader: If your organization has a dedicated training team, you’ll want to engage early in the implementation process. Include them at the beginning so they understand the scope of the implementation and which business operations will change. Then invite them back when it’s time to create or update training procedures and materials, and of course for training end users.

Ultimately the composition of your implementation team has a significant impact on your success. Bring the right people, and you’ll be more efficient, effective, and enthusiastic about adopting new technology.

[List] 5 more best practices for custodial reconciliation

Thanks to all the response I got from my previous article, Best Practice: 5 Considerations for Custodial Reconciliation, I was inspired to share 5 MORE Considerations for a sound Custodial Reconciliation process.  Please share your thoughts and let me know what you think of this list.

6. Clearly classify current reconciling items into research buckets.    

Aside the standard TOEC formulas, an additional set of calculation that may be included within the Bank Reconciliation process is an automatic classification of reconciling items by research bucket. This classification applies to current outages and is intended to help analysts in their research activities when identifying reconciling items. The following list represents a highly generalized classification of reconciling items classified by research category using data that should already be present to fuel the process. Far more refined research categories (and perhaps even automatic reconciling item identification!) may be accomplished depending on the overall quality, consistency and detail available within the source data inputs. The research categories provided below also represent a hierarchy meaning that items are classified as they meet the criteria of each bucket per the order below:

  • Paid in Full – Check for ending actual remittance balance to be zero along with a payoff date provided in the source data.
  • Liquidation – Applies to S/S remittance deals only. This classification is given when the actual remittance balance is zero and both the beginning and ending scheduled remittance value is not zero.
  • Reinstatement – Check for the beginning scheduled remittance balance to be zero and the ending scheduled remittance balance to not be zero. Also check for the beginning actual balance to be zero and the ending actual balance to not be zero as either of these conditions can be true for a reinstatement.
  • Modification – Simple; check if there is a modification date provided in the data.
  • Stop Advance – Similar to Modification; check for a stop advance date provided in the data.
  • Miscellaneous – This category catches any outages not linked to a research category above.

7. Apply a standard description to reconciling items.    

This one is key. Any outages or reconciling items resulting from the Bank Reconciliation process should be identified and categorized using a standard description that is meaningful to the business (i.e. reason codes). We suggest defining a comprehensive list of coded values representing all the different types of reconciling items in a typical reconciliation cycle. For example, consider grouping all reconciling items related to liquidations under a standard notation – LIQ1 to represent liquidation net loss, LIQ2 to record a service fee outage, and so forth. Another important detail to add to this master list of standard descriptions is the expected resolution type – in other words, if the item is expected to be resolved via wire, remittance adjustment or perhaps a system-level adjustment as would be the case for non-cash outages. Keeping in discipline with this consideration helps in fulfilling #8 below.  

8. Meticulously clear ageing reconciling items; start with the oldest first.    

It is both tempting and (theoretically) time effective to simply bump the list of reconciling items against wires /remittance adjustments by amount and delete these off the spreadsheet as resolved items. Unfortunately, any virtue found in this approach quickly goes away when a discrepancy is identified a couple months later (i.e. clearing a wrong item) and an analyst is tasked with trying to unravel the components in an effort to correct the issue. We recommend implementing a mechanism for tracking the resolution of reconciling items which also ensures that the correct wire /remittance adjustment is paired with the intended outage. Adopting a practice of applying standard descriptions along with an expected resolution type as suggested in #7 addresses the first part of this recommendation. A solution to the second part of the recommendation related to pairing wires /remittance adjustments to outages is offered under #9 below.    

9. Optimize Wire /Remit Adjustments for future clearing.   

This suggestion may require some coordination to accomplish and some discipline to maintain, but the added value of this effort will be well worth the work. The simplest and most effective way to properly pair wire /remittance adjustments to corresponding reconciling items is to link these together using a common reference number. Implement this consideration by assigning a unique reference number to outages identified during the current period. If a standard description and corresponding resolution type is assigned to each reconciling item as suggested in #7, a listing of required wires and remittance adjustments should be readily available at the conclusion of each Cutoff. Passing along this unique reference number to the wire /remittance adjustments request as the transaction identifier creates an immediate link between both items that can be leveraged for clearing. The real trick in having this work is convincing the downstream processors (i.e. Investor Reporting and Treasury or team responsible for wires) to include this value as part of their process from request through transaction settlement. As an extra credit bonus, include a unique identifier for these transactions at the account-level as well (i.e. remember, items in TOEC are at loan /pool-level but these settlements typically disburse as a rolled-up transaction by bank account). This additional step will save a lot of time pairing bank statement items to corresponding book wires, thus enabling book-to-bank reconciliation for Cashbook.

10. Track and measure the process.    

All the considerations leading up to this one focus on ensuring a sound Bank Reconciliation end result, which is fantastic. However; visibility and metrics gathering over the process as it is happening in real-time distinguishes a proactive team vs. a proactive team. What’s the difference? A reactive team sees smoke and eventually reaches the fire with whatever tools happen to be on-hand to try to extinguish the flames, and a proactive team sees the spark that started the fire – this level of visibility is afforded by adopting well-defined work assignments and developing a dashboard to track the resulting metrics. We recommend doing what most companies already do: create a spreadsheet to assign analyst resources to specific Bank Reconciliation reports, but we push it one step further by suggesting the inclusion of triggers to track the progress within a Cutoff as it is happening. Create a spreadsheet or tool that listens for status changes in Bank Recon reports (i.e. Pending to Approved) as well as a means to collect metrics (i.e. number of reconciling items by ageing or number of items resolved vs. outstanding) in an effort to get a meaningful pulse of the process as a whole. The development of the dashboard is certainly an evolutionary process; the trick is to subscribe to this mentality or management overview philosophy if the terminology is more fitting. Either way, evaluating the health of a process needs to occur as the process is happening and not after the process is completed – test this statement by applying it to a living body. Find creative metrics (and corresponding triggers) to track the process as it is unfolding to prevent a spark from becoming a forest fire.

 What considerations can you share about how you manage your Bank Reconciliation business process?

[List] 5 best practices in custodial reconciliation

An accurate and effective Custodial Reconciliation process is the cornerstone of a healthy Investor Accounting function.  Completing a monthly Bank Reconciliation for each Custodial account (i.e. P&I and T&I) accomplishes two important goals: (1) it confirms the Custodial bank account is in balance at the aggregate level; and (2) it ensures the individual loans /pools within the Custodial account are also in balance by performing Test of Expected Cash (TOEC) calculations.  Every company servicing loans in-house adopts some sort of Bank Reconciliation process – after all, it is a compliance requirement under Regulation AB.  Here are 5 considerations for building an optimum Bank Reconciliation business process based on our experiences working with companies like yours:

1. Clearly define Cutoff start and end dates.    

I know it sounds intuitive, but we’ve seen this mistake consistently – make sure that there is no overlap between Cutoff start and end dates as you define processing calendars. More importantly, verify that all activity considered by the process is restricted to this range; that is, all wires, remittances, remit adjustments, servicing data and investor reporting inputs must fall within the criteria. Not following this simple guideline will lead to a lot of transactional “noise” and incorrect TOEC calculations.

2. Roll from a previous period.    

Again, it may sound intuitive but it is surprising the number of companies we’ve seen that essentially “start anew” with their Bank Reconciliation process. Lesson learned – live with your results (and calculations). The true power of a Bank Reconciliation summary is in rolling it forward; in other words, tie together Beginning Balance from the current period to Ending Balance of the previous period. The value of this practice is accentuated for PLS. For these reconciliation reports, the following balances should roll forward from a previous period: (a) cashbook balance; (b) beginning scheduled balance for the expected remittances; (c) beginning actual balance per the actual UPB; and (d) actual remittance rolled forward from last period’s expected balance.

3. Ensure the bank account is in balance before digging into loan /pool level balances.       

Often overlooked and oversimplified, the Cashbook process serves a fundamental purpose in achieving an accurate and effective Bank Reconciliation process. It is important to actively balance the custodial bank account as a precursor to performing reconciliations at the loan /pool level rather than assuming than any discrepancies will simply float to the surface.  

4. Perform simple data integrity checks.    

Because we are working with two related but DISTINCT data sets when performing Bank Reconciliations (i.e. bank statement and cashbook vs. servicing and investor reporting inputs), there are some simple data integrity checks that can help verify that source data is complete and accurate before relying on these values for balancing. It is a good idea to perform the following sanity checks: 

  • Test that wire and remit adjustment amounts collected at the loan /pool level roll up to the amount reported at the bank account level. In theory, these values are extracted from the same transaction set, however; invalid translations /mappings between bank accounts and associated loans /pools can lead to different results. The potential for this discrepancy is magnified as the volume of bank accounts and loans /pool increases.    
  • Perform a Custodial Reconciliation Difference calculation to verify that all necessary inputs are collected in the Test of Expected Cash calculation. The sum of (a) P&I advance; (b) remittance adjustments; and (c) current period outages /reconciling items should equal zero, thus certifying that Servicing and Investor Reporting inputs are captured completely and accurately.

5. Have a clean TOEC formula.    

A whole new article could be written about best practices regarding TOEC formulas given the intricacies between PLS vs. GSE and considerations within Sch/Sch, Sch/Act and Act/Act remittances. For argument’s sake, let’s assume a consensus that a TOEC formula, at its most high level, should include (a) prepaids;  (b) delinquencies; and (c) remittance information (i.e. scheduled interest and principal, additional principal collections, etc). For extra credit, you could include curtailments and other items but these would point to a specific type of deal. More to the point, a TOEC formula SHOULD NOT include remittance adjustments as part of the calculation.  Including items such as HAMP incentives, claims and refunds, interest adjustments and other similar items unnecessarily abstracts the meaning of the calculated figure and misrepresents any true discrepancy in cash. In addition, including any of these items in the calculation prevents a clean roll-forward (see #2 above) particularly when one of these “expected” items does not materialize for whatever reason.  

Showing Cashbook Some Respect

Often overlooked and mostly oversimplified, the Cashbook process presents an important opportunity for reducing rework and increasing efficiency in Custodial reconciliation. During more than one occasion, I’ve heard people in Investor Accounting call it a mere formality; a means for validating the depository balance. Some have gone as far as not considering Cashbook its own process at all, but simply a data input to the real star of the show: the Test of Expected Cash (TOEC). 

Their rationale? Any outages in the account would just fall out while calculating the loan-level TOEC, so performing a full Cashbook reconciliation seems somewhat redundant.  I tend to agree, in principle. However, my experience has proven the opposite in certain situations. Any time savings gained in abbreviating the Cashbook process are more than lost when researching certain outages in TOEC.

At a basic level, the goal of Cashbook is to ensure the Custodial bank account is in balance. At a deeper level, the Cashbook process presents an optimal tool for certifying the bank statement (i.e. via performing a transactional book-to-bank reconciliation). This is good because collections, for example, recorded in the Servicing system would match deposits in the bank statement with any discrepancies falling out as reconciling outages. Yes, TOEC should catch these same discrepancies. 

How about this scenario: a wire is coded incorrectly and ends settling within the wrong P&I account? The TOEC process should also catch this, but the outage would not be linked to loan-level activity as it is an account-level item. In a sophisticated TOEC process, the outage may be caught early without missing a beat. If the process is not designed to specifically handle these scenarios, things start getting ugly. It may take analysts a lot of extra digging to identify why loan-level activity does not match up with the account balance. 

Also, consider how this outage would be recorded in TOEC. Is there an appropriate root-cause category code for it? Maybe; probably not. Lastly, consider timing (chronologically, not Reg-AB time). By the time the outage is identified in TOEC, this money may be in the incorrect Custodial account for 30 (maybe even 60) days, idle. Then, depending on the process, it may take another 30 days to initiate the transfer and move the money. Another good example for wasting time in TOEC: researching and correcting a true bank error.

From my perspective, all this could be avoided with a disciplined and well-structured Cashbook process; a proactive approach to handling account-level items that get resolved before they reach TOEC. It is time to show Cashbook some much well-deserved as past-due respect. In honor of this neglected business process, I am proposing 5 considerations for building a sound practice within your operations:

1. Clearly Define Start and End-date Parameters   

Avoid the common mistake of overlapping Cutoff start and end dates by double-checking data filtering parameters. This could get tricky as not all Cashbook reconciliations fall on month-end (think FHLMC) and processing cycles do sometimes become extended to work on a non-business day. In other words, verify that all activity for the bank statement is restricted to this range and that no book transactions enter this process ABOVE the defined range (consideration #3 below will explain why some book transactions from the previous period should be considered in the process). Not following this simple guideline will lead to a lot of transactional “noise” and a disorganized Cashbook reconciliation.    

2. Roll from a Previous Period

This may sound intuitive, but it is surprising how many times we’ve encountered companies performing their Cashbook reconciliation without considering results from the previous period. The key lesson here: it is important to live with your results (and calculations). The true power of a Cashbook Reconciliation summary is in rolling it forward; in other words, start by tying together Beginning Balance from the current period to Ending Balance of the previous period. Also, make sure to carry-forward any reconciliation discrepancies identified in the previous period to attempt resolution or continue ageing (see item #3 for more detail).

3. Track and Age Discrepancies        

The only sound method for identifying reconciliation discrepancies within the Cashbook process is to perform a transactional book-to-bank matching of bank statement items. This means bumping up collections recorded in the Servicing system, for example, and matching them with deposits on the bank statement. The benefits of this process are two-fold: (a) matching book-to-bank transactions certifies the bank statements (i.e. the backbone of the entire Custodial recon process); and (b) the process will reveal any true discrepancies /reconciling items in the Custodial account. Please remember to roll-forward any book items not matched against bank statement items (i.e. deposits in transit) for the following cycle.

Adding some additional sophistication to the process, book-to-bank reconciliation could be performed on a daily basis. Bank statement data is available daily via BAI files and there are several reports in Black Knight and other Servicing platforms that provide daily activity, such as the T690 showing daily collections (i.e. daily version of the ZZ80). Performing this reconciliation on a daily basis catches issues quickly and allows those involved to correct the issue well before this becomes an outage in TOEC.

As far as best practice – track and age any reconciliation discrepancies at the Cashbook level (even if you might be tracking certain outages “twice” if these are also identified in TOEC). Why? The majority of outages in Cashbook will fall under one of two main categories: (1) errors in movements of cash; or (2) true bank errors, such as incorrect settlement amounts. For these types of issues, communicating the discrepancy with corporate treasury, for example, will be more effective at the bank-account level. This, in turn, should reduce the turnaround time for resolution and possibly correct the item before initiating TOEC (particularly if performing this reconciliation daily).   

4. Validate ALL Balances

The clear figure to validate here is the Depository Bank Balance. The Depository Bank Balance should be composed of the ending bank balance on the bank statement PLUS any deposits (or withdrawals) in transit that are yet to settle in the account. If your process is already taking account point #3 above, this value should be simple to certify.

Another important balance to validate is the depository balance according to the Servicing system. It may sound slightly counter-intuitive, but there could be a discrepancy between the calculated Depository Bank Balance and that which is presented in the Servicing system – think adjustments not entered correctly or manual transaction activity not recorded accurately (or at all) in the Servicing platform. We’ve found that it is best practice to perform a simple daily check to make sure both these values are in synch. 

5. Track and Measure the Process.      

All the considerations leading up to this one center on ensuring a sound Cashbook reconciliation, which is fantastic; however, visibility and metrics gathering over the process as it is happening in real-time distinguishes a proactive team vs. a reactive team. What’s the difference? A reactive team sees smoke and eventually reaches the fire with whatever tools happen to be on-hand to try to extinguish the flames. A proactive team sees the spark that started the fire. This level of visibility is afforded by adopting well-defined work assignments and developing a dashboard to track the resulting metrics. 

We recommend doing what most companies already do: create a spreadsheet to assign analyst resources to specific Cashbook reconciliation, but we push it one step further by suggesting the inclusion of triggers to track the progress as it is happening. Create a spreadsheet or tool that listens for status changes in Cashbook reports (i.e. Pending, Submitted, Approved) as well as a means to collect metrics (i.e. number of items matched vs. outstanding) in an effort to get a meaningful pulse of the process as a whole. The development of the dashboard is certainly an evolutionary process; the trick is to subscribe to this mentality or management overview philosophy if the terminology is more fitting. Either way, evaluating the health of a process needs to occur as the process is happening and not after the process is completed – test this statement by applying it to a living body. Find creative metrics (and corresponding triggers) to track the process as it is unfolding to prevent a spark from becoming a forest fire.

Below is an example of real-time processing metrics as offered within Integra Recon. To get the full picture, it is not only important to see the status of current work completed (left chart), but understanding when the bulk of the work was performed (right trend analysis).

screenshot custodial reconciliation dashboard

What considerations can you share about how you manage your Cashbook business process?

[HousingWire] Embracing the future of mortgage servicing

The following article appeared in the February 2021 issue of HousingWire.

This year has brought plenty of disruption to mortgage servicing, from regulatory and economic uncertainties, to a long-term shift toward remote work environments. Meanwhile, the past decade has seen an explosion of digital solutions in mortgage origination, and servicing will inevitably follow suit. 

In this context, it’s natural to consider digital transformation; as all our processes are upended, this is perhaps an ideal time to rethink the business, and the technologies that support that business.  

But this is a decision to make with care. About 70% of digital transformations fail. The cause of these failures can often be traced back to not keeping the business goals at the forefront of the transformation process, or overlooking how technology impacts and interacts with the entire operational ecosystem. 

It’s important to remember that digital transformation isn’t just about implementing new technology. It’s about strategically using technology to help you achieve your business goals. If your organization is looking for digital transformation, these tips will keep you on track for success. Continue reading on Housingwire>>

Data challenges in mortgage servicing: Bank statements

Bank statement information presents a data challenge for many Investor Accounting and Reporting teams. Created especially for automation, BAI files offer a great solution. Switching to BAI files provides a means to streamline multiple business processes, an important preparatory step in digital transformation.

How to prepare a clearing account for audit in only 15 minutes

Find out how a leading non-bank mortgage servicer streamlined the clearing reconciliation process with Integra RECON.

Using Integra RECON to automate clearing account reconciliation, a top-20 non-bank mortgage servicer has substantially improved efficiency, consolidated operations, and introduced critical operational controls.

Results

  • 50%: Reduction in FTE’s required to complete the process
  • 89%: Payment clearing transaction automatically matched by the system
  • 3: Number of checks manually cleared per day, instead of 400+
  • 30: Hours required to train a new FTE on the new process
  • 15: Minutes it takes to prepare an account for audit, instead of weeks

Challenge

The company’s clearing reconciliation process required 5 FTE’s to manage 7 accounts using spreadsheet solutions that offered limited quality control. And because there was no formalized process for clearing reconciliation, training new staff took several weeks. Each clearing account also came with its own specific challenges. For example, payment clearing required coordination of data from multiple sources and presented an unmanageable daily transaction volume. Disbursement clearing involved multiple touchpoints and heavy manual intervention, resulting in higher risk of errors.

Solution

Implementation of Integra RECON resulted in multiple key benefits:

  • The application-based process brings standardization and visibility. Introducing a single application was key to centralizing the function in one department and standardizing the process. Furthermore, the system’s workflow capabilities ensure easy oversight of the entire process.
  • Automation streamlines several aspects of the process. Thanks to automated data gathering and matching, analysts no longer spend time on tedious, error-prone tasks like collecting bank statements or manually entering data.
  • Built-in controls ensure processing integrity. The clearing reconciliation process no longer poses an audit concern, since built-in controls prevent unauthorized changes to data; timestamp analysts’ work; and keep analysts from submitting unbalanced reconciliations.
  • Audit preparation requires considerably less time. With Integra RECON, preparing for an audit now requires about fifteen minutes. Analysts simply print or export the appropriate reports directly from the application.
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Increase efficiency in custodial reconciliation by 69%

See how top regional bank M&T reduced risk and saved 283 hours per month in custodial reconciliation processing with Integra RECON.

To overcome the challenges and risks of a spreadsheet-based custodial reconciliation process, a leading regional bank partnered with Integra to implement Integra RECON. The bank is now well positioned to scale its custodial recon operations through loan acquisition.

Results

  • 283.7: Hours saved using Integra RECON
  • 69.4%: Improvement from implementation of Integra RECON
  • 66.8%: Increase in efficiency for researching, finalizing and quality control
  • 76.2%: Decrease in time required for data gathering, import and integrity checks

Challenge

The bank’s former custodial reconciliation process relied on cumbersome spreadsheets. It was mostly
manual, presenting multiple concerns for internal and external auditors:
Integra BILLING delivers multiple key features for you and your subservicing team:

  • Errors and inefficiencies
  • Lack of visibility and controls
  • Limited repeatability and scalability

Solution

With these challenges in mind, the bank implemented Integra RECON for their loan portfolio. This represented a complete transformation of a key business function that increased productivity and reduced risk in three key areas:

  • Process automation and agility
  • Visibility and reporting
  • Audit and controls
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