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, among other banks, have recently implemented full or partial foreclosure moratoriums as the latest housing-related crisis takes fold. State officials have launched a nationwide probe into the foreclosure processes as calls for fraud and the hasty signing of documents have gained momentum.

Brian O'Reilly, president of The Collingwood Group and a former

Fannie Mae

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director, sat down with


to discuss the foreclosure crisis and what needs to be done in order to correct problems pervading the system.

O'Reilly's firm provides business advisory services to financial services firms including large financial institutions, mortgage bankers, loan servicers and special loan servicers, among others.

TheStreet: Share some general thoughts on this latest foreclosure crisis.


In understanding the current foreclosure issue, it's important to know that it's really a symptom of a much larger issue within the mortgage industry.

Between 2002 and 2006, the industry quintupled in the volume of loans that were being originated from around $1.5 trillion to nearly $3.2 trillion over that very short period of time. During that period lenders, investors and servicers invested their money in those areas of the business -- the front end of the business -- that were generating revenue.

During that period foreclosures defaults were very, very low. Housing prices were increasing and consequently no one was making an investment in the back end of the business. So the systems and the processes were largely ignored. The foreclosure issue today is a symptom of gross underinvestment by the industry over the last decade.

" Unfortunately this lack of investment and the foreclosure issues we're experiencing today are I think the beginning of a much larger problem,"

--Brian O'Reilly, president of The Collingwood Group.

TheStreet: Who should take the liability for this latest crisis?


There's lots of blame to go around. The underinvestment occurred on the part of originators, it occurred on the part of servicers, it occurred on the part of investors.

TheStreet: What will the clean up look like?


Well, that's exactly what our clients are asking us. The biggest problem with the foreclosure issue is that it adds uncertainty to what is already a tremendously uncertain environment. The measures that have been taken thus far by some of the largest lenders and servicers to impose voluntary moratoria makes sense.

Taking a pause for reasonable period of time to determine whether or not their systems and processes are adequate, whether or not they've been properly deployed and the rules are abided by is critical.

Once it's determined that the systems are working, we need to begin proceeding with these foreclosures to clear the system.

Foreclosure Automation Called For

TheStreet: One analyst projected that costs to the banking industry as a result of the foreclosure issues is likely to be in the $6 billion to $10 billion range, and that's if the issues are cleared up rather quickly. That number could potentially be much worse.


It should be frightening to everybody that is affected by this because we've all come to appreciate that the housing industry generally is not something that is isolated. So I hope the worst case scenario does not come to pass and that in the next couple of months it's determined that -- for the most part -- the problems that exist are reasonably isolated and can be quickly corrected.

If the foreclosure process comes to a standstill the consequences could be quite dramatic, first and foremost, to the housing industry, but to the economy more broadly.

TheStreet: Is automation of the foreclosure process the problem?


It's not the automation that is the problem, it's frankly the lack of automation.

Take by contrast automated underwriting over the last decade. The

government-sponsored enterprises and the largest lenders embraced the concept of automated underwriting and made the process more efficient and better for the general public. Again, the lack of investment over the last decade has resulted in a situation in which the foreclosure processes have not been automated.

Add to that the fact that property laws in the U.S. are state-based, so you effectively have 50 systems that lenders have to abide by and add to the fact that these are largely manual processes -- there are inevitably going to be gaps. So one of the answers to this problem is the largest lenders should be looking at these processes, making the investments that are necessary in order to automate them where reasonably possible.

TheStreet: Is the lack of investment a result of lenders and servicers not used to dealing with the amount of foreclosures in the system?


That's exactly right. The number of foreclosures in the U.S. have increased to levels that are unimaginable even three years ago. In 2007, when default rates were sub-1%, no one imagined that in some states you would see the foreclosure rate at 10% or even higher in some instances.

This lack of investment and the foreclosure issues we're experiencing today are I think the beginning of a much larger problem. It's a little bit like the dam starting to give way. I predict we're going to start hearing stories about lost documents, other documentation gaps, things that are important to the transaction being missing or not existing or not being able to be traced and all of that unfortunately is going to add to the uncertainty that plagues the industry.

TheStreet: Let's talk about fraud in general in the foreclosure process.


Our experience in the mortgage industry is the largest banks, the largest servicers, the largest investors take the challenge of foreclosures very seriously. If you look at the level of personnel they have committed to this process and how those numbers increased over the last three to five years -- it doubled, tripled, quintupled. So there is no question that the big banks and the big servicers have taken the process seriously and have worked to devote resources to it.

I think we have to draw the distinction between fraud, which I typically associate with nefarious behavior, and human error, again largely as a result of the lack of investment in this process. These are very manual processes, human beings are involved in every step of the process and are fallible. They make mistakes and I think when the book is written on what we're experiencing today, you'll see that a lot of this is human error, not necessarily the result of nefarious behavior on an individual's part.

See Related Items:

Bank Foreclosure Costs May Hit $10B

Foreclosures Still on the Rise -- For Now

Foreclosure Fear: Q&A Risk Analytics Chris Whalen

Foreclosure Crisis May Be a 'Blip': Dimon

--Written by Laurie Kulikowski in New York.

To contact the writer of this article, click here:

Laurie Kulikowski


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