Although the expectations were strong that 2010 would be the year of the short sale, the other option for a graceful home forfeiture – the deed-in-lieu (DIL) of foreclosure – remains a valuable alternative for investors, according to servicers and outsource providers. DILs carry higher expenses than they have in years past, and compared to short sales, they provide far less potential for recovery.
Nonetheless, servicers and investors note that once home retention has been ruled out, DILs can play a key role in resolving one of the main challenges of default management: gaining control of the property.
‘The underlying premise of the deed-in-lieu is to give the servicer/investor control of the property,’ says Kevin Wall, CoreLogic's vice president of operations for outsourcing and technology solutions. ‘At the end of the day, that's the primary driver. It offsets a lot of the issues and regulations around how hard it is to take control of the property for a servicer/investor.’
Considering the nominal levels of DILs in recent years and the expected fallout of loan mod programs, it is hard to imagine that DIL activity will go any direction but up. DIL transactions made up an extremely thin slice of servicers' loss mitigation actions in the second quarter. A report from federal bank regulators that covers more than 60% of the nation's first-lien mortgages showed 1,736 new DIL actions between March 31 and June 30 – a 46.5% increase over the first-quarter total.
The Federal Housing Finance Agency's second-quarter foreclosure-prevention report for Fannie Mae and Freddie Mac reflected a total of 1,506 DILs for the government-sponsored enterprises (GSEs) – a lean sum, but a rise from 934 in the first quarter.
Investors such as Fannie Mae appear to be clearing the way for larger DIL volumes. In August, the GSE announced it was doing away with its policy of requiring borrowers to list their properties on the market for at least three months before servicers can recommend a voluntary DIL option to borrowers.
The policy change is part of what Fannie Mae calls its ‘one and done’ initiative, John Harris, the company's director of servicing management, explained at an industry event earlier this year. The idea is to move servicers away from cascading loan files through multiple treatment options, instead focusing on one optimal path to loan resolution.
‘Wherever makes the most sense is where you need to go [with the loan],’ Harris said. In some cases, that will mean DIL or Fannie's alternative, Deed-for-Lease.
A common component of a DIL transaction is the cash-for-keys incentive for borrowers, which is now more diplomatically referred to as relocation assistance. Prior to the foreclosure crisis, relocation-assistance amounts could be as low as $500, says Tara Williams, vice president of Altisource's field-services division and head of the company's new short sale and DIL unit.
Now, many servicers are starting at the $3,000 mark for relocation assistance – a by-product of the standardization created by the federal Home Affordable Foreclosure Alternatives (HAFA) program, she says. If the opportunity exists in the market for the servicer to dispose of the asset at a decent price, servicers become more willing to raise their cash-for-keys offers, and Williams says she has seen offers grow as high as $10,000.
‘You are seeing servicers becoming more aggressive in working with borrowers to create incentives, because they're seeing downstream that the costs to carry the loan – and certainly the costs to go through foreclosure – aren't necessarily going to make it advantageous for them to hold onto that,’ she says.
Wall views the higher cash-for-keys payments as a result of borrowers' becoming more aware of their options.
‘They're not willing to relinquish their rights as quickly, because they feel there is an opportunity – and maybe even potentially an entitlement – around a better deal,’ Wall says. ‘That's the headwind we've created in the market with the administration and the programs around home retention. It created laws and regulations and consumer awareness that actually makes a deed-in-lieu very challenging.’
The nation's largest servicer, Bank of America, has tens of thousands of customers in its aged inventory who have not made a mortgage payment in years, according to a speech given by Rebecca Mairone, a default servicing executive with the bank, in late summer – prior to the robo-signing crisis. The short sale and DIL options are ‘incredibly important to take a large percentage of what would be foreclosed out of that space,’ she said, noting that the company has tested the DIL waters with a variety of pilot programs.
Through the programs, the bank offered relocation-assistance amounts ranging from 2% of a loan's unpaid principal balance (UPB) to 4%. The results were surprising, Mairone explained, as the 4% UPB offers did not trigger a significantly better response from borrowers. Instead, what resonated most with customers was assistance in the form of social services. When Bank of America placed an added emphasis on borrower education and ‘hand holding,’ DIL completions improved markedly, Mairone said.
Altisource's Williams says social services are an integral part of the DIL process. She believes servicers should perform good-faith gestures where possible to help ease borrowers' transitions out of properties. These options include offering referrals for cooperative borrowers who are seeking rental housing but whose credit rating is impaired as the result of missed payments.
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