REQUIRED READING: Many servicers' default units, expectant of future servicing standards and additional best practices from the government-sponsored enterprises (GSEs) and state attorneys general, are in a state of limbo, cooperating with regulatory orders as necessary but also waiting to see how homogeneous various requirements are before making major overhauls.
That uncertainty has crept into collection departments, which, according to vendors in the space, are hesitant to make big moves before understanding for certain what type of borrower-contact measures will be required of them.
However, the service providers say, elements of a more normalized collections atmosphere – complete with early-and-often consumer outreach and strict timeline management – should not be ruled out.
"There seems to be a lot of old-school philosophies coming back into loss mit, and early-and-often contact has always been there," says Jay Loeb, a vice president and principal owner of National Creditors Connection Inc.
Early intervention is clearly a priority for the GSEs, which are in the process of aligning their default servicing requirements. Fannie Mae and Freddie Mac are pushing servicers to begin their collection-call campaigns on the third day of delinquency and continue the calls until a quality right-party contact is established, the delinquency is cured, a borrower response is received, or the borrower enters a forbearance or repayment plan. With an eye toward reducing roll rates, Freddie Mac's newest servicer scorecard emphasizes early borrower contact.
In response to political pressure and the mainline perception that servicers are callous in their collection efforts, many shops in 2010 drifted away from a policy of calling past-due accounts before late charges were assessed. The pre-2010 strategy of early contact, to which servicers appear to be returning, can help unclog the pipeline by removing the low-hanging-fruit accounts – e.g., borrowers who simply forgot to make their payment or those who are financially stressed but able to pay.
"I think one of the benefits in all forms of consumer credit of getting an early and appropriately phrased collection call � is you do tend to get cases out of the delinquency pipeline and keep them from aging," says Brian Moore, an executive of collection solutions at Varolii Corp. "You remove them from the workflow so you can focus on more serious delinquent accounts."
Further down the pipeline
The recession and popular belief that all borrowers are entitled to loan modifications have spawned a new breed of no-contact borrowers, who can safely be considered more serious delinquencies. This group includes strategic defaulters; misguided borrowers who were wrongly advised to skip payments; and wounded customers who were denied loan modifications.
Borrower-contact strategies such as skip-trace services have the potential to turn up much different accounts now than they used to, says Rick Lee, an executive vice president at HP Locate LLC. Skip-trace buckets now contain not only borrowers who are running from collectors, but also borrowers who feel ignored by servicers.
"Skip-trace used to connote getting back a trashed-out REO, but that has changed," says Lee. "There are borrowers in that bucket who have cash, the ability to reperform and should be able to do some type of positive resolution."
Lee claims that HP Locate, which connects servicers with delinquent borrowers, has a similar success rate of finding no-contact borrowers at the six-month mark as at the 18-month mark. What does change over that timeline, however, is the potential loss severity. "The tighter you're in toward the 30-day bucket, the higher the probability of a resolution that has a very good outcome for the bank, versus a much higher loss," he says.
Gauging levels of strategic default, meanwhile, has never been an exact science, and a pair of recent reports paints an unclear picture.
A first-quarter 2011 survey from Fannie Mae shows that acceptance of strategic default is gaining among underwater borrowers, with 27% of borrowers surveyed believing it is OK to walk away from their mortgage – nearly twice as many borrowers as when Fannie Mae asked the same question in January 2010.
On the other hand, the Chicago Booth/Kellogg School Financial Trust Index found that the incidence of walkaways fell seven percentage points to 30% from December 2010 to March 2011 – a conclusion that index co-author Paola Sapienza hypothesizes could be attributed to the "perceived probability that a lender will go after a strategic defaulter."
James Zeldin, executive vice president of Default Resource, sees it another way. With housing prices trending downward – the latest home-price indices have sounded the double-dip alarm – Zeldin believes the problem of strategic defaults will worsen before it improves.
"From my perspective, you're going to see more and more strategic default as people realize housing markets aren't coming back as quickly as they expected," he says.
Despite the Chicago Booth/Kellogg School findings that consumers may be cognizant of servicer recourse, collection professionals say there is little evidence that servicers are pursuing deficiency balances as aggressively as they could be. Not only are servicers leaving money on the table, but their inaction on charge-offs risks perpetuating a certain belief among consumers.
"If you start enforcing other collection remedies beyond foreclosure and borrowers understand there are consequences, you will see incidences of strategic default go down," says Leo Stawiarski, president and CEO of LCS Financial. The problem, he adds, is that the servicing community is reluctant to employ collection strategies that could appear insensitive in such a politically charged environment.
"We're seeing substantial pushback, but when you boil it down at the end of the day, it's contract enforcement," Stawiarski says. "It's really up to the lenders to use the legal enforcement mechanisms that are in the contract to not only mitigate their loss, but curb this behavior that's taking place."
However, servicers that decide to go after deficiency balances or charged-off assets should take a targeted approach, which often begins with leveraging an intelligent scoring model, Stawiarski says. Such a model might include information on a loan's original and current balance, interest rate, the monthly payment amount, the length of delinquency, the borrower's credit score and other factors. This type of portfolio segmentation is detailed work that requires a scalpel – not a machete.
Scoring models may also consider the many legal factors that affect late-stage collections. Several of these considerations relate back to lien position and the geographic location of the borrower and/or property.
For example, servicers should be aware of a given state's statute of limitations, Stawiarski adds. Generally, this is not an issue for second-lien holders, whose liens may have been extinguished by a first-lien foreclosure. Second-lien servicers still have a right to collect under the promissory note in most jurisdictions, and because the note is a contract and most states' statutes of limitations for enforcing contracts last between four and six years, there is greater flexibility.
Time frames may be considerably shorter for deficiency judgments, however. Many Eastern states are what Stawiarski calls "short filing states," meaning creditors have a very limited amount of time (typically, between 30 and 90 days after a foreclosure action) to decide whether or not to pursue a borrower.
Also important are the types of collection remedies available to servicers, such as the ability to garnish wages. Furthermore, servicers ought to consider the court docket in a particular state and what it portends for timelines of procuring deficiency judgments. Florida's gridlocked judiciary and huge backlog of foreclosure cases, for instance, will delay a servicer's attempt to collect a deficiency.
Though Stawiarski strongly disagrees with assertions that unsecured second liens hold no value – "That couldn't be further from the truth," he says – all late-stage collections should be pursued thoughtfully.
"We need to make sure we're targeting those borrowers who we should be pursuing, because we're not trying to get blood out of a turnip," he says.
