Holistic Financial Counseling Can Help Avoid Big Foreclosure Losses

Holistic Financial Counseling Can Help Avoid Big Foreclosure Losses Holistic financial counseling that considers more than just mortgage-related expenses is critical to preventing foreclosures and reducing recidivism rates among modified loans, a new study says.

According to the study, released by Peachtree, Ga.-based mortgage consultant firm STRATMOR Group and sponsored by specialty servicer Outreach Financial Services, holistic financial counseling could reduce losses on a 10,000-file loan portfolio by as much as $71.5 million. The findings of the study are available in a white paper titled "The Impact of Consumer Credit Counseling on Distressed Mortgage Loan Losses."

Whereas traditional borrower counseling in a default-servicing context focuses mainly on the monthly mortgage payment, holistic financial counseling incorporates analysis of a borrower's lifestyle decisions, assessing factors such as credit card debt, car payments and discretionary spending, the groups explain.

According to the white paper, the loan modification model of using credit counselors to work with homeowners on lifestyle savings reduces borrowers' monthly spending by an estimated $300. When combined with a prospective $550 reduction on the monthly mortgage payment from the sample loan modification, the model allows homeowners to realize approximately $850 per month in freed-up cashflow, the paper states.

Although standard mortgage counseling limits losses and lowers the redefault rate on loan modifications, holistic financial counseling can yield greater results, according to the study, which was authored by STRATMOR Group Managing Director Matthew M. Lind.

For borrowers receiving standard counseling, Lind's research estimates annual losses avoided at $3,894 per borrower on a $210,000 average loan balance. The annual benefit increases up to $7,147 per borrower if borrowers receive holistic financial counseling (which, when applied to a portfolio of 10,000 loans, results in $71.47 million in losses avoided), the study claims.

The research is based on the 2010 Urban Institute's National Foreclosure Mitigation Counseling Program Evaluation Study. Additional data was developed from a multivariate statistical analysis based on a sample of roughly 335,000 loans tracked by LPS Applied Analytics, along with data provided by the National Foundation for Credit Counseling (NFCC).


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