REQUIRED READING: If you want to start an argument among regulators, legislators, the courts, consumer advocates and the mortgage industry, ask them how they feel about the dual track of foreclosure and loss mitigation. It is difficult to find an issue that has divided all the players in the mortgage arena as much as this one.
While everyone agrees that a mildly delinquent borrower should have a chance to work out his or her problems, they disagree about how long that opportunity should last and how servicers should balance the needs of borrowers, guarantors, investors and their own need for profits.
Consumer advocates point to a recent survey of about 100 attorneys representing more than 2,500 homeowners, half of whom said their clients' note holder tried to foreclose while the homeowner was negotiating a loan modification.
"We'd like to see an end to dual tracking," says Diane Thompson, an attorney for the National Consumer Law Center (NCLC), based in Washington, D.C. The NCLC wants all homeowners evaluated for modification and then offered a modification in cases where it would return a net present value (NPV) to the owners of the loan or the investors.
"Our goal is to stop avoidable foreclosure," she says. "Under the duty of good faith and fair dealing implied in all contracts, we believe – and some courts have agreed – that servicers have an obligation to offer a loan modification before proceeding to a foreclosure when doing so would save investors money."
Thirty days to respond to a loss mitigation offer would give the consumer a fair shot at providing the required documentation without unduly slowing down the process, Thompson says.
Mortgage industry experts are divided on the issue. A moratorium would just create a 30-day window in which the consumer would use the money saved on mortgage payments to pay other creditors, says Gerald Alt, president of LOGS Network in Bannockburn, Ill. "When you relieve the pressure to make the payment on the house, it's na·ve to think the homeowner is setting aside the money," he says.
"The threat of foreclosure is a powerful motivator," agrees Jay Loeb, vice president of strategic business development for Lake Forest, Calif.-based National Creditors Connection Inc. (NCCI). "We've had thousands of people whose doors we've knocked on and a modification was sent out to them, and they won't sign because they think there's a better deal coming. They've been offered a $1,600 payment, and they want a $1,400 payment."
Regulators are split on the issue. Federal Deposit Insurance Corp. Chairwoman Sheila Bair says dual tracking should end. In testimony before the U.S. Senate Committee on Banking, Housing and Urban Affairs, she said "it is vitally important that the modification process be brought to conclusion before a foreclosure sale is scheduled. Failure to coordinate the foreclosure process with the modification process risks confusing and frustrating homeowners and could result in unnecessary foreclosures."
In his testimony before the same committee, Federal Housing Finance Agency Acting Director Edward DeMarco said, "At times, simultaneous actions are necessary because of the long time frames of the foreclosure process and because borrowers are not always responsive to foreclosure-alternative offers.�Delay is costing taxpayers money and creating undesirable incentives for homeowners to stop paying their contracted mortgage obligations."
Some argue that government mandates have interfered with the servicing process so much that dual tracking no longer exists. "It's a dual track conceptually," says Camillo Melchiorre, senior vice president for loss management at Philadelphia-based Radian Guaranty Inc. But in reality, mandatory mediation, the switching of states from nonjudicial to judicial foreclosure, and court orders for lawyers to recertify documents have imposed hard stops that have lengthened the foreclosure timeline to the point where the average disposition is now 44 months, he says.
‘I have a master policy that requires servicers to do certain things and the investor has a contract that requires servicers to do certain things, but I have influential people saying there should never be another foreclosure, Melchiorre says.
Investor-mandated timelines allow for monetary punishments to servicers to do not efficiently process a loan through to foreclosure, creating the need for dual tracking, says Scott Gillen, senior vice president of Stewart Lender Services in Houston. "Servicers are graded based on timelines, and to meet those, servicers have to be Jekyll and Hyde," he says. While one employee discusses loan modification, another is making sure a foreclosure timeline is being met.
But that does not mean servicers are foreclosing when they should not be, says David J. Miller Jr., senior vice president and business development director for Ewing, N.J.-based Cenlar FSB. "I don't know of any reputable mortgage lenders who will push forward with foreclosure when there's an opportunity to save the property," he says. "It doesn't happen. There's too much media play on one or two unfortunate incidents where details are twisted and the full story isn't there."
Delay or cancel?
It's easy to call a foreclosure moratorium a delay, but in some states, the difference between a foreclosure delay and an outright cancellation is time. For example, in Washington, a servicer can delay a foreclosure for up to 120 days. After that, the process has to begin anew, explains attorney Fred Rivera, a partner at Perkins Coie LLP in Seattle.
When a delay grows into a cancellation, investors and servicers bear the extra cost of that delay. The dual track could be ended if there were uniform foreclosure standards that allowed for a 30- to 60-day foreclosure in cases where the loan modification is not going to work, Rivera says.
"The only real reason for the dual track is that it takes so long to get a foreclosure completed," he says. "If that were taken care of in legislation, dual tracking would be less necessary, but that's not going to happen." States are unlikely to give up, from a constitutional perspective, their right to control real estate law, including foreclosures.
How could we create national servicing standards without violating the Constitution? Via the Real Estate Settlement Procedures Act, answers Thompson. "The precedent is there for regulating at the national level," she says. "Servicing is a national business, and it clearly affects national commerce."
Thompson says such standards would not interfere with pooling and servicing agreements (PSAs), because PSAs allow servicers to follow usual and customary industry practices. "If we have a national servicing standard, that's going to be usual and customary practice," Thompson says. "To the extent constitutional issues are raised, they're overblown. A lot of things we talk about are requiring servicers to comply with existing contracts and creating mechanisms to enforce compliance."
The differences really are about how we govern ourselves, Melchiorre says, adding, "We have Congress dictating NPV and debt-to-income ratios – things that were never intended to be controlled by a government body."
There are positive aspects to servicing standards, says Steve Kravitz, vice president of default administration at Cenlar. "Generally speaking, standardization is a good thing," he says. "We saw that with the [Home Affordable Foreclosure Alternatives] program that standardized the short-sale process. There are best practices that come out of standardization, but when those standards are in direct conflict with PSAs, that's problematic."
Standards would give servicers a better ability to accurately price servicing rights. "We'll never get an [accurate] interest-rate scenario established until we understand the cost of default servicing, and right now, it's constantly being refined because of government intervention," Gillen says. "The time to reconsider this and invent a new servicer compensation structure is now, when we have [government-sponsored enterprise] reform hanging over our heads."
Standards would also assure homeowners of consistent treatment, regardless of which company services their loan. In the past, Fannie and Freddie developed
and led changes in servicing processes, but today's political scenario has placed them under intense pressure to limit losses, and that influences what they can do, Cenlar's Miller says.
"There are folks in the customer corner trying to help consumers and investors trying to protect themselves, and on Capitol Hill, there is a mix of support for both sides," Miller says. "This is probably the biggest area of disagreement we've had in a long time."
Single point of contact?
Some market participants have suggested that standards include having a single point of contact for each troubled homeowner. A single point of contact would "go a long way towards eliminating the conflicts and miscommunications between loan modifications and foreclosures in today's dual-track system and will provide borrowers assurance that their application for modification is being considered in good faith," Bair told the Senate panel.
Opponents of the single-point-of-contact approach liken it to walking into Best Buy and expecting to have one salesperson who knows all the products, from televisions to computers, and can also process your transaction, come to your house to install the product and then handle your return if you change your mind. It is all but impossible for one person to understand the borrower, the property and investor requirement in parallel.
"A collector only understands the borrower information, [and] an evaluation group may only understand the value of the property, liens and other property information," says an industry observer. "Another group knows the investor requirement a servicer has to live up to."
"The biggest need is for data and analytics that segment borrowers into actionable buckets based on where they are in the servicing process, with transparency for external service providers and having dedicated subject-matter experts internally and externally," he adds.
Melchiorre, however, says the Best Buy metaphor does not hold up. "Some of the best special servicers have one person who's responsible for a loan, and they may interact with subs to handle the processing," he says. "That doesn't mean they do every task. It's like having one doctor who sees a patient and refers him to specialists but continues to coordinate his care."
Although it is impossible to say how the argument over dual tracking will end, one thing is certain: The disagreements over how to best balance the needs of consumers, servicers, guarantors and investors will likely continue as long as there's a mortgage market to argue about.
Dona DeZube is a freelance writer based in Clarksville, Md.
