PERSON OF THE WEEK: Kevin Wall is president of Santa Ana, Calif.-based First American Mortgage Services, a division of First American Title Insurance Co., offering origination and default servicing solutions and a primary source of national title insurance, settlement and valuation services for residential originators and servicers.
MortgageOrb recently interviewed Wall to learn more about the loan modification market in today's housing industry.
Q: Describe the state and direction of loan modifications in the housing industry.
Wall: The housing industry has reached a point of standardization when it comes to loan modifications. All parties involved are finally working in sync, and there is a collective understanding of everyone's roles and responsibilities, resulting in a more efficient process. The approach, methodology and timing of loan modifications have stabilized with regard to how borrowers entering the loss mitigation stage should expect to be treated by servicers and investors. The transparency of data shared between servicers and investors today really aids the marketplace. Investors now receive frequent snapshots of their portfolios so they can proactively identify any red flags and mitigate issues.
The servicers' approach to borrower engagement has become more of a proactive outreach effort. Early-stage delinquency efforts no longer consist of simply making a payment agreement but now include early-stage loss mitigation efforts at the first indication of a potential issue.
Servicers have shifted much of their focus from making collections to avoiding foreclosure through early detection and counsel. From what we've seen, even though servicers are required to alert distressed borrowers when they fall behind on their mortgage and discuss available options to rectify the situation, they do so more on their own accord, knowing that borrower interaction only improves the overall situation. In a way, the industry has evolved to having a more altruistic frame of mind.
Q: How has the recent regulatory environment affected a borrower's eligibility for a loan modification?
Wall: Every homeowner, regardless of loan type or financial situation, is given the benefit of the doubt, and fewer hurdles exist for those trying to save their homes through appropriate modification options. Today, borrowers are typically considered eligible on the front end until proven otherwise. The Consumer Financial Protection Bureau has endorsed responsible lending practices, and the housing system has been given a chance to recover.
The regulatory environment drives the movement to keep Americans in their homes. It is better for the borrower, it is better for the community and it is better for the investor. Bottom line: it is always better to have people in their homes with the ability to repay than to have people exit their homes. It would cause great economic and social upheaval to change course now.
Q: How can servicers turn loan modifications into a source of profitability?
Wall: Look at the alternative. It is rarely profitable to foreclose on a property. When someone stops paying the mortgage, it results in negative cash flow, or "cost carrying," because servicers are funding property preservation activities, paying taxes and other miscellaneous maintenance fees around that account with no revenue coming in against it.
Servicers don't usually profit from the time, costs and amount of unpaid balance on a loan. Loan modifications are a mechanism of cash flow. Once the loan is modified and performing again, servicers typically earn the fee associated with servicing the loan. Positive cash flow is always better than no cash flow or negative cash flow.
Servicers use three metrics to help manage their expenses and returns: optimize cash flow at a borrower level, maximize and leverage incentives provided by investors for modifications, and do it as quickly as possible to reduce the costs associated with an extended timeline. The longer the loan is carried without cash flow, the more out-of-pocket expenses will occur.
The quality and experience of the servicer's staff and support services directly impact the servicer's ability to work more effectively with the borrower and avoid costly foreclosure. This all begins with an effective hiring process. A carefully selected, experienced staff will see key opportunities others might miss and will be able to more effectively manage the risk associated with troubled loans, which will improve the odds of converting these to performing loans once again.
Q: What are the greatest challenges associated with loan modifications and how can they be avoided?
Wall: Historically, the greatest challenge has been maintaining and collecting proper documentation from the borrower within the allotted time frame and determining which of the documents are still considered valid. For example, bank statements, pay stubs and affidavits need to be collected promptly so that those documents are still considered acceptable to the investor.
It ultimately boils down to proactive borrower engagement and the thorough collection and completion of documents. Issues can be avoided through comprehensive reporting, setting borrower expectations clearly, efficiently collecting and inventorying documents, underwriting in a timely manner, identifying incomplete information and executing promptly. The more you can compress the time frame, the more efficient the process, the better the borrower experience and the higher the likelihood of avoiding another foreclosure.