Ensuring a loan modification fits a particular borrower's financial situation can be a tricky proposal. Scott McGuane, president of Halo Group Inc., explains how a strong understanding of unsecured-debt trends can prove beneficial for loss mitigation professionals.
Q: In discussing borrower behavior, Wells Fargo's senior vice president, Mary Coffin, recently noted that loan modifications often redefault when a borrower's total debt-to-income ratio (DTI) exceeds 55%. Is enough attention being paid to total DTIs, as opposed to merely mortgage DTIs?
Scott McGuane: No. The industry does a poor job of addressing the total debt load of a borrower. Most models used to qualify a borrower for a loan modification use crude estimates of the borrower's debt load. Buying behavior and future suitability and accountability are not fully developed or tracked. The servicer is solely focused on the overwhelming number of defaults before it, and concentrates only on the loan it services.
Unfortunately, the borrower is often inundated with calls and collection efforts from their unsecured debtors, as well. Frankly, the unsecured debtors are better equipped and more experienced in collecting and have a wider array of resale options for their challenged accounts. The result is a non-secured machine that can overwhelm even the best attempts by a servicer to maintain the customer's attention throughout the term of a modified loan.
Each industry has approaches that should be adopted by the other. The past thinking that mortgage debt prevails and unsecured is left in the cold in this era is no longer valid. The consumer is driving many of these decisions based on their lifestyle, economic factors and regulatory restrictions. A holistic approach to oversight on the consumer's debt should be taken until we return to a more "normal" economic environment where the loss of a primary residence is a more compelling event for the borrower.
Q: What disconnects do you identify in the debt settlement process?
McGuane: A poor perception and lack of cohesive partnership approach define the most notable disconnects in the debt settlement process. Debt settlement relates to unsecured debt and is nothing more than a "short sale," as most of your readers would categorize it.
Debt settlement serves as a key component to effective and efficient mitigation of risk for both the borrower and the unsecured debtor, and it plays a critical role in working out a sustainable mortgage solution. Rather than force the borrower into bankruptcy or continue the ongoing resale of consumer debt until it reaches a level serviceable by the borrower, settlement allows for rapid achievement of price stability, liquidity and management of the debt load.
Simultaneously, the borrower is forced to be accountable over extended periods, which is consistent with creating a performing mortgage loan scenario.
The disconnect in today's economic environment, however, results from a lack of barriers to entry for new settlement entrants, varying levels of regulatory oversight and controls, and few reporting standards. In effect, you see many small or poorly run operations rapidly entering this space whose sole focus is more toward their own survival rather than the borrower's interests.
Even rarer still is a balanced approach to considering the borrower's and all of the servicers' needs.
Major banks themselves are unable to take a complete view of a customer who is challenged. Debt settlement should be considered where the mortgage is held by the same company that services the borrower's unsecured debt.
Asked at a recent loss mitigation conference, a Bank of America representative recognized that the bank's systems are only now being programmed to address Home Affordable Modification Program guidelines with no efforts under way to address the customer's multiple accounts with BofA.
Until a fresh look is taken at optimizing a financial solution for all of the stakeholders, disconnects and stress points will continue to develop at each decision point in these processes. It seems imprudent to ask a customer to sell his house "short" when the bank won't allow for a discussion on selling the "unsecured" debt short.
Q: Among its suggestions for ways to improve the Home Affordable Modification Program, the Government Accountability Office advised the Treasury to (1) monitor whether borrowers with high total household debt actually obtain HUD-approved housing counseling (as HAMP instructs), and (2) assess how such counseling affects the performance of modified loans.
What do you make of the GAO's recommendations?
McGuane: I commend the intent of wanting accountability. The magnitude of the challenges before the servicers and counselors requires transparency into these activities. Sadly, HUD does not require the counselors maintain the most efficient technology platforms that could enable this type of tracking.
Integrating the counseling results, the willingness of unsecured debtors to participate in these cases and the servicer's resulting performance will require a collaborative tracking and reporting solution. Simply tracking the decisions of both the first- and second-mortgage servicers on a single home has proven to be a challenge for even the most advanced servicers.
We have found that tracking the responses of every debt servicer for one of our customers allows us to predict success in achieving a workable solution. Unfortunately, it would take many of the servicers a year to recreate this integrated approach to accountability. My advice is that servicers consider an outsource partnership to assist them in this aspect.
With so many variables in the performance equation – including loan structure, economy, jobless rates, savings rates, etc. – I firmly believe the GAO's recommendations will only be fully implemented long after we have turned the tide on this crisis. It will be somewhat like taking an account of the number of horses that are in the barn as it is burning.
While somewhat valuable for a historic perspective, I would rather we devote more creative resources and effort toward getting the horses out of the barn quicker than distract our momentum with endless discussions about the "right" scorecard.
Q: What are your impressions of Barney Frank's threat to bring back bankruptcy cramdown legislation? Do you believe such legislation would stand a better chance of passage now, as compared to earlier this year? And if it were to be introduced and subsequently passed, what would be the long-term effects?
McGuane: Frank's "threat" is understandable and an expression of his frustration, which is shared by many others. He is seeking to compel the expediting of the loan workout process. In reality, though, he runs the risk of many loans being worked out simply to "hit the numbers."
Long-term performance becomes secondary to many servicers who are attempting to keep themselves from being singled out as the "least effective" by sheer modification numbers. No two mortgage portfolios are the same. To benchmark them all against one another is a challenge.
I believe such legislation faces a harder chance of passage now than ever before. I believe we are making headway, albeit not as quickly as desired or even possible. But I doubt that such legislation will pass if the facts are given serious consideration in the debates.
My concern is that Frank's cramdown legislation will have two serious drawbacks: Servicers outperforming their peers will be penalized for other's ineffectiveness and lack of success, and borrowers have already developed a sense of entitlement. I can easily foresee borrowers holding out for further concessions rather than doing what they can actually afford. This latter dynamic will only worsen the impact and slow down the process.
Q: Time for the crystal ball: How do you see the foreclosure crisis playing out? The Federal Open Market Committee sees signs of economic stabilization, yet foreclosure activity reached new heights in July, according to RealtyTrac. In your estimation, when can we expect to see foreclosures begin to truly decline?
McGuane: I am cautiously optimistic. The pay option-ARMs crisis is largely still in front of us, and commercial real estate still poses a daunting challenge for our economy. But strong signals in declining credit card defaults give positive news to the undercurrent of this crisis.
A return to more normalized volatility may arrive as early as end of the first quarter of 2010, releasing the pent-up capital we are all seeing and fueling the upward swing in our economy. The backlog of foreclosures is already declining in some markets. But it will likely not be until spring of next year before we see consistent positive signs across a wider segment of the country.
I believe we will be able to claim recovery when we see the reemergence of one or two large-scale independent national mortgage lenders. The consolidation among the largest banks has created opportunities for new entrants, albeit better controlled through prudent underwriting and originations.
Halo is going public this summer, as we believe the timing is right for a strong recovery to begin. While I expect all of our business channels to have opportunities for years to come, my expectations are that our mortgage originations will see significant growth in the latter half of next year, fueled by purchase mortgage lending – thus signaling the decline in foreclosure inventory. I am hopeful for a very busy summer.
