Earlier this month, Altamonte Springs, Fla.-based loss mitigation specialist Sterling Technology Solutions reported commendable performance metrics relating to the company's Home Affordable Modification Program (HAMP) efforts. Among the results highlighted were an 85% right party contact rate, documents collected on 80% of its HAMP cases, and a 47% acceptance rate among borrowers who have been offered trial modifications.
To get a better understanding of Sterling's success, MortgageOrb caught up with the company's CEO, Ron Morgan. In the following Q&A, Morgan explains how Sterling's strategic partnerships have helped the company pull borrowers from initial outreach through to permanent modifications.
Q: What are your impressions of HAMP, to date?
Ron Morgan: We were one of the original component servicers approved by Fannie [Mae] to do HAMP mods. We basically set up our operation and technology platform around designing the exact workflow process – we helped Fannie build a lot of the features and functionalites on how they were going to execute the HAMP program.
We gave them a better understanding of what the mortgage market intelligence was, how to affect some of the hamp pull-through, what some of the processes should be, how to score the loans, etc.
We were very successful in the HAMP program, because we had a very strategic approach to a plan on how to execute the process. Obviously, the most important process was borrower contact. It hasn't been handled very well by the indstury – I think the [document collection] standard as of August was about 30%.
So, we developed what we called a readiness plan. We took the general requirements and characteristics of the program and said the first thing we need to do is perfect how we're going to contact the borrower and how we're going to be different from other service providers and institutions – the top 10, 25 banks that are in that process currently.
We went out and used Convergys, which was one of the worldwide providers of the call service, to make sure we could effectively get ahold of the borrower and collect his financial information.
Our pull-through rate was about 80% against that 30% ratio. The difference was, we would call the borrower six to 10 times, when the requirement of the program is to call three times. We would use various databases to get better contact numbers, and then we built an application where Convergys could take the verbal financial information and directly input it into our system.
[After a borrower is approved by Fannie], we call on the first of the month to make sure the borrower had their payment ready to come in with the documents. When the borrower signs the initial trial mod, they send the first check and then go through the 90-day period, and we monitor that process very carefully.
Q: What are your thoughts on HAMP's documentation requirements and the supplemental directive, issued by program administrators, that speaks to the need for streamlined document processing?
Morgan: The initial documentation was way too cumbersome for the normal borrower to execute. We believed that when the program was first announced, and we recommended scaling it back to five or six docs, at most. We had 21 pages of docs under the Fannie Mae HAMP opportunities that went out. Scaling it back helps tremendously.
We use FedEx Office as another partner, and we've adopted a process whereby they can tell us, in real time, that a package is delivered to the borrower at 10 am – that the package is there. Then, we will call the borrower at 6 pm and start to engage in the process of getting the borrower through the system as quickly as possible.
One of the problems that Fannie had was absorbing the amount of data from all the different servicers and service providers. We did have a bottleneck there that they've finally cleared out.
We think there's still a lot of room for improvement. We're not sure there should even be a trial period – there's still a lot of skepticism on how much success is going to ultimately be accomplished on the back end of the permanent modification. A lot of people are betting the recidivism rate will be high, with some people estimating 10% to 15% success rates.
Next year, the question is going to be, what to do with the loans that fall out? Unemployment's a big factor in this, and we've got a long way to go.
Q: The administration has already displayed its willingness to alter the guidelines for its various programs mid-game. How open do you believe the administration is to further refinement of HAMP?
Morgan: [The administration is] trying to get some wins for the HAMP program, and for [Tim] Geithner and the Treasury and say, "Hey, these guys are coming up with some valid solutions." They're trying to turn around the political football and tell Americans that we are getting better and that we are saving more homes.
I think the administration is willing to come up with more streamlined programs – probably less restrictive, maybe to increase the qualifying criteria. Geithner called the top 10 servicers to tell them they need to get 500,000 modifications by Nov 1.
Well, to some people, doing a modification is sending a piece of paper, having the borrower sign it, and freezing the loan. For HAMP, it's going end to end, by gathering financials, running it through the qualifying engine, doing the trial mod and collecting all the checks.
The other big problem behind this is the home equity loans and second trusts, as well as the mortgage insurers (MIs) trying to keep from issuing claim checks on foreclosures. There's a heck of a lot of volume, but no simple answer for relief.
Bank of America/Countrywide alone could keep every service provider in the market busy for probably the next three years. We had one guy tell us this morning they had a portfolio of 500,000 whole loans serviced by one of the top five shops, and they couldn't even begin to gauge them on how to get started on the portfolio.
There are so many issues, here. You've got the Federal Deposit Insurance Corp. (FDIC), which is broke; the Federal Housing Administration, which is broke.
Fannie Mae has 2 million-plus Alt-A loans that are getting ready to reset. I think that's going to produce a 30-40% default ratio, and that's not even in the mix of what's happening today.
We don't see any bottom yet in the economy. We don't see any long-term workout with financial systems as it relates to the liquidity and solvency of the banks. We dont see whether they can write down the assets to where the fair market value is today. Short sales, we think, are just on the verge of being able to be a solution – finally getting some traction as less of a hit than taking a foreclosure.
You hear what [Federal Reserve Chair] Ben Bernanke says, what Geitner says – and we're not seeing it today. We're at ground zero every day, looking at exactly what's happening in the trenches and in our neighborhoods.
Fannie has done a great job of at least starting to turn the wheel, but their engine isn't even powerful enough right now to address the defaults. They're looking for technology to scale to 300 or 400 loans per person.
Q: What are the costs and benefits of government intervention?
Morgan: It puts instant revenue in servicers' pockets. Remember, for Fannie and Freddie portfolios, they've really been focusing on their own corporate business to reduce write-offs to improve their capital structure. HAMP puts a couple thousand dollars into servicers' pocket.
Servicers aren't making any money on servicing, because there's no servicing-fee revenue. They're doing these huge advances to securities, which are required on guaranteed pass-throughs to begin with. The way we see it today, servicers are asking, "How many loans can I save, and can I make $2,000 on a loan that would probably double what my servicing fee is on the asset if the loan were current?"
It's trying to put money back into the servicers' hands to try and work these toxic assets. We said that two years ago – why don't you take servicers' 25 basis points and pay them 100 basis points so they will work on the assets and, if it gets current again, go back to 25 basis points?
The administration and the industry haven't figured out what to do with toxic assets on the balance sheets. I worked with the Resolution Trust Corp. (RTC) when it was created as an adjunct to bring relief to the savings and loan collapse.
I actually got a letter from the FDIC asking if I wanted to work on a new quasi-RTC. I chose respectfully not to do that right now, but they are formulating an entity internally that would be tasked with trying to figure out exactly what to do with these assets. I'm not saying they won't write down these assets. If they mark-to-market these assets, basically what they would do is create a good bank/bad bank to offload banks' toxic assets and keep their balance sheets healthy.
Q: How big an impediment do seconds play?
Morgan: Seconds can play a huge hurdle when they're on a back end of a $1 million loan and represent a $200,000 loss. The problem with that, is some of the same guys who hold the first also hold the second. So, you might have a $1 million first and $250,000 second. I know Countrywide had a ton of them. Chase had a ton of them, as well, as did Wells Fargo. Even in their own shops they were fighting about whether they could write off the second trust or the home equity – or the third, in some cases.
It's been a real impediment when seconds can block your ability to modify a loan. Then you have the MI company coming in, saying, "I won't allow you to write down the asset, because I have to cut you a $80,000 claim check." MIs are teetering on the verge of insolvency. Some of them are very cash-constrained, having been rejected for participation in the [Troubled Asset Relief Program].
I think the government's going to have to step in and say, "You're taking $3,000." Otherwise, at the end of the day, the alternative is go to foreclosure and get wiped out completely. It is a big impediment to being able to do not only loan workouts, but short sales.