In the not-so-distant past, mortgage delinquency levels were fairly steady and predictable. Servicers obtained basic borrower and delinquent property status information to drive the usually simple processes that comprised borrower communications, collections and default resolution.
Today's exploding foreclosure volumes have significantly changed the servicing landscape. Lenders do not want to foreclose and add more properties to their mushrooming real estate owned inventories. Borrower circumstances, real estate markets and property conditions vary widely, making tough situations infinitely more complex to resolve.
As a result, the mortgage industry is rethinking and reinventing the entire borrower communication and delinquency/default resolution process. Many new tools and strategies have emerged to open dialogue and execute effective solutions for all parties – the lender, the servicer and the borrower.
A critical key to ensure that all parties are at least on the same page and that all alternatives are understood and explored is establishing open and effective communication with the borrower. This task is, of course, much more easily said than done in the new world.
In-depth analytics and tiered strategies, now readily available from third-party vendors, can assist in producing much more effective borrower communication campaigns and delinquency solutions to avoid foreclosure.
Taking the time and using automated tools to analyze a delinquent loan and borrower in the early stages of delinquency allows servicers to commit the appropriate resources to mitigate potential losses. This step is a new concept for many servicers when they are building borrower communication strategies, but it is fast becoming the methodology driving the ways borrowers are contacted, messages are conveyed and resolution alternatives are offered.
Automated models can quickly analyze data and answer many key questions: What state laws apply to the foreclosure process on the property? What are the characteristics of the borrower's credit? What type of loan is involved? Is the property owner-occupied or vacant?
Is it investor-owned rental property that is occupied or vacant? What is the property value today?
This information enables informed, reasonable loss projections to be made during the foreclosure process and is necessary information to not only determine how much money to invest in the collection process but also to define a more effective, informed communication plan.
Beyond phone calls
Many servicers are asking for help in analyzing their portfolios and developing cost-effective borrower contact/resolution options. Today's environment requires a multi-layered approach to take the best action by identifying potential exposure at the loan level.
Analytics can rapidly process large amounts of information and segment a loan portfolio on a loan-by-individual-loan basis into relevant risk tiers or tranches. Servicers can then allocate resources matched to specified exposure levels. A tier that presents a less than 2% loss exposure requires a much different communication strategy than a risk exposure tier predicted at more than a 5% loss.
Tailored solicitation campaigns can make all the difference in communicating with borrowers. Knowing the entire picture means better odds in assisting the borrower as well. Depending on the situation, contact with the borrower can focus on workout possibilities, disposition options such as short sale or deed-in-lieu, or other appropriate alternatives.
How the collections process is conducted is an important element in creating early action. When a borrower hears from a collection agency, it frequently gets their attention. The collection-agency shock usually leads to an uptick in response percentages – the desired goal. Once a foreclosure action is initiated, costs skyrocket. Therefore, using the right messaging can generate beneficial, informed action at a fraction of typical foreclosure costs.
Outsourcing the collections process can generate an even faster response which means less overall cost. Each correspondence should clearly, specifically spell out what action is needed by the borrower. Each message should also state clearly that these notifications are part of the collection process and that actions such as these will continue until the debt is resolved.
In addition, any and all collection actions should be in compliance with the Fair Debt Collections Practices Act. Solid risk management demands that any third-party collections comply with this act to protect the servicer and borrower.
The hardest part of the foreclosure process is getting a borrower to respond. Fear of the unknown, potential embarrassment and a possible lack of understanding of readily available alternatives all contribute to borrower contact avoidance.
Consequently, servicers, anxious to work with borrowers to find solutions, are branching out from the traditional repeated phone call/letter communication approach.
It is a fact that the chances for borrower contact diminish over time. The longer the process takes, the less likely a borrower is to respond. To increase the possibility of borrower response, the methods and messages are evolving.
Web techniques
One of the latest, most effective means of generating borrower response is via a borrower-facing Web portal. A Web portal eliminates the embarrassment aspect, as there is no direct human contact. Instead, it presents a nonconfrontational way to collect borrower information.
If a lender doesn't have the means to develop a dedicated Web site, third-party vendors can offer use of their existing delinquency Web portals, and a select few can even offer private labeling options for further transparency.
Customized communication campaigns, sent early in the process, can be used to specifically drive traffic to a Web portal. The entire process is non-threatening and uninterrupted, and it is one of the most cost-effective ways possible to assist customers in their communication strategies.
Employing someone to knock on the borrower's door or sending a form letter are strategies as old as the foreclosure process itself. But there are some new ideas to consider.
One new service being offered by select field services providers shifts the standard knock-and-go mentality for trying to contact the borrower. Today's door-knocker arrives at a delinquent property on a Saturday and, if no one answers, waits a prescribed period of time to see if anyone eventually comes to the door or comes home.
If unsuccessful, the representative visits again during the week, after 5 p.m. this time, with the same knock-and-wait timetable. If the representative is unsuccessful in reaching the borrower again, another Saturday visit is made to attempt borrower contact.
With three attempts made at the times it is most likely someone will be home, the success rate of connecting with the borrower definitely goes up.
The last-minute response
A new twist on the standard #10 envelope and form letter that have seen success for many customers is to utilize overnight mail delivery services. The oversized envelope catches the borrower's attention and is much more likely to be opened. The message inside can be as simple as driving the borrower to the Web portal.
This strategy is a step above even sending a registered letter because it is crucial to make things absolutely as easy as possible for the borrower. Each additional action required of the borrower, like retrieving the registered letter at the post office, greatly diminishes the likelihood of receiving a response at all.
The purpose of contacting a delinquent borrower is to educate him on the realities of the loan obligation he took on and to convey foreclosure alternatives.
It is no secret that during the last week prior to foreclosure, there is a dramatic spike in borrower response. Contact from the sheriff crystallizes the realization that immediate foreclosure is eminent. Servicers can, however, take action earlier so it does not take a last-straw sheriff's visit to shift the borrower's mindset from denial to action on available options.
Many providers have assisted servicers, with great success, in launching "it's not too late" campaigns.
For example, a "we have several ways to help you keep your home" or "we know the property is vacant – here are several ways we can help" letter creates a positive outlook in the borrower's mind and can drive beneficial situations for everyone involved in an otherwise stressful foreclosure process.
Once a foreclosure date has been set, the message can change to "you have been put into foreclosure and you will lose your home on this date unless you take actions such as…" Again, creating action as early as possible is key as servicers have to comply with investor guidelines that may make any last-second workouts impossible.
By gathering and examining all relevant data surrounding a borrower facing default and matching the borrower communication plan to tiered risk levels, you can achieve more successful and cost-effective results.
Gearing communication campaigns and messaging to the different stages of foreclosure can be the difference between a satisfied borrower and quick resolution or a tremendous drain on money and people resources.
Rick Roniger is executive vice president and chief operations officer of First American Loss Mitigation Services in Dallas. He has been involved in the management and disposition of nonperforming loans for over 20 years and has overseen the management and disposition of more than 400,000 nonperforming loans. Roniger can be contacted at rroniger@firstam.com.
