Though there appears to be no trendier phrase – and perhaps, no busier department – in the servicing industry at the moment than loss mitigation, housing counselors report that far too many of the resolutions offered to borrowers facing foreclosure are, simply put, inadequate.
Qualifying for a loan modification, it turns out, is much more difficult for many borrowers than it was to qualify for a mortgage in the first place.
Panelists who spoke at the Coalition for Mortgage Industry Solutions' Executive Leadership Summit in Washington, D.C., expressed frustration with a process that they described as slow in delivery, unaffordable in nature and unattractive to investors. Affordability and sustainability, they stressed, are considerations that are all too frequently ignored during modifications.
Moreover, flawed loss mitigation processes could alienate potentially helpful allies – the counselors themselves, whose involvement in this area could bring about quicker and more suitable results, as well as better communication with borrowers.
"Borrowers don't look at us as a threat," said Patricia A. Hasson, president of Consumer Credit Counseling Service of Delaware Valley Inc. (CCCSDV). "They look at us as somebody who's going to help them save their home."
Despite the widely accepted understanding that foreclosure is only very rarely a preferred economic option, the nation is quickly approaching the two-million-foreclosures mark, observed Bruce Dorpalen, co-founder and director of housing counseling for ACORN Housing Corp.
Loss mitigation litigation counseling has become ACORN's "bread and butter," he said, estimating that the nonprofit organization will perform about 30,000 counseling sessions dedicated to the subject this year. That figure starkly contrasts the 21,000 mortgages that ACORN helped secure last year for borrowers through the Community Reinvestment Act (many of which went to African American and Latino borrowers – the same communities that were severely hit by subprime and high-cost lending).
The shift in resources and focus from helping borrowers receive mortgages to helping borrowers avoid foreclosure is not unexpected, given what has occurred in the past year. What the servicers have brought to the table in terms of modifications, however, is somewhat of a surprise, if not a disappointment.
"We are seeing resolutions routinely offered to people that are both unaffordable and economically make no sense whatsoever in terms of the investors' interests," Dorpalen explained, adding that most modifications offered today include not only the mortgage payment, but also a small premium to cover arrears.
"This is not a winning strategy," he said.
A new proposal
A better resolution, Dorpalen offered, would be one that reduces both the interest rate and the principal – an aggressive proposal that he also acknowledged may leave some servicers nervous about the potential lawsuits that could ensue.
To ensure "servicers don't end up being sued to death two years from now," he said the industry must reshape market standards. If a set of "commonsense standards" was made public – and if the bulk of the industry, specifically large outfits, agreed to it – servicers would theoretically be safeguarded against litigation.
"If everybody's doing them, then it becomes a standard – and that's a market standard, and that's an easy protection against the lawsuits in the industry," he said. "And because of that, the resolution's faster."
A suitable set of standards, Dorpalen argued, should contain two characteristics: It must include a common affordability standard, and it must allow the borrower adequate residual income.
In formulating a common affordability standard, he recommended including at least a 45% back-end ratio. To accomplish this, he suggested servicers take a torch to the "burn the seconds" school of thought, in which servicers essentially ignore any second-position loans and view the first-position mortgage as a borrower's sole obligation. This approach, he warned, does little to actually ease the borrower's financial troubles.
"The sad thing about all of this is if you, for example, destroy your FICO score and burn your seconds, your homeowner's insurance goes up," Dorpalen cautioned. "Our job is to figure out how to keep these folks in the house and keep it financially sustainable too."
The use of loss mitigation by the Federal Housing Administration (FHA) has grown every year since it was first rolled out about a decade ago, said Laurie Maggiano, deputy director with the U.S. Department of Housing and Urban Development's (HUD) Office of Single-Family Asset Management.
In 1999, the FHA had a 13% market share and was involved in 30,000 loss mitigation actions. In 2007, the FHA had 90,000 loss mit actions with less than a 3% market share. Maggiano noted that of the 90,000 actions taken last year, fewer than 5,000 were pre-forclosure sales.
"So, the vast majority of what we do is home retention," she said. "And home retention involves long-term repayment plans with special features like reduced or suspended payments for a period of time, graduated payments so a borrower can catch up, [and allowing the borrower to be] 12 months delinquent before going into foreclosure."
Too often, when a borrower has a temporary hardship, slips into default and subsequently overcomes the financial difficulty that originally caused the default, servicers offer only a repayment plan as a resolution. Touching on Dorpalen's argument that residual income must be considered, Maggiano said this offering is insufficient.
"There's no way they can come up with five or six months' worth of delinquent payments," she said. "There's simply not enough residual income. They're never going to be able to catch up if we put them on a repayment plan."
Instead, Maggiano suggested these types of cases may call for use of partial claims.
Essentially a silent second, a partial claim involves a mortgagee advancing funds on behalf of the mortgagor in the amount necessary to reinstate a delinquent loan. The note accrues no interest and is not due and payable until the mortgage either pays off the first mortgage or no longer owns the property.
HUD encourages servicers to use this product only if absolutely necessary, and Maggiano said the organization monitors servicers and has found that they use it appropriately and not indiscriminately. She also pointed out that a partial claim that represents six or seven months of mortgage payments is considerably less expensive than a conveyance claim.
But perhaps the most heavily criticized dynamic of loss mitigation is the lengthy timeline that's attached. Dorpalen said a typical resolution takes about three months, although there are cases of resolutions taking six to eight months.
"I think we hear a lot in this industry right now about the 50 percent of people that [servicers] cannot reach, and I will always throw out that the 50 percent that is contacting you aren't being helped," added CCCSDV's Hasson.
"If 50 percent of the people are reaching out to you and it's taking three to six months to get them an answer, there's something wrong," she remarked.
Panelists identified several obstructive common practices that, if left unchanged, will only perpetuate the cycle of prolonged resolutions. Dorpalen, for instance, criticized those servicers that refuse to accept housing counselors' client authorizations and instead demand to speak directly with borrowers.
"Every deal that any HUD-approved housing counseling agency sends to you will come with a client authorization, and these things have been vetted by all the legal departments," he said. "This is a broadly accepted standard, and we still have servicers that say, "I want to talk to the client.'"
Counselors will always take servicers back to clients, Dorpalen further stressed, but to require direct borrower communication is a detrimental practice. He said those deals more often than not die on the table and need to be escalated to senior vice presidents, which simultaneously delays the process.
Hasson pointed out another reason why mandating direct communication is unreasonable.
"We have seen good news from the servicers, but one feedback I hear from our counselors is that when it's the client calling one-on-one, they don't seem to get the same responses as they do if the counselor's on the line," she said. "I think that's something that really needs to be looked at from the servicer's perspective."
Yet another area of frustration – this time for servicers – occurs when an agreement is reached but a client signature is still not secured. Dorpalen said he's heard estimates of a 50% sign ratio and less.
"Why is that? Some of it is that people are really scared, don't understand the document, have bad experiences and need a third party involved in that conversation to say, "This makes sense, this is what it does for you, this is what your real budget looks like,'" he said. "This is the kind of thing that housing counselors can make happen – and make happen pretty quickly."