Subservicing is all about efficiency. Issue a competitive bid, get your processes as systematic as clockwork, have as few loans as possible that require heavy lifting, and you've got a business proposition that has been effective and profitable for decades. Once a disproportionate number of loans start requiring repeated phone calls and attention, however, the business model starts clunking along like an old car, sucking profits from the organization at an alarming rate.
Most servicing contracts were written well before the current state of the industry, with broken loans constituting huge percentages of portfolios and heavy lifting part of the rule instead of the exception. In the current environment, subservicers are inadequately incented for dealing with problem loans, so it is easier to give up on them, let them go into default and, ultimately, into foreclosure.
This, of course, is of little benefit to the owner of the servicing rights. The owner wants delinquent loans brought current, not ignored as soon as they become difficult. A loan that is seriously delinquent or formally in default isn't just scratched or dented; it's sunk – and probably unsalvageable, at least without bringing in a expert with experience in raising such wrecks.
Loan modifications are the watchword of the industry right now, and the servicer is tasked with making them work. Blanket modifications, or mass mods, have not proven effective and individual modifications have not been a strong suit with mainstream loan servicing because they can require multiple phone calls, specific instructions from the lender or investor, and generally take more time than the servicer's business model allows. Government-mandated streamlined loan modifications are still unproven, but hope springs eternal that more loans will be saved. For now, the future of the secondary market and the entire industry remains at stake.
In the meantime, the industry needs salvage experts – people who are experienced at raising shipwrecked loans from the abyss and bringing them back to re-performing buoyancy. Fortunately, those experts have surfaced, and with some highly innovative tools and tactics. The most confident of these are even using a pay for re-performance business model, which is designed to save lenders and investors heavy expense as they seek to recover value in loans that seem beyond saving.
A change in tactics is necessary, because the primary weapon is a hands-on approach, for which most servicers simply don't have the time. But it is required if you set forth to work with people who want and need a lifeline that will help them stay in their homes.
Even loans already in foreclosure may qualify for this sort of ‘extreme servicing,’ and results are obtainable before foreclosure sales take place.
The process starts with analytics. Property values, borrower capacity and other metrics are plugged into a technology platform, with some data coming from third parties and other data gleaned from a phone conversation with the borrower. The loan recovery specialist is a highly trained, highly compensated individual with a deep understanding of the specialty servicer's methodology, much of which revolves around the idea of psychological equity.
This core concept recognizes that borrowers – we're talking about ‘real’ borrowers here, not the ones who jumped in with no equity and no motivation – have great interest in staying in their homes because of the personal stake they hold in them. They may have lived in the neighborhood for years, have children in the local schools, and be involved with youth sports and community organizations, all of which would be disrupted if they were to lose their home to foreclosure. The social stigma of foreclosure is not as strong as it used to be, but it is very much still there, along with the knowledge that a comparable home will be hard to come by if the existing one is lost.
The loan recovery specialist spends a good amount of time on the phone with the borrower to make certain these issues are understood and appreciated. If it becomes clear that the borrower is highly motivated to stay in the home and can make partial payments, a payment program is developed.
A loan modification is not the first alternative explored, as it is not regarded as a panacea by specialty servicers. If the borrower is not motivated by the psychological equity established in the home, experience has shown that a something-for-nothing loan mod is not the best approach at the outset. Once the willingness to make payments is evident, leading to a partial re-performance of the loan, a loan modification can provide the stickyfactor needed to cement a long-term solution in the mind of the borrower.
Barring a catastrophic inability to repay (e.g., due to job loss), this type of arrangement has real potential to ultimately achieve full-performing status. Even a partially re-performing loan is worth much, much more than one that is mired in default and pending foreclosure, so the benefits to investors are clear.
The word ‘lifeline,’ used earlier, is really quite appropriate. Once a lifeline is extended, in the form of a helpful, understanding voice on the phone that isn't anxious to end the call, most borrowers will grasp the lifeline and hold on – very tightly.
Loan recovery specialists can realize 50% of their compensation for success in getting defaulted loans to re-perform. Specialty servicing companies get paid only when they perform, so their lenders and investors have little to lose.
The American Legal and Financial Network is an organization of foreclosure attorneys across the country. This group has instituted a program that allows a specialty servicer to work in parallel with their own foreclosure process in an effort to save loans. If the specialty servicer can work out a meaningful payment program with the borrower, foreclosure can be averted, right up to the day of the foreclosure sale. If the specialty servicer is unsuccessful, the foreclosure goes through as planned, but at least the constructive alternative is explored.
The early results are highly positive; the majority of loans that go through this process are brought back, and foreclosure is averted. Time will tell how durable these solutions are, but with up to 2 million homes facing foreclosure in 2009, this is a highly encouraging trend.
Just as subservicing is about efficiency, specialty servicing is about leaving no stone unturned in finding ways to save loans. Sometimes it is just not in the cards, of course, especially given how many no-equity loans were made to people without the capacity or motivation to repay. But the vast majority of loans out there have life to them, no matter how faint, and the specialty servicer's role is to detect that heartbeat and make it stronger.
Steve Horne is CEO of Wingspan Portfolio Advisors LLC, based in Carrollton, Texas. He can be reached at (214) 254-2115.