Like any complex and high-profile national industry with a large number of variables, the mortgage servicing industry is always evolving. As the people, products and perspectives that shape the industry continue to develop new and more sophisticated legislative and professional tools to meet today's challenges and prepare for tomorrow's inevitable obstacles, changes both small and significant begin to become evident throughout the industry.
The last few years have been a particularly noteworthy time of change. Responding to a turbulent lending landscape and ongoing mortgage defaults that continue to make headlines, the changing legal landscape in the mortgage servicing industry reflects a professional community that is actively working to better understand the challenges and how to manage them.
That legal landscape presents perhaps the clearest window into the priorities, proposals, problems and solutions that are foremost on the minds of industry professionals.
Spanning and defining the dynamic relationships and shifting boundaries among governments, municipalities, lenders, borrowers, attorneys and mortgage servicers, recent legislative developments and operational trends are a rare opportunity to peek behind the curtain a little bit and examine more closely the inner workings of mortgage servicing.
By examining these changes, it is possible to generate new insights and obtain a deeper and more comprehensive understanding of this vital industry.
And there is no doubt that change is taking place. From impressive new efforts in loss mitigation to a host of influential new federal, state and regional legislative initiatives, and from code compliance and the numerous proposals to adopt and/or amend local ordinances, to fresh perspectives on bankruptcy procedures and improved communications between servicers and legal counsel, the industry is witnessing a number of important changes and improvements in the way business is conducted on a day-to-day basis.
In the Darwinian marketplace of ideas and initiatives, these trends are likely to represent the clearest and best thinking about how to better serve clients, improve communications, streamline operations, create new efficiencies, protect the interests of all parties involved in the process, and ultimately change the industry for the better.
Loss mitigation
Changes in the ways that mortgage servicing attorneys are doing their work can be seen at the most fundamental levels of the industry, perhaps nowhere more so than in how mortgage servicing professionals are addressing issues surrounding loss mitigation. A renewed emphasis on loss mitigation has prompted a wide number of creative proposals and programs that offer intriguing new opportunities for change.
These efforts take on many different forms, from required mediation, to borrower outreach; an ongoing development that is most clearly evident in the abundance of creative expanded loss mitigation programs presented by government-sponsored enterprises (GSE) such as Fannie Mae and Freddie Mac and other investors.
While cash for deed and short sales have always been part of the loss mitigation process, new non-traditional initiatives such as sending prepaid cell phones to encourage calls from non-communicative borrowers are being tested and adopted. One servicer, Franklin Credit Management Corp., explained to me that their employees are knocking on their borrowers' doors and achieving remarkable resolutions.
The pressure from outside of the industry for quicker resolution has compelled a traditional industry to become creative and to speed up resolution processes as much as possible while still maintaining the integrity of the loan information. It is a challenge that is not for the weak of heart or mind.
As one might anticipate, there are new tools to facilitate this increased focus as well as a rethinking of current methods; innovative software by the process outsource and title industry, and servicer- and investor-developed software applications help provide a guide to the user on navigating the complexities and sometimes confusing loss mitigation options.
More and more, attorneys are being given access to this software and limited delegated authority to make agreed-upon deals with borrowers, and are being involved much earlier in the process, sometimes at the very earliest stages of default. This is part of a larger trend toward providing attorneys the same tools and degree of authority that servicers have long enjoyed.
While this is promising, one of the inherent concerns with attorneys and borrower contacts is the fine line between providing settlement options and the unintentional consequence of violating the Fair Debt Collection Practices Act (FDCPA), or providing legal advice in contradiction to the Rules of Professional Conduct. A welcome assist from Congress would be some FDCPA relief to the secured real estate industry professionals.
Generally speaking, these fresh approaches to loss mitigation all share some fundamental commonalities: No matter what the specifics, it is all about education and communication to the borrowers that such programs exist to assist them.
More than ever, borrowers have other resources available to them to explain and navigate the myriad of programs now available. Such resources include housing counseling agencies approved by the U.S. Department of Housing and Urban Development, NeighborWorks America and HOPE NOW (a service of the Homeownership Preservation Foundation), Neighborhood Assistance Corp. of America (NACA), FHASecure, statewide legal services such as state bar association Lawyer Referral Services, and other community-based agency initiatives.
Unfortunately, there are also disreputable foreclosure rescue scams preying on the vulnerable borrower, an inevitable consequence of a problem making headlines every day.
Legislative initiatives
There are a number of proposed and existing federal and state legislative initiatives out there, running the gamut from preventing this housing situation from happening in the future, to curing it now. The latest, the new Federal Housing Administration (FHA) Housing Stabilization and Homeownership Retention Act of 2008, permits the FHA to guarantee up to $300 billion in refinanced, viable mortgages for primary residences considered at-risk for foreclosure.
The high number of proposals at the state level, coupled with new federal laws – many of which have come to fruition in the last year or so – create challenges for servicer compliance and are already impacting foreclosure processes around the country. Many programs overlap each other, although all have the laudable intention to helping borrowers save their homes.
An example of just such a program is mandated mediation sessions adopted by states like Ohio, Connecticut and New York. Although the mediation laws may slightly differ, the intent is to bring the borrower, the servicer and legal counsel together, with a trained loss mitigation mediator.
While most servicers, even prior to mediation programs, have attempted to contact their borrowers to discuss home saving options, the unfortunate statistic is that despite best efforts, there are too many "no contacts."
Mediation offers the opportunity to bring all parties together and help to bridge that all-important communication gap. The structure of these programs varies from state to state; for example, in some states the mediators are volunteers, and in others they are paid employees of the state, but the fundamentals are generally the same.
Other states have followed different paths. Massachusetts and Maryland, for example, have implemented legislation that essentially slows down the foreclosure process, putting things on hold while providing the parties more time to work things out. Other states have extended the foreclosure process under extreme circumstances such as the death of the homeowner.
The intended destination is the same: In lieu of costly and fractious disputes and litigation, let's promote resolutions that benefit all parties.
With regard to code compliance and local ordinances, new rules and policies – together with amendments to existing rules – are in a state of ongoing development, sometimes with startling speed. The scale and speed at which these kinds of fundamental changes can take place in a local district makes this an especially relevant issue for our industry.
It is not uncommon as of late for local housing authorities or building departments to respond to industry developments or popular demand by tightening timelines for servicers to preserve and secure abandoned properties both before and after ownership. Tighter timelines typically increase the costs and logistics for servicers dramatically.
Keeping abreast of these issues is vital, not only because an increased awareness of local policies ensures compliance and minimizes costly mistakes, fines and even criminal prosecution, but also because staying informed and up-to-date on code compliance and local ordinances can also help deepen servicers' understanding of the subtleties and complexities of distinctive market-specific priorities.
Bankruptcy matters
Bankruptcy decisions, rule changes and procedures have also created challenges for servicers and their counsel. The impact of even small changes to bankruptcy procedures can have a profound impact within the mortgage servicing industry, and lenders and servicers alike would do well to familiarize themselves with any and all potential shifts.
There has been some movement in recent years toward increased detail in proofs of claims as to ownership of the loan as well as the calculations of the claim.
Courts, trustees and creditor counsel are working towards ensuring that an emerging Chapter 13 debtor does not owe additional mortgage payments, taxes, insurance or other charges at the conclusion of a successful payment plan.
As these and other proposals continue to take shape, one of the ways in which the industry continues to respond constructively is to contribute to the formation of and participate in coordinated "best practices" groups composed of multiple industry-related parties coming together to address these issues and codify agreeable, mutually beneficial solutions.
One such example is the "Best Practices For Trustees and Mortgage Services in Chapter 13," a document developed by the National Association of Chapter 13 Trustees (NACTT) Mortgage Committees, made up of trustees, servicers, legal counsel representing both the creditor and debtor, and bankruptcy judicial members. This has been a unique but inevitable coming together of all sides of our current housing crisis.
In much the same way that "location, location, location" has long been the tongue-in-cheek description that captures essential real estate priorities, "communication, communication, communication" could describe the healthy and welcome ideal that more and more mortgage servicers are striving to meet.
The mortgage servicing industry's changing legal landscape is awash with complications, complexities and potentially costly roadblocks. Compliance issues are always fluid and evolving, making it more important than ever for servicers to keep in close contact with their experienced legal counsel. In fact, some firms are embracing a more formal framework to make sure that they regularly touch base.
Even something as simple as a quarterly conference call can help ensure that rapid changes in technology, policy, legislation and perspective are not only absorbed, but embraced.
Ultimately, it is by embracing these developments and adapting to them that mortgage servicers will find that operating within an evolving legal landscape can be an enriching, rewarding and profitable professional experience.
The journey thus far has been a bumpy one for most, although not without its rewards. It is the continuation of this journey that will dictate the future of our industry, and it is in our best interest to be holding the reins, or at the very least, to be attentive passengers.
Richard M. Leibert is president of USFN and serves as the managing attorney of Hunt Leibert Jacobson PC – a Hartford, Conn.-based law firm concentrating in services to the residential real estate finance industry. He can be reached at (860) 808-0606 or rleibert@huntleibert.com.
