Loss mitigation has never been easy, and it's even more difficult in today's servicing environment. Moreover, industry experts say subprime and U.S. Department of Housing & Urban Development (HUD/Federal Housing Administration (FHA) mortgages have special challenges.
Chase Home Lending's Tom Kelly says loss mitigation is much more complicated now. Two years ago, when home prices were rising, a distressed borrower could sell the house, and maybe even make a small profit.
"In a market where prices are going up, you're in a better situation," he says. "When prices are down, you know you're going to mitigate."
Servicers are doing more loss mitigation, and they're developing different ways to solve problems. "In the current climate, servicers are willing to listen to a lot of different solutions," says Ed Delgado, senior vice president with Wells Fargo Home Mortgage.
However, the focus is still – and must remain – centered on protecting investors' assets. "We are not in the business of modifying loans that do not benefit the investors," says Larry Litton, president and CEO of Litton Loan Servicing. "We help keep people in their homes, but we also show investors we are driving down credit losses."
Gagan Sharma, president and CEO of BSI Financial Services, says one of the biggest challenges in subprime loss mitigation is borrower contact. "They are hesitant about picking up the phone," he says. "They are not really financially savvy."
Delgado says subprime borrowers lack the capacity to sustain a financial disruption. "For subprime borrowers, that can be as little as needing four tires on a car, or the phone bill after their teen discovers text messaging," he says. "A prime borrower can handle a $75 mistake, but to some homeowners, that $75 just isn't there."
Ron Faris, president of Ocwen Financial Corp., says subprime borrowers cannot get a new mortgage or borrow from their credit cards when they have a financial emergency.
"Historically, many subprime borrowers relied on property appreciating to get them out of problems that would pop up," he says. "In today's world, they do not have that. Their access to new credit has almost become non-existent."
Litton says another challenge is that broker price opinions (BPOs) can become outdated rapidly. "In some markets, you have very quickly falling prices where servicers have to be more aggressive with regard to loan modification," he notes. "You have a BPO today, but what that value doesn't take into account is how much more the market is going to fall by the time you sell the asset."
FHA challenges
Laurie Maggiano, deputy director of the Office of Single-Family Asset Management for FHA, says FHA servicers' default rates are lower than subprime, but still higher than normal because of the economic downturn. FHA saw a downward trend in foreclosures, from 1.64% in 2004 to 1.42% in 2007. She says that trend has ended, and the rate will be between 1.5% and 2% for 2008.
Allen Jones, government lending executive for Bank of America, notes that FHA has written loss mitigation procedures that are federally regulated. That means HUD regulates the five types of workouts that FHA servicers use.
"It's dictated to you as a lender," he says. "It's in black and white."
Delgado says a factor that affects borrowers in general, not just FHA or subprime, is misinformation. "There are some urban legends out there," he says. "One is, "If I call my servicer, all it will do is speed up the foreclosure.'"
Maggiano says if a borrower does a Web search for "stop foreclosure," the person will find more than a million results, and many are not credible. For instance, one service offers to help borrowers if they pay $1,695 and have a mortgage payment that exceeds $750.
"Often, those are services that [carry] a fee – services that are available free from HUD counselors," she says.
Sharma says BSI tries to reach borrowers via overnight mail, which shows more urgency than regular mail. BSI also works with vendors who communicate with borrowers. One company sends representatives to visit the borrower at home.
"They knock on the door and say, "We have been asked by your lender to contact you. If you need to reach them, here is a cell phone. I have already dialed the number,'" he says. "Or, they carry documents the borrower needs to sign for a loan modification."
Another tactic is mailing gas cards or gift cards to borrowers. When the person dials the toll-free number to activate the card, he gets a customer service rep from the servicer. That presents an opportunity to talk about the mortgage.
Faris says Ocwen sends borrowers a DVD with information. Also, the company works with local nonprofits and home advocacy groups.
"For the borrower, there is someone in their community helping them negotiate with us," he says. "The advocates want to strengthen their neighborhood, and having someone next to them not paying their bills doesn't strengthen their neighborhood. They approach it from a different angle, but we get to the same place."
Bank of America tries to reach borrowers early and often. "If you are past day 10, we are going to make an outbound call," Jones says. "For a borrower who is in a foreclosure event, we call that borrower, on average, 17 times."
Wells Fargo recently hosted home preservation workshops in Atlanta and Charlotte. Borrowers attended presentations and met with loan servicing specialists.
Separately, servicers participated in events coordinated by HOPE NOW, an alliance of servicers, investors and nonprofit housing counselors. The Home Preservation Tour attracted a total of about 4,000 attendees at events in Dallas; San Antonio; Las Vegas; Newark, N.J.; and Mount Laurel, N.J.
According to HOPE NOW, the alliance sent 1.3 million letters to at-risk homeowners, and 18% to 20% of recipients contacted their servicers. The alliance's hotline receives 4,000 calls a day.
Other initiatives include Project Lifeline, which puts a "pause" on mortgages, then fast-tracks the borrower into a loan modification or interest-rate freeze.
Preemption
Kelly says Chase began calling borrowers in the spring of 2007, two months before their adjustable-rate mortgage (ARM) resets kicked in.
"We told them three things: You have an adjustable-rate loan due to reset on such-and-such a date, the new rate will be whatever, and your payment will become this," he says.
However, some borrowers need help understanding the math. "They think if the rate goes up two points, the payment goes up two percent," he says. "The payment might go up 25 percent."
ARMs do have room for negotiation, Kelly notes. "On the ARMs, you have one lever you don't have on fixed: you can lower the rate," he says. If the borrower paid the starting rate on time, the bank talks to them about staying at that rate.
"Keeping the homeowner in the house and paying means there is an opportunity for investors to be repaid in full – maybe not at the same interest rate, but paid in full," he adds.
FHA servicers, on the other hand, can use partial claims, in which HUD loans money to the borrower to pay for the months that the loan was delinquent. The money is payable when the homeowner sells the home.
Of course, foreclosure is a form of loss mitigation, if it prevents investors or taxpayers from losing money on loans.
"If a foreclosure action that is inevitable gets delayed because it's not prosecuted properly, it does cost the government money," Maggiano says. "If foreclosure is the only answer, we want it to go quickly."
To make foreclosure go somewhat smoothly, some servicers contract with vendors to implement a cash-for-keys program.
"They knock on the door, and when somebody answers, they ask, "You're being foreclosed�what's your plan?'" Kelly explains. The borrower or tenant might respond that he needs a down payment for a rental. "We say, "We'll give you $1,500 if you can be out in two weeks, and payment is dependent on the condition of the house.'"
Servicers have also added staff to manage higher volumes of loss mitigation work. Ocwen increased loss mitigation staff by 23% in 2007 and by 50% so far in 2008. The other servicers say they also increased staff sizes, but decline to say how much.
On the ground, Litton's staff travels to various areas to add their own research to the information they get from BPOs.
"We visit the properties and meet with brokers and consumers in the area," he says. "We're trying to get a better sense of what's happening in the marketplace. When I get a BPO [indicating] that a house is worth $150,000 on Elm St. in Miami, it gives me a better sense of whether that is reasonable, inflated or lowball."
Results
Regarding BSI's loss mitigation efforts over the past 12 months, Sharma says 30% of borrowers avoided foreclosure through short sales, deeds in lieu of foreclosure or loan modifications.
"We think 50% is doable," he says, adding that short sales are hot today. "A couple of years ago, we hardly did any short sales. Now, it is one of the top three things we suggest to borrowers."
Kelly says Chase modified or refinanced more than $4 billion of subprime ARMs from April 1, 2007, through March 31, 2008. "We have another $2.5 billion in the pipeline," he notes.
Litton says his company has done 30,000 loan modifications in the past 12 months. Of those, 35% redefaulted.
Faris says Ocwen used repayment plans to help 30,000 homeowners so far this year, or about 8 out of 10 homeowners who anticipated trouble making payments or were delinquent.
HSBC North America in Mettawa, Ill., launched its homeowner preservation program in October 2006. The bank, which serves nonprime consumers, modified approximately 11,900 loans ahead of ARM resets, with an aggregate balance of $1.9 billion.
Maggiano offers these statistics for FHA servicers: "From October 2007 through May 2008, we had 62,000 loss mitigation actions resulting in borrowers keeping their homes, about 3,000 nonretention [actions] – which are deeds in lieu of foreclosure and pre-foreclosure sales – and 37,000 foreclosures. Of the 62,000, about 9,500 were partial claims, 37,000 were modifications and 15,000 were long-term repayment plans."
HOPE NOW estimates that from July 2007 to May 2008, more than 1.7 million homeowners avoided foreclosure because of industry efforts.
In July, HUD announced a pilot program in Detroit, in which FHA lenders could assign nonperforming FHA mortgages to HUD. HUD also announced plans to expand FHASecure to include homeowners who missed payments.
Legislative efforts are also circulating. H.R.5679, the Foreclosure Prevention and Sound Mortgage Servicing Act of 2008, and H.R.5796, the Foreclosure Prevention Act of 2008, are still in committee.
Maggiano anticipates an increase in loss mitigation. "Our biggest problem is not coming up with new jazzy loss mitigation. Our biggest problem is reaching borrowers," she says.
Litton predicts delinquencies will continue for a while, based on housing inventory and rising fuel prices. "I thought we would see a peak by the end of "08 or "09, but I believe that can be extended," he says. "Long term, like with all recessions, things will stabilize."
Wells Fargo's Delgado says there is more work ahead. "We are trying to change the way the nation thinks about default," he says. "That is a fairly arduous task."
Nora Caley is a Denver-based freelance writer.
