REQUIRED READING: So you have a customer who has fallen behind on his or her mortgage payments, and the normal customer-service collection efforts have not resulted in any arrangement to bring the loan current. Because of investor guidelines, the financial implications of losses from a foreclosure and your institutional sense of responsibility, you have created a dedicated department to evaluate and execute loan modifications, repayment agreements, forbearances or short sales to assist the customer.
Now, having used all of those resources to determine that your customer is ineligible for help, you get accused of acting in bad faith. What's a servicer to do under these circumstances?
The Treasury Department's Home Affordable Modification Program (HAMP) was announced a year ago, but most loan servicers have taken a proactive stance on workouts with their customers. Repayment agreements, negotiated Chapter 13 plans, forbearances for cause and cash-for-keys programs are nothing new. After all, with a few individual and isolated exceptions, there isn't a loan servicer today who wants to hold, maintain and sell foreclosed property in this economic and housing cycle.
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On the other hand, servicers have a responsibility to their investors and insurers to collect on the mortgage contract. That dynamic tension has always existed, but the general public awareness of loan modifications and other workout options has grown exponentially this past year because of HAMP and its almost daily inclusion in the vocabulary of government rhetoric and the popular press.
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One challenge for the mortgage industry is consumers' perception that there is a "right" to a loan mod. When customers hear on the radio and see on television that "they have the legal right not to pay their debts," it becomes difficult for servicers to explain to them that their particular loan characteristics, investor guidelines or financial circumstances do not qualify them for the assistance they want – and, in some cases, need – to stay in their home. That misunderstanding is the basis for the recurring complaint that lenders are not acting in good faith.
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Three factors commonly prevent borrowers from qualifying for a HAMP modification or any of the "waterfall" of alternatives. First, the value of the collateral – the home – has fallen substantially below the outstanding debt. Secondly, the borrower has experienced unemployment or underemployment (the latter being more prevalent). Third, the overall debt carried by the consumer, including credit cards and household expenses, exceeds her or his capacity to pay even a modified loan. None of these circumstances is the "fault" of the servicer, and yet it is the mortgage servicer and not the credit card issuer or the bad fiscal habits of the borrower that gets blamed for the low rate of successful modifications to date.
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So long as jobs are scarce, employers are cutting back hours on existing workers and housing prices are deflated from the levels at which the loans were originated, there will be no quick fix for this problem. The challenge for the residential mortgage industry, and my thesis for this article, is to make sure that the blame is not unfairly placed on servicers' and investors' shoulders. There are some suggestions I would make to deflect, if not eliminate, this burden.
Set expectations
Too often, borrowers have an unrealistic expectation that they will qualify for some relief if they only pony up all the financial data, income and expenses, supporting documentation and hardship affidavits they are asked to produce. It seems like everyone knows or has heard about a person who got a modification that reduced their payment by 75%, or who was able to surrender the keys to a seriously underwater home without liability for the balance of the note. In most cases, these stories are urban myths arising from vague government promises or the insights of pundits who themselves have not had to face a pending foreclosure.
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To combat these misconceptions, servicers must work diligently to align the expectations of their borrowers with reality as soon in the process as possible. If a consumer's financial circumstances or investor rules will not allow for a modification that falls within the borrower's ability to pay, the borrower should be made aware of this up front, and a conversation about other foreclosure alternatives should begin.
Borrowers often interpret the absence of a denial or a request for more documentation as a vague promise of a future approval. When the approval doesn't come, borrowers feel as though they have been misled by their servicer's actions, if not their words.
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Servicers should also look at their approaches to handling customers' short-sale inquiries. At many financial institutions, short sales are handled by the real estate owned department or are otherwise separated from the silo of customer-service representatives handling modifications. A typical conversation with a borrower contemplating a short sale starts with a customer-service representative asking whether the borrower has an outstanding offer. If the borrower does not have an offer – which is most often the case – the customer service rep will tell the borrower that an offer is needed to process his or her request.
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What happens is that when an offer does come in, with an impatient buyer in the wings, the wheels are set in motion to obtain a valuation, to review title, to ask for financial information and hardship affidavits, to run a net-present-value analysis, etc. By the time the offer can be approved, which often takes weeks or more, the buyer walks, and frustration sets in. When you later put the home in foreclosure, the borrower is now more likely to defend on the basis of bad-faith servicing.
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Customers would be better served and servicers' returns on investment would be increased, if consumers were given a heads-up on the requirements and expectations for a successful short sale. Borrowers should have access to the forms and information they will need, including details on any subordinate liens. That way, when the offer arrives, it includes a completed package that can be streamlined. The offer still might not be approved, but a rapid and certain process will instill more confidence in the customer that the servicer made a good-faith effort on his or her behalf.
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The last bit of advice that I would offer – which may be harder for larger servicers to accomplish because of the sheer volume of calls they handle – is to strive for "single point resolution." The reality of dealing with millions of delinquent customers is that despite servicers' best (and continuing) efforts to personalize the experience, the industry is plagued by borrower frustration from long hold times, reaching a different person every time they call and the defeating sense of starting over every time they have a conversation.Â
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A common borrower complaint is that servicers repeatedly ask for documents that have already been provided. As with the point above about setting a reasonable expectation, these borrowers feel they did what was asked and are now being intentionally ignored or that their servicer doesn't care enough to have the processes in place to track and safeguard the documents for which they asked. A good deal of this aggravation can be avoided by establishing a person – or a discrete team, in the case of larger portfolios – that works with a fixed pool of borrowers and can be more attentive to the follow-up.
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Some of the servicers with the best loan modification results also have the best feedback from their customers for having a personal connection through these dedicated teams. Even if the answer is ultimately "no," the human side of making a connection and taking the time to discuss it with the borrower leads to a more positive outcome and shields against later allegations of bad faith.
Gerald B. Alt is president of LOGS Network, a network of attorneys that specialize in real estate-related title and legal services. He can be reached at (847) 205-3311 or jalt@logs.com.
