Many servicers, investors and banking institutions in the distressed residential loan sector often overlook the many positive effects that occur when a servicer is able to help borrowers understand and improve their credit profile.
Teaching struggling borrowers how to manage their finances creates value at numerous levels not only for the parties directly involved such as servicers, lenders, investors and borrowers but also for the housing industry as a whole.
What are the benefits?
Helping borrowers manage their money more efficiently has many benefits, but the most immediate is the opportunity to keep their homes rather than lose it. As borrowers become better educated on the long-term effects of certain spending choices, they tend to make more responsible spending decisions.
Most American homeowners have never made a budget for themselves and do not realize where their money is going every month. With the help of their servicer they can identify problematic spending patterns, make wiser decisions, gradually restore their financial health and ultimately enhance their credit scores. Borrowers’ improved credit allows them to qualify for new offerings and enables them to afford the things their families need most.
Distressed loan investors also have very clear benefits from borrowers with improved credit.
Investors who are successful refinancing borrowers generally receive much higher liquidation proceeds and cash flows from monthly payments as a percentage of collateral value than when loans are liquidated through short sales and foreclosures.
In many cases increased FICO scores are critical to achieving a refinance. Further, investors looking to resell loans or securitize loans can receive material price increases when loans have higher FICOs. Not only so, by utilizing a servicer with borrowers’ best long-term financial interest in mind, overall, investors protect their own brand.
Enabling borrowers to better manage their money and restore their credit also benefits banking institutions.
In addition to helping banks take advantage of government refinance programs like HARP, improved credit scores are very helpful for troubled debt restructures. TDRs have a much better chance of avoiding redefaults when the servicer is able to do a thorough analysis of the borrower’s complete financial situation and design a customized credit improvement plan.
Helping a borrower improve credit also has the added benefits of qualifying the borrower for more cross-selling opportunities at the bank and strengthening customer loyalty.
How can it be done?
Servicers must first be able to build strong relationships with their troubled borrowers, which is much easier said than done.
Servicers need to recognize that when dealing with delinquent borrowers they should earn the right to ask for payments by first learning what the problem is.
One way to do this is to conduct a personal budget analysis, which allows the servicer to take an in-depth look into borrowers’ spending habits to identify and analyze their true mortgage affordability. To complete a PBA, borrowers speak with their single point-of-contact who evaluates their monthly income, their existing debts and makes close estimations of total monthly expenses.
The servicer should then thoroughly examine borrowers’ spending habits and assist with managing monthly expenses to strategically lift credit scores.
Through this process, the servicer gains a deeper understanding of how to improve the borrowers’ overall financial health much better than what can be learned from a credit report. At the same time, the servicer also builds a positive relationship with the borrower.
Importantly, servicers must be equipped with the talent to make improving credit scores a reality, which starts with having a staff that has a background in improving credit scores.
This kind of talent typically comes from associates with consumer finance or nonprime origination backgrounds who have deep expertise in dealing with less-than-perfect credits. These are the best people to speak with troubled borrowers because they have both the mortgage intelligence and the sales skills that enable them to connect with borrowers.
Prove that it works
Prove to your investors, banks and borrowers that helping manage borrowers’ troubled finances will improve long-term profitability for all parties. Track the credit scores of your borrowers each quarter and compare them to the previous quarter. Take note of the percentages of liquidations that turn into refinances and provide borrowers the tools to continue managing their credit.
Tucker McDermott is a co-founder and executive vice president at Fay Servicing, a special servicer that manages distressed and at-risk loans for mortgage bankers and alternative real estate investors. For more information, please visit www.fayservicing.com.