A Different Sort of Equity
When originating loans, lenders know that the equity in the home is easily the most powerful factor in the underwriting equation. Regardless of credit score, regardless of debt to income ratios, if the borrower has sufficient equity in the home, he will do just about anything to avoid losing that investment. If the primary income lessens, he’ll take as many jobs as needed to keep up payments. If his credit becomes damaged, he’ll always make the house payment first if he’s sitting on enough equity. As long as there is the proverbial “skin in the game,” borrowers will move heaven and earth to protect it. And what about when there is less equity in the home and times get tough? Many people will just hand over the keys and walk away. Others will trash the place like an over-indulged rock star and disappear from view. But for the mainstream borrower, the family that has been in the home for a while and has simply fallen on hard times, it is an entirely different story. They may have seen their financial equity in the property erode thanks to declining markets, but they possess a different sort of equity – and it can be more powerful sometimes than mere money. We call it “psychological equity,” and it is a key component in the art and science of bringing mortgage loans back from the brink of foreclosure. Psychological equity has less to do with financial capital and everything to do with personal capital. It is composed of all the human factors that make neighborhoods something more than a collection of houses along a common street, and all the houses something more than mere bricks and lumber. Psychological equity turns houses into homes and is ultimately ever bit as binding to a community as is the Force to that galaxy far, far away. Chances are good that you have gobs of it in your home, as do most of the borrowers out there. Examples of psychological equity are as close as your personal calendar, especially if you have a family living at home. Your children probably have soccer and Little League games you go to on weeknights and Saturday mornings. Your son’s best friend lives down the street and he may be in puppy love with the girl next door. Your daughter goes to gymnastics with her best friend down the street, and they are inseparable classmates at the neighborhood school. You are close to your neighbors on both sides, and you were there at the baby shower for the young couple across the street when they were expecting their third. You exhilarate in evening walks, when everyone is out and you catch up on the neighborhood news while you compare notes on your kids’ grades. If any of this sounds familiar, now consider what it would be like to have to leave it all because of a job layoff or other financial reversal. If you are like most borrowers out there, you would do everything humanly possible to avoid losing not just the house, but the personal capital you and your family members have invested there. Even in cases where the property values have dropped to par or are even under water, we see psychological equity at work on a daily basis in the specialty servicing business. We hear the panic in their voices and we feel the pain even over the phone lines; they are not just losing a house, they are losing their home. They have typically talked with servicers without much success if they don’t qualify for HARP, HAMP or any other acronymic assistance that might bail them out. The lender and servicer have pretty much given up on them when we get involved, bringing with us an understanding of the borrower’s state of mind and this other sort of equity. Specialty servicing success on defaulting loans depends almost entirely on two things: the borrower’s mental “place” and the investor’s appetite for turning a worthless loan into something of value. The second of the two isn’t very difficult to work with, as the properties are seldom worth more than the balance due and will cost thousands to foreclose upon and maintain. The first, however, is more fluid and not always predictable. The specialty servicer’s approach finds the solutions that create the most value in the long run, and this attitude is conveyed in the very first call with the defaulting borrower. A calm, non-confrontational and empathetic voice on the phone can work wonders in turning that bad mental place into a better one. The people who deal with borrowers at this level are highly skilled in the “soft arts” of working with people, and are genuinely good listeners. They are incented not on how fast they can get a borrower off the phone and move on to the next case, but rather on how long they can keep borrowers talking. It is the only way to find out what the borrower is feeling, and especially to evaluate the true levels of psychological equity that are present. In many cases, the borrower doesn’t even realize the scope of his commitment to the property, and as his story is told, the recovery specialist can help make him appreciate all the things the home and neighborhood mean in the lives of his family. Part of this process is gently extending not just a helping hand in the borrower’s direction, but a true lifeline in the form of some alternatives that may mean the family will not have to lose the home. A payment plan over a period of time, showing good faith and sacrifice, and one that builds up to a sustainable loan modification plan is one of many possible scenarios that the investor may agree to in order to avoid another REO on its books.