Streamlined Loan Processing Still An Industry Challenge

The creation of a loan processing structure that streamlines the transition of a distressed loan into a modified mortgage remains a challenge for regulators and the industry at large.

The confusion and backlogging that derives from conflicting systemic requirements in addition to capacity shortages is surfacing as the issue of the day for mortgage servicers.

While twice as many people are now engaged in a conversation with a mortgage company, according to the Fourth Report of the State Foreclosure Prevention Working Group, a much smaller number gets out of the pipeline with a solution. In addition, it can take up to six months, or more, to go through a modification process. And that "is unacceptable," participants of the Fourth Report of the State Foreclosure Prevention Working Group said during a conference call.

The group's analysis of mortgage servicing performance shows that one reoccurring problem for both borrowers and servicers is the simultaneous start of proceedings for both a foreclosure and a modification. It recommends that servicers suspend foreclosure proceedings on loans that are going through a modification process.

Even though HAMP encourages servicers to stall a foreclosure sale while a loan is modified, that is a last-minute resort, North Carolina chief deputy commissioner of banks, Mark Pearce, said, so if such requirement is extended to allow the suspension of the foreclosure process earlier in the process, both servicers and borrowers will benefit.

It would help eliminate the confusion.

Data show that often at the same time the loss mitigation department of the company is engaged in a workout process, another department within the same company initiates and pursues foreclosure proceedings, Mr. Pearce says.

"Given the challenge servicers have been facing due to the number of people coming through the pipeline, it is important to make sure people do not fall through the cracks."

Most importantly, foreclosure-processing costs such as filing fees, lawyer fees and other processing fees weigh on the homeowner alone since they are added to the loan balance making the mortgage even more unaffordable to someone who already is in financial distress. These costs have to be negotiated during the modification process adding to servicer challenges as they struggle to settle a solution. "The longer the foreclosure process goes on, the more paperwork is done and the higher these costs are," he said, while with HAMP loans costs are covered by a third party.

If the first important step is avoiding the aforementioned mishap, providing adequate programs at the state level is yet another important venue that helps control cost and ease up the backlog.

And since currently a growing number of foreclosures are driven by prime mortgages, programs designed for these borrowers can minimize the number of such loans from going into foreclosure.

According to New York State superintendent of banks, Richard H. Neiman, data show more high credit score individuals facing economic hardship, loss of income or medical burdens are now at risk of default and foreclosure. Furthermore, these homeowners may not be eligible for HAMP modifications, so state-level emergency support for this specific segment of distressed homeowners may be the best solution. Treasury does not need authorization to utilize funds for these purposes, he said.

One of the recommendations of the congressional oversight panel calls on the Treasury to utilize TARP funds to support a state-level emergency mortgage assistance program. Among others regulatory reform supporters include chairman Barney Frank, D-Mass., who has proposed the allocation of a $3 billion fund earmarked for such efforts.

Encouraging results from a few market-tested programs has added to the belief that they represent an efficient solution.

For example, North Carolina and Pennsylvania already have in place programs that consist of short-term bridge loans designed to address the needs of homeowners who have suffered economic hardship. Their ability to help is however limited by the amount of funds available since demand is high and growing.

"They certainly aren't funded in the scale that we need them to be," Mr. Pearce said during a press conference. "North Carolina has a relatively small allocation and with the state budgets being what they are it is hard to see that number going up. We really do need support from the Treasury and the Federal government to make that program reach more people."

Mr. Pearce is concerned that there are not enough non-HAMP loan modification product options available for that market segment. Demand is high especially in markets along both coasts, such as California and Florida where foreclosure and delinquency rates remain very high.

He recalled how a few years back when the working group was created its focus was primarily on two subprime adjustable-rate mortgage products identified as 2/28 and 3/27, whose structure was seen as risky because it would lead the borrower to foreclosure at rate reset time.

Right now the marketplace is facing the inherent threat of payment-option ARMs originated without truly considering borrowers' ability to repay but instead relied entirely on property value appreciation. As many of these loans reach the reset deadline this year, payments will go up by 60% or 70% in times when home prices have declined, in many cases to "underwater" levels, so homeowners will not be able to refinance.

"We have $200 billion worth of loans out there that risk going into foreclosure. In fact 40% of them already are at least two payments behind, so we need to have loan modification programs and approaches that address that product," Mr. Pearce said.

He joins other insiders who warn that beyond its focus on how capacity shortages affect loan modification efficiency, the industry needs to keep process streamlining high up in its priorities list.