Changing Borrower Contact to Meet Loan Mod Realities

It seems lately that just about every time a government edict or regulatory requirement aimed at the mortgage sector comes rolling out of Washington, D.C., industry practitioners are left scratching their collective heads, wondering: "How are we going to comply?"

It is not that these professionals - many with decades of experience and an honored sense of doing what's right - do not want to be good citizens and follow these directives. Often it is a case of not having the resources or necessary information to do so.

Case in point: The multiple loan modification initiatives intended to help burdened borrowers suffering a loss of income or other interruption in their ability to make mortgage payments, remain in their homes under new terms agreeable to them and their lenders. Despite high hopes, statistics indicate slow going so far. As we begin the new year, some 680,000 borrowers (274,000 in the much-heralded Home Affordable Modification Program - or HAMP) are in the initial "trial" (tryout) phase of loan modification, and barely 10 percent have yet made the transition or "conversion" to permanent status.

The number will rise over time, but more than a few observers are wondering why the modification process has gone so slowly and whether it can help a majority of those in need. The simple answer is that the sheer volume of modifications required is not only a new experience for most servicers but may be asking too much of their systems and personnel.

When government-imposed metrics are not met servicers become handy scapegoats - which is not only unfair but also senseless, since servicers benefit from loans that perform. In truth, they are struggling to continue servicing loans properly all the while finding "speed bumps" at every turn in the road.

The four key issues

These "pain points" coalesce around four issues.

First and foremost, borrowers generally do not respond to initial loan mod solicitations. Industry-wide we're seeing about a 20 percent response to these outreach efforts and when asked why, most people say they are frustrated with the process (and their servicers).

But, when we push past this response we discover more meaning, finding that many people consider the deal offered to them "not good enough". How can this be? Isn't anything better than default? Well, yes, sort of. But we find that homeowners sometimes have been unduly influenced by outside forces (second-hand stories) and, in other cases, they are simply frightened and unwilling to move forward until someone walks them through the process. (This is, by the way, not unlike what they experienced when the first got the loan.)

Then, there are those homes that are no longer owner-occupied, which surfaces the "Golden Rule of Loss Mit," namely that when a borrower leaves the house (i.e. a "walkaway"), it becomes really difficult to get a modification completed. The departure probably means they no longer want the house.

Loan modification ideas are numerous and have varying degrees of success, but statistics show if you reduce a homeowner's principal balance, it produces a certain positive psychology pointing to more success in getting the desired outcome.

A second pain point, getting borrowers to respond, is as the saying goes, only half the battle; the other half being to get the right documents returned in proper shape. That requires a lot of borrower contact and tells why document chasing has been such a large part of our growth. A big help is the availability of e-signing for many trial mod dox; it's proving to be very useful in increasing fulfillment.

Laxity in necessary paperwork

Interestingly, many borrowers who have entered the three-month trial period get very relaxed about their mortgage payment problems and then get lax about submitting the necessary paperwork to convert - or worse when the reality of making those payments arrives, they fail to make them as promised. Sometimes, and for whatever reason, the mod numbers provided verbally don't match the subsequent written terms.

I maintain that it is better not to offer a trial arrangement until all the necessary documents have been submitted for a (ultimate) permanent modification.

With the industry facing up to 7 million (or more) at-risk borrowers in the next few years, the borrower contact model may have to shift from a "mass communication and solicitation" effort - of endless packages being delivered to borrowers with a relatively low rate of response - to a more "community-centric" outreach approach, whereby face-to-face interactions between the borrower and the servicer have proven to work best in cementing a long-term commitment.

We are working on offering "strategic mortgage outreach" events for our clients in 2010 that center on "event invitations" sent to a focused population of at-risk borrowers who truly wish to help themselves out of a tough situation.

Serving main objectives

These events will serve three main objectives:

* to educate borrowers, often seriously lacking in crucial information;

* to involve a venerable (often non-profit) intermediary to act as a document prescreening and auditing partner; and

* to provide a medium for both the borrower and lender to reach an agreement by the end of the event as to the best home retention or exit strategy for each individual borrower.

Of course, at the end of the day, all the government help - in the form of HAMP, TARP and programs like them - cannot change an insolvent truth, that a modification may be impossible.

As such, alternate strategies, like short sales and deeds-in-lieu, become viable means for lenders and servicers to avoid the costs associated with carrying loans on the books and incurring losses that easily can become astronomical (particularly when the road inevitably leads to foreclosure).

As my colleague Nigel Brazier of Acqura Loan Services so aptly put it: "You've got a population of [up to] 10 million people you have to talk to, to validate that they don't have [necessary income] or they've lost a job or have a permanent correction in cash flow. You need a lot of bodies to do this contact," he said, adding for emphasis: "The numbers are staggering and it's not going away soon."

Jay A. Loeb is vice-president and a principal owner of National Creditors Connection, Inc., Lake Forest, Calif.