Not So Optimistic Investors Support Special Servicers

Praised and scrutinized, the Home Affordable Modification Program is deemed a work-in-progress solution that needs a helping hand from the private sector, particularly special servicers.

Chris Katopis, executive director of the Association of Mortgage Investors, argues that May data demonstrate "HAMP is still not a perfect solution to our foreclosure crisis," still dealing with significant homeowner challenges that make investors "cautiously optimistic about the future."

AMI sees recent changes to HAMP as "long-overdue improvements" that enhance the importance of long-term solutions to the crisis. Increasingly, the research data suggest that an all-too-high proportion of HAMP modifications will redefault within the first 12 months, Katopis says. HAMP helps many homeowners but it "must ultimately acknowledge" market realities.

In fact, the most recent Department of Treasury data show that only 340,000 modifications have been completed under HAMP, an insufficient increase of only 13% from April to May. Since the total number of distressed loans that may need a modification is calculated at around 7 million, this slow pace of progress ignites cautious optimism at best.

Bank of America modified 56,400 HAMP loans in April bringing the total to over 600,000 modifications through all available programs since January 2008. It qualifies as an improvement from the 98 permanent modifications B of A reported in November 2009.

These data indicate that even combined, government and private sector sponsored modifications are not enough.

AMI stated in a press release that "a private sector solution is needed to supplement" HAMP. And that includes specialty servicing companies that can provide high-touch operational support "to remediate the massive pipelines of severely delinquent homeowners."

AMI maintains that specialty servicers can help create workable solutions within private investment contracts that help resolve defaults in an expedited manner.

Increased demand for third-party servicing indicates that sentiment is catching up.

Integrated Mortgage Solutions of Houston, a collateral protection services provider for mortgage servicers, recently added seven new clients that include traditional mortgage servicers, community banks and credit unions.

Part of the reason, IMS said, is that industry projections "point to the continued need for experienced loss mitigation support," including Fitch Ratings' expectations that 65% of the prime loans and 75% of subprime loans modified under HAMP will redefault.

A developing trend, according to IMS president and CEO, Cheryl Lang, is that now community banks and credit unions are recognizing "the importance of leaning on an experienced firm to conduct these services." Traditionally large mortgage servicers would outsource asset management services, she says.

It is not news that the crisis continues to linger on both servicers and borrowers.

Consumer liquidity and debt collection data also illustrate borrowers' ability to stay current on their bills and mortgage obligations. So the fact that collection professionals ranked their liquidation performance 4.5% higher in 1Q10 compared to the same quarter in 2009 should be good news.

It is not certain whether this performance improvement is sustained through the second quarter since the first quarter "is historically a good-performing quarter," says Patrick Lunsford, senior editor at insideARM.com, because consumers tend to use tax rebates to settle their debts. The slow economic recovery and high unemployment still contribute to "high numbers of accounts and lower collection rates."

The ARM Confidence Index provides a snapshot survey of how accounts receivable management firms anticipate their financial performance in the next six months, based on current conditions. The Spring 2010 ARM Confidence Index rose nearly 9% to 65.5, up from 60.2 in the Winter 2009 index. Over 58% of collection agency professionals surveyed said they expect to add staff until the end of this year.

Apparently debt collection industry executives join investors in their "cautious optimism" about economic recovery in 2010 and beyond.

As the primary trade association representing mortgage-backed security investors including university endowments and pension funds, AMI said, it has been developing "a set of policy priorities" that may contribute to alleviating the foreclosure crisis.

Suggestions focus on loan performance improvement measures. AMI notes that HAMP performs best when the government works with those responsible borrowers willing to meet certain refinancing guidelines that consider consumers' mortgage and payment ability.

Also, HAMP "only works when all stakeholders, including bank servicers holding second liens...are willing to sacrifice to help" distressed homeowners seeking to rehabilitate their overleveraged balance sheets.