Proactive B&C Loan Workouts Seen as Efficient

Today, there is a lot of talk about using Federal Housing Administration loans to refinance troubled B&C borrowers out of risky loan products. But one company that's built its business around Veterans Affairs lending believes its retail loan origination staff can also play a role in saving troubled borrowers by modifying their current loans.

Bill Edwards, chairman of Mortgage Investors Corp., St. Petersburg, Fla., believes that a proactive approach to refinancing borrowers facing rate resets could save many from foreclosure. And MIC, a firm that is one of the nation's leading VA lenders but is approved to originate other loan types as well, has approached industry servicers about using its workforce of loan officers to aid in a massive streamline refinancing attack on the problem. But to save many borrowers from foreclosure and to minimize losses, lenders, servicers and investors may have to make some concessions themselves, Mr. Edwards believes.

Mr. Edwards says the current subprime crisis is "shameful for the industry," noting that almost all of the headlines stemming from the failure of some lenders and higher-than-expected early payment defaults have been negative.

Mr. Edwards acknowledges that it won't be possible to save every troubled borrower and that finding solutions to help those who can be helped will not always be easy. But he believes it is in the best interest of lenders and investors to try to negotiate ways to salvage these loans wherever possible.

"The only answer is that there is no steadfast answer to it. It is a crisis. It's obviously less of a crisis if you don't foreclose than if you do foreclose," Mr. Edwards said. "I think there are a lot of good people getting some bad luck right now."

There are a number of causes for the current rise in defaults on subprime loans. In addition to a loosening of underwriting standards and the advent of some riskier loan products, borrowers have had to deal with rising gas prices and higher minimum payments on credit cards. Many couldn't manage to balance the competing demands on their finances as gas prices doubled and credit card payments doubled. Next, mortgage resets, particularly on teaser rate loans, have doubled the home loan bill for some.

"The only thing that hasn't doubled is your income. That's sitting the same," Mr. Edwards said.

For that reason, he believes the problem extends beyond the subprime market into prime loans. Financially strapped borrowers, even if they were prime credits at loan origination, have the potential to see their credit deteriorate as mortgage payments reset and they run into difficulty paying bills.

And with a record number of homes for sale nationwide, it is getting more difficult for borrowers who bought more house than they can afford to sell their way out of the problem. Some experts predict that the industry could see 2.5 million foreclosures this year.

Instead, loan modifications and workouts will be needed to keep borrowers in their homes, Mr. Edwards believes.

Why is MIC getting involved in this issue? The company, which has produced $7 billion to $8 billion in home loans during its best years, has helped many military veterans refinance into more attractive financing through the VA home loan program. And MIC is exclusively a retail lender with a national sales force dedicated to talking to customers and educating them about their home loan options.

Mr. Edwards notes that about half of borrowers who go into foreclosure never talk to their loan servicer. Servicers need to be more proactive about reaching these customers, Mr. Edwards said. He added that early detection is the key to helping borrowers avert foreclosure.

"The wisest thing would be to go to them and sit down with them and see if we can't do something in the way of a loan modification that would salvage the loan, the lender and everybody alike," he said.

Lenders may have to sacrifice things like prepayment penalties to make it work, he said. And loan terms perhaps would have to be stretched out to make the loans affordable to troubled borrowers.

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