Finding Alternative Solutions to High Foreclosure Rates
With a record number of foreclosures and costs ranging from $50,000 to $100,000 or more per foreclosed loan, lenders are taking a beating on their REOs. The industry is in crisis, yet many are busy pointing the finger rather than getting into the solution. It's time to break out of the mold. If lenders want to put an end to accumulating excessive losses, they're going to have to change their ways of handling foreclosures.
The industry has reached new territory. It takes two to three times as long to sell REO properties and borrowers are facing a magnitude of payment shock that's never before been realized by the American public. Despite these immense differences, lenders continue to use solutions that were designed for an outdated industry model. Quick disposition is no longer an option, and banking on a borrower's ability to find alternative financing will result in money lost on both the borrower and lender's side of the transaction.
Lenders, who are still threatening bad credit ratings and foreclosures in an attempt to get the borrower to make good on their loans, need to get out of denial and realize that this method doesn't work in today's market. Borrowers don't have the options that were available in previous foreclosure markets. In the past, borrowers have secured high-cost, short-term loans or used accrued equity to tie them over until they could dispose of their homes or get better financing rates. In today's market, the subprime market is no longer an option, and due to declining values there's no longer the safety net of built up equity. In fact, with so many negatively amortizing loans, borrowers often find that they owe more than their homes are worth. Under the current paradigm, borrowers are stuck, and lenders are losing money because of it.
Sixty percent of defaulted loans go to into foreclosure without any borrower contact whatsoever. The sheer number of borrowers slipping into default has caused a backlog that lenders are struggling to manage, which in turn costs them even more money. Now, more than ever, the industry needs an alternative to the ineffective ways of handling defaults and foreclosures. It's time for a shift in our paradigm. Rather than dealing with foreclosures, lenders need to start employing tactics to prevent foreclosures and keep borrowers in their homes.
Flexible Workout Solutions
Old-school methods using coercion and scare tactics simply don't work any more. Unless they want to bulk up their REO portfolios and take the resulting losses, lenders need to employ more borrower-friendly methods. They need to use win-win settlement strategies focused on keeping borrowers in their homes when contacting the borrower. Anything less will lead to continued losses on both the borrower and the lender's end.
And while most defaulted loans are from subprime loans and not from government-sponsored enterprises, it's still important to note that the standard Fannie Mae, Freddie Mac and FHA guidelines for developing workout solutions are ill equipped to handle the tsunami of defaults and foreclosures in today's market.
Lenders must consider an alternative. They must be willing to offer an alternative that's outside the current paradigm. These changes, which may seem significant to the lender, involve shifts like leaving the borrower's payments at the same price point offered by the teaser rate and stopping any additional negative amortization. Lenders must also stop stockpiling additional fees, like late fees, onto the principal balance. They should be more flexible on loan assumptions and remove any prepayment penalties. These new policies must be implemented for a two to three year period, until the market has the chance to recover.
This may sound like a tough pill to swallow for lenders, but if lenders want to mitigate their losses, they'll have to stop thinking about who's wrong and who's right and start getting into the solution.
Looser Timelines to Foreclosure
Servicers and investors also need to extend the timeline to foreclosure. The sheer volume of delinquent and defaulting loans has crippled lenders' capacity to reach the borrower for negotiation, and servicers are having trouble getting to the loans to put them into the legal process to start the foreclosure process. Even so, lenders are keeping traditional timeframes for initiating foreclosure proceedings. As a result, loans are going into foreclosure often before borrowers have been notified of their options for working out their loans.
Lenders should contact their investors to extend foreclosure timelines at least 60 days. During this period, lenders should make every effort to work with the borrower to reach a win-win solution that keeps them in the home and saves them the exorbitant costs of foreclosure.
As the current foreclosure backlog indicates, lenders do not know how to effectively deal with the current foreclosure issue. Rather than to let bad move to worse, lenders need to partner with companies that are experienced in handling the foreclosure process. In addition to the Home Retention Alliance, the USFN National Attorney Network also offers support that can alleviate the backlog and reduce losses. Lenders don't have the time to reinvent the wheel. Each moment of delay is adding to their foreclosure losses.
The final phase in reducing foreclosure losses is to engage in preventative action. Early intervention is the best prevention. Lenders should start contacting borrowers between one and twelve months before their loans are scheduled to reset. They should devise flexible solutions and employ outsourced teams who are experienced in special workout solutions to contact each borrower and resituate them in loans that are less likely to result in foreclosure.
Paying the Price
Many lenders may balk at adjusting their foreclosure processes to accommodate win-win, borrower-beneficial solutions. This is where lenders need to read the writing on the wall. If lenders want to reduce losses, they're going to have to step up to the plate and proactively amend the situation that many of them created.
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