Borrower: Friend Servicers Save Thousands
Success in today's default market requires flexible, friendly strategies.
The days of the foreboding stranger, cloaked in a black hat and cape, lurking around the corner to steal a borrower's home and flee with gobs of money, have fallen the way of the silent movie.
Today's loan servicers are an entirely different breed and as such, they need modern, collaborative default tactics that align with today's market needs.
Today's servicers don't want to deal with the hassle and costs of defaulted loans. They'd be happy to simply collect mortgage payments, forward those payments to the appropriate investors and retain what amounts to an extremely small servicing fee.
In some case they retain the payments for their portfolio loans, which are usually home-equity loans. It sounds simple enough.
However, in the last five to six years, loans have been generated in record numbers, fed in many cases by the buying frenzy and dramatic increases in real estate values. The problem arose when many borrowers could no longer make their mortgage payments or were no longer interested in the property because of its declined value.
This was often the case for many borrowers with nonprime loans who, in a declining market, found their loan values higher than the property's value.
Whereas the servicer was accustomed to playing one role, it now has the added responsibility of managing a deluge of potential losses due to the number of defaulted loans in this market.
In exchange for the small fees servicers collect for receiving payments, they have now exposed themselves or investors to potential losses that can range from $40,000 to over $100,000 per loan.
Large Losses or Small Losses? It's Your Choice. It's time to change the strategy. Up until 10 to 15 years ago, borrowers in default were given two choices: pay the amount due or forfeit the home. Since those days, servicers and investors have started taking the approach that a smaller loss is better than a large one.
Loss mitigation was born and is now thriving. It's basic arithmetic. If a servicer can lose $20,000 instead of $40,000 or $50,000 or more, it's in a better economic position. Sure, no one wants a loss, but smaller losses are better than large ones. With proper loss mitigation, foreclosure fees and costs can be avoided, and personnel costs for foreclosure departments and REO departments are saved.
A number of creative approaches have been developed to determine the best and most economic approach for the borrower and the investor.
For example, many servicers are using scripted interviews that maintain a consistent approach toward finding an agreeable solution.
The interview obtains such critical information as the reason for default, the borrower's intentions (retain, dispose or don't know) and the financial capacity of the borrower to repay.
When this relatively small amount of information is used in conjunction with a valuation analysis, servicers can access a potential loss calculation that they can then run through economic models to find a plan that will suit both parties.
Stay Flexible and Remember Your Primary Purpose. If the primary objective of the servicer is to collect payments, it stands to reason that the servicer wants to find a way for the borrower to retain the home.
After all, they're in the servicing business, not the foreclosure business. Therefore, the first plan that a model will attempt is a payment schedule, where a borrower is to repay all or part of the arrearage and continues with their regular payments.
The prime objective is to receive all of the arrearage, which may include late fees or other costs. These fees and costs, however, may be waived if the borrower is able to make the payments. I've heard of servicers that will increase a payment by $50 to $70, which in effect spreads arrearages over 100 months.
In some cases, the arrearages are waived, and in other cases, they're set up as a silent lien that would be repaid without interest when the loan is paid off. The point is to maintain flexibility in finding a program that benefits both parties.
In the cases of ARM loans or other situations where monthly payments are beyond the borrower's capacity to pay, servicers can use a loss mitigation decision model to determine an alternative solution.
If calculations indicate that that a repayment plan won't work, then servicers may opt for a loan modification program.
The general approach for this type of solution is to add the amount of arrearages onto the loan balance, vary the interest rate and calculate a payment that the borrower can afford.
In the cases where even a drastically reduced interest rate is still financially out of reach for the borrower, the servicer may partially write of some or all of the arrearages and even partially charge off or forgive some principal balance. Again, the point to keep in mind is that a smaller loss is much better than a large loss.
A loss mitigation decision model can make this calculation while the borrower is on the phone. Experienced loss mitigation specialists use the same basic approach with spreadsheets.
The bottom line is that there are alternatives to the massive costs of foreclosure. Once a plan is agreed upon by both the servicer and the borrower, the final approval can be determined in five to 10 days. That's less than two weeks to a win-win solution for both the borrower and servicer.
Duke Olrich is the founder, president and chief executive officer of DRI Management Services Inc. based in Newport Beach, California. He can be reached via e-mail at: Duke.Olrich