Servicers Focus on Minimizing Default Loan Loss
Servicers continue to be focused on minimizing loan losses for lenders and investors and restoring liquidity to the mortgage market.
At the SourceMedia Mortgage Servicing Conference here, speakers said the impact of the subprime mortgage crisis has created one of the most challenging environments the industry has seen in 20 years.
Larry Litton Jr., president and chief executive officer, Litton Loan Servicing, said more servicers are going out into the field and working with consumers to bring down barriers.
He said 35% of borrowers over an 18-month period are going back in to default. Mortgage servicers are hiring seasoned talent and leveraging every opportunity from a capacity perspective to do more to connect with borrowers in fear of default. They are studying analytics over their vendors like never before, he said.
Real estate-owned assets are scaling up quickly in areas with declining values. These days, the speakers said there are a lot more REO auctions going on. It used to be investment buyers were purchasing the homes, but now the trend is first-time homebuyers who are looking for a deal. Lenders are still keeping investment lists for them to pick and choose REO properties to bid on.
Servicers are not waiting until the property is foreclosed on to liquidate the asset. They may market it even before it is all the way through the foreclosure process.
States like Maryland are extending the foreclosure timeline. Servicers must be ready to move quickly and focus on regulatory issues, said Greg Zeeman, executive vice president, chief servicing officer, HSBC Consumer and Mortgage Lending. "This is another cost but it is a must," he said. "Look at the pipeline of ARM resets. Deal with customers in advance to delinquency and modify the loan in advance."
Going forward, the payment shock for ARMs might not be as bad. It will depend on product type and the market borrowers live in and the individual cost of living. Diane Pendley, managing director, operational risk group, structured finance, Fitch Ratings, said sometimes there is not an upside to paying.
Borrowers pay their credit cards first before their house payment and can live in their cars if they have to, she said.
"They need to use their credit card for groceries. Borrowers are walking away and mailing in the keys," she said. "Nothing the servicer can do will change that. The numbers are guided by fraud and a change in consumers.
Borrowers used to care about keeping their credit clean. Now they buy a house, car, and bad credit doesn't change their lifestyle. We're seeing instances when borrowers make five payments before they redefault."
As the mix of borrowers and products becomes more diverse, the complexity of the mortgage servicing problem is growing exponentially. In regards to document management and recording, it is crucial to keep a record of every task completed before the workout is done. Do not assume the vendor is preserving the property in the right way, panelists on the "best practices" panel agreed.
That is where technology plays a very important role in producing consistent results, said Ingrid Beckles, vice president, servicing and asset management, Freddie Mac. Technology helps servicers handle the high volume of loans in risk of default. As a loss mitigation tool, borrowers are contacted using scripted programs. There is analysis done on the pros and cons of hiring new employees or asset managers in the REO department compared to seasoned veterans in the industry.
"Our outsource vendors use our technology so we make sure we all speak the same language," said Ms. Beckles.
Freddie Mac is pushing short sales, she added. The company has completed 25% since November. It's something to offer for foreclosure avoidance before the property is taken into REO in declining markets, she said.
"It puts less hurt on their credit." Training is crucial within the organization when it comes to understanding short sales. Ms. Beckles said a lot of people don't know how to structure them. The second-lien holder can be a hindrance to a short sale. Then it becomes bartering REO and the company can get a rental for the property.
During the legal panel at the conference, the panelists told servicers to watch out for improper assessment of fees and possible mishandling of payments. "Look out for sloppy servicing practices," said Larry Platt, a partner with K&L Gates. "Congress is watching."
The scary thing is that some of the proposals in the market have federal cause of action for these mistakes, he said.
Late fees have to be assessed as "reasonable," said Craig Lackey, executive vice president, deputy general counsel, Countrywide. "You need to do an analysis to show why you charged the fee."
Under the Dodd bill, servicers would be required to provide periodic statements on monthly transactions with a variety of information. The proposed law would also include increased calls to call centers. The issue has not been addressed yet whether the call center language would have to be written in English and Spanish.
Foreclosure fees in all 50 states would be hard to do, according to Mr. Lackey. A list of fees could be based on ZIP codes and the servicer could get sued if they don't follow their schedule of fees.
Statutory damages range from $2,000-$5,000 per violation. "A small violation can cause great monetary damage," added Mr. Platt.
Servicers are continuing to focus on two goals: minimizing loan losses for lenders and investors, and restoring liquidity to the mortgage market, preventing further price erosion. The federal government action does not override mortgage underwriting going forward, said Kevin Petrasic, special counsel, Office of Thrift Supervision.
The possibility of giving a judge the authority to modify a loan is not likely unless there is a change in administration.
Mr. Platt said that public policy debate regarding "what the borrower can afford" is a standard that doesn't exist in any other industry than the mortgage market.
Barry Wides, deputy comptroller, community affairs, Office of the Comptroller of the Currency, said community-based organizations are becoming partners with servicers to reach borrowers.
The market is seeing the disposition of REO to groups for affordable housing. There is money in proposed legislation for community groups to buy nonperforming loans in different cities and states. Lenders provide the authority to the municipalities to renovate and sell these properties. (c) 2008 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com/ http://www.sourcemedia.com/