Reaching Borrowers Before Default
Orange, CA-There is a need for servicers to find the borrowers who are doing everything they can to make their mortgage payments but live in fear of someday losing their homes to foreclosure.
Janice Ramocinski, COO of Kondaur Capital Corp., a buyer of scratch-and-dent loans here, said servicers must get to these borrowers before they are in default and address the character component of mortgage lending.
"These people believe that beyond any other asset or obligation they have, they believe their mortgage payment is paramount. They give up their cell phone, their fancy car, they've lowered their monthly out-go to keep that obligation going. They've taken a second job or part-time work. And the servicer doesn't even know who that person is," Ms. Ramocinski said.
"From a servicer's perspective, the question is, 'How do you reach those people?' Those are the people you'd really like to work with, but they are unidentified. They just make their payment and they never come up to your radar. They are not in default but they're struggling."
Right now the industry does not have the statistics or tools to connect with these borrowers. "There needs to be a roundtable discussion or more brainstorming in terms of identifying those people. Servicers are so varied trying to deal with the delinquent borrowers that how do you ask them to devote those resources to the borrowers who are current. How do they find those resources?" she said.
The traditional way of dealing with borrowers is not helpful in this environment, adds Ms. Ramocinski. The borrower that becomes delinquent will be turned over to a collector where the conversation is based on collect, collect, collect. There is no relationship between the borrower and the lender for the longer-term solutions, she said.
"Don't collect it. Let the borrower keep that $1,000 payment as a longer-term solution, which might be a complete loan modification or educating the borrower as to what they really can and can't afford. Maybe they can't afford that house any more. But in the meantime, you've collected $1,000. Does it do any good for anyone in the long term?"
Kondaur Capital, one of the nation's largest buyers of nonperforming loans, uses a very high-touch approach to purchase these types of loans. The company spends an extensive amount of time and energy during the due diligence period reviewing these loans for purchases.
"One of the reasons is not only do we want to make sure we have a very solid understanding of what the value is of the underlying collateral, but we also want to make sure we have a good idea of what situation the borrower is in from a credit underwriting situation," said Jon Daurio, chairman, Kondaur Capital.
The company communicates with its borrowers using extensive skip-tracing techniques to try and reach them. Kondaur is currently at 200 employees but its goal is to be at 400 by June 30. About half of time, the company is actually able to communicate with the borrower during the due diligence period. Half the time, it is not. Along with the three C's of underwriting there is a fourth one that no one really talks about, Mr. Daurio said, which is character.
Character means taking into account the credit, capacity and the collateral, which all indicate whether or not the borrower has the character to make the payments. "It's a good bet that someone who has been in their home for 25 years will do whatever they can to make their payments and not lose the home. If the borrower has been at his job for 20 years, that person may be less likely to lose their job when cuts are prevalent. The majority of these people are more likely to make their payments."
There are times Kondaur cannot get a hold of the borrower because he or she is in denial. "We resell the note 'as is' or sometimes we get all of the information from the borrower. We look at the 4 C's and we're able to modify the loan. It has been properly underwritten and we are able to sell it," he said. "We are able to help the borrower to understand that they have too much loan. The converse of that is too much house."
Mr. Daurio brings up the example of a borrower with a 100% LTV stated-income loan for $600,0000 who makes $3,000 a month. "Under FDIC guidelines, even though the borrower can afford a $930 a month payment, is it fair for someone to live in a house worth $400,000 that in my opinion they never should have bought in the first place?"
Or perhaps the borrower has a $400,000 unpaid balance. The home is worth $300,000 today but they are making a mortgage payment on the $400,000. "The challenge for servicers is that they have an owner of a loan that has their head stuck in the sand that doesn't want to realize the loan is not worth $400,000. That loan is worth at best a fraction of the $300,000 collateral value."
The company has seen this tragic situation even on the loans it has purchased. For modified borrowers, their payment goes from $3,000 to $2,000 for six months. "We have the loan. We bought it. Now what after six months? We're sorry they took your $2,000. That prior owner of the loan, when you were seeking your modification, should have educated you. Can you make the $2,000 payment? Yes. But for a $400,000 or $500,000 or $600,000 house, that modification is not, using normative terms, fair."
Both Ms. Ramocinski and Mr. Daurio believe most loan servicers are doing a loan mod that addresses the payment part of the loan mod and not the principal reduction part. "That's where they are doing a disservice to the borrower. It's not good for the long-term health of the borrower, the lender, or the servicer," Mr. Daurio added. "The problem with so many loan modifications these days is that many are not requiring proof of income. It's almost like the loan mod is the new stated-income program."