Goal: Servicing One Borrower at a Time
Shelton, CT-The success of every single effort made so far by the government, the mortgage industry in general and servicers in particular to avoid foreclosures apparently boils down to a very simple concept: One borrower at a time! And special servicers are one of the most adequate venues to provide that singular approach.
"The major issue with the Home Affordable Modification Program is its ability to address the equity position in people's mortgages," says John Anderson, senior managing director of Quantum Special Services, a division of Clayton Holdings here. "Servicers are not reducing the principal amount. So even though they are creating a vehicle that allows borrowers to stay in their homes and pay their mortgages, essentially the borrower still owes a massive debt on a piece of property that probably today is not worth it."
He sees HAMP as a successful operation when creating a more affordable mortgage that has allowed borrowers to stay in their home. Statistics show that about 600,000 modifications still are in trial mode, of which about 400,000 will turn into permanent modifications in 2010.
"That is great, but the challenge with HAMP is: What is going to be its recidivism rate? Because people still do not have enough home equity in their homes."
Currently these HAMP borrowers may be able to afford their home, he said, but they still are overleveraged, so the question is: Are they going to stay in that home if they know they owe $100,000 more than it is worth?
When factoring in lessons learned from the past, in order to be successful.
Traditionally successful workouts have required servicers to be very tuned with investor demands as much as borrowers need to have both the intent and the ability to make payments. Similarly, when refinancing or modifying a loan value starts with home equity.
Having said that, Mr. Anderson argues, a sustainable loan modification is possible once someone has built equity in their home, the borrower's financial profile review shows they can afford to make mortgage payments and thereafter, six months down the road, the servicer can try to refinance the borrower into a government-insured mortgage to get back the investor's money.
Furthermore, success in servicing distressed borrowers in default or foreclosure also depends on how realistic all parties involved in the mortgage process are about what is doable and what is not.
Even if lenders reduce the interest rate, reduce the principal amount and thoroughly examine borrower data, he said, there are some people who because they are unemployed, or underemployed, simply cannot afford that piece of property any more - which is when the best solution is a preforeclosure short sale that helps preserve the value of the property allowing the borrower to stay in their home while it is marketed, and assist them in selling it.
A short sale remains the best alternative to a home turning into real estate-owned property, which is why the government is now emphasizing the value of short sale to the individual homeowner and the economy at large.
The newly issued guidelines offer some uniformed guiding principles that facilitate the efforts of both large servicers and small boutique servicers like Quantum to be more effective.
Both the large institutional servicers and the small specialty servicers first try what is called a credit solution that keeps borrowers into their homes, or if that fails, a collateral solution, meaning a short sale or ultimately a foreclosure.
"If you talk to any servicer foreclosure is the last resort these days," he said, since due to a variety of federal and state mandated requirements, including mandatory lender-borrower mediation, it takes so much more time to go through to finalization.
All of the above indicates that servicers' success and survival depends on their ability to provide personalized borrower servicing that minimizes short- and long-term costs and foreclosure risk.