Ocwen: Technology, Execution, Bring Better Mod Results
While data support the public's cry against the slow pace of loan modifications by megabanks, Ocwen Financial Corp., West Palm Beach, Fla., the lonely large servicer that continues to outperform the industry, says technology and execution is the key to success.
In testimony before Congress, Ocwen president Ronald M. Faris pledged support for HAMP before voicing constructive criticism based on positive results.
"Almost a year into HAMP too many homeowners facing foreclosure are having difficulty getting their loans modified," Mr. Faris told the Domestic Policy Subcommittee of the House Oversight and Government Reform Committee, due mainly to a lack of sufficient capacity and experience to handle the volume.
Since the beginning of the mortgage crisis Ocwen saved over 100,000 homes from foreclosure and what helped, according to Faris, was the early adoption of a comprehensive loan modification program. It helped Ocwen lead in converting trial mods into permanent at minimal redefault rates under HAMP.
He praised technology and execution as the main reasons enabling Ocwen to convert trial mods to permanent solutions at a rate that is 10 to 20 times higher than that of the big banks in the HAMP program.Ocwen's three-month redefault rate on HAMP mods is under 5% and below the industry's average of 18.7% to 33.7%.
Ocwen's success in modifying sustainable mortgages brought in more cash flow for investors than they would get from foreclosures and at the same time allowed Ocwen to invest over $100 million in technology.
Some of the largest beneficiaries of the government bailout are far behind.
Bank of America has the highest number of loans in trial mods, the highest estimated amount of loans both eligible and delinquent, totaling 1,066,025. Even though the number of trial or permanent mods increased to 234,156, or 22% of the total, up from 19% in December.
JPMorgan remains second. Loans in trial or permanent mods total 162,483, or 38%.
While well-designed, HAMP needs enhancements, Faris said, suggesting it require underperforming servicers to outsource to servicers that perform.
"Whether for lack of effort or just an inability to handle the volume, too many banks are not producing the results needed to achieve program goals."
If Treasury is empowered to redirect servicing to servicers who have both a proven track record and capacity to execute trial mods, more borrowers will be able to sustain homeownership.
Other helpful measures, in his view, include lower monthly payments on mods, or borrower debt-to-income ratios at below 31% will boost the number of qualifying candidates since "one out of every four HAMP applicants is rejected for failing to meet this standard."
Higher basic living expenses, such as food, are the main reason they cannot comply, he said, so if HAMP uses "a residual income approach" to determine a mortgage payment, it should either require an across-the-board DTI of 28% or a flexible DTI based on family members.
Ocwen also recommends principal reductions on modified loans allocating additional funds for housing counseling groups.
As the industry struggles with the problem of depreciation, principal reduction mods can help overcome the "negative equity" problem as the primary driver of defaults on mortgages and redefaults on mods, Faris said.
Ocwen's experience shows negative equity increases the chance of a redefault by 1.5 to two times, so approximately 15% of all of its mods involved some principal reduction.