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Servicers Focus on Loss Severity Exposure

Faced with ongoing loan modification challenges and high levels of distressed property inventory servicers are focusing on improving target solutions that help preserve portfolio values.

If the servicer goes down the waterfall and it becomes clear the modification is not going to work the next step is a short sale or a deed-in-lieu. "But those are not home retention strategies, they are home abandonment strategies," says ISGN senior vice president, Bill Garland, which is why coming up with solutions to keep homeowners in the home is the best way to minimize liquidation loss exposure.

Judging from the deterioration in the rate of accounts going from current into a cured state, coupled with the overall default rates and the extended loan resolution time due to modifications or other interventions, he says, "the probability of loss severity exposure is going up." The best solutions so far, including the Home Affordable Mortgage Program, do not focus only on ways to keep under control real estate-owned properties and "not allow a loan in default to go into liquidation." Overall, he adds, the industry is looking at how to avoid negative developments in the marketplace. Most programs today focus on how to help people get in a situation where they can control debt, which would decrease volatility in the residential mortgage market and help stabilize housing values.

Data show that HAMP and other industry efforts have started to work, but they are not enough, Garland says. "Even if we had the optimum HAMP we still need to deal with all the other issues faced by the marketplace and the economy at large to be able to have a more comprehensive solution."

Founder and chairman of the board of Safeguard Properties, Robert Klein, agrees that despite signs of recovery most industry experts predict that "it will be some time" before the mortgage industry can significantly reduce the portfolios of foreclosed properties. One reason is the still high rate of prime loan delinquencies and foreclosures, he says. Almost 37% of new foreclosures come from fixed-rate prime loans and 21% from prime ARMs, according to the Mortgage Bankers Association. So if this "jobless recovery" continues loan modification programs "probably will continue to meet with limited success," and even higher numbers of defaulted and foreclosed properties.

Garland says industry and company data indicate these developments have re-enforced interest in analytics and modeling. ISGN borrower outreach efforts have shown that highly sophisticated call centers make a difference in anticipating and managing defaults. Intense loan surveillance is an added value operation that helps to lower high recidivism rates and negative equity, which also is critical.

It is widely agreed, however, that REOs pose the biggest loss risk. Klein finds there are areas where "the industry either has made or has the potential" to make a big impact in preserving values and facilitating sales.

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