Loss Mitigation Sparks Concern

Loss mitigation strategies aimed at avoiding or lessening the cost of foreclosure are a cornerstone of good servicing, but recent "predatory lending" complaints have raised concern that some practices may get lenders in trouble.

As a result, Fitch Ratings recently issued a special report examining residential mortgage loss mitigation strategies. Fitch says that good servicers can engage in loss mitigation practices that serve the best interests of both investors and borrowers.

"Highly rated servicers typically have strict timeline adherence policies, clearly delineated workout options, together with a robust analytical process for evaluating those options, and automated decision support systems to ensure that their loss mitigation strategies benefit both the borrowers and certificate holders," the Fitch report said.

If workout options are unrestricted or lack appropriate controls, Fitch is likely to have concerns about potential "predatory servicing practices."

Kathleen Tillwitz, a senior director at Fitch Ratings, said servicers should make sure that loss mitigation practices are designed to keep borrowers in their homes, rather than just keeping reported delinquency rates down for a few months.

"We want to make sure that people understand that when you are offering loss mitigation options, you make sure the person can afford to stay in the house," she said.

As a result of publicity surrounding alleged lending abuses, Ms. Tillwitz said rating agencies and the entire industry are focusing more attention on issues that may raise predatory concerns, such as aggressive collection practices and the charging of fees.

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