Default Servicing Expectations

This time last year, the Obama administration introduced the Making Home Affordable Program, which gave mortgage servicers access to funds that could be used to modify or refinance loans for distressed homeowners. This push to enable borrowers to regain control of their mortgages resulted in the largest number of loan modifications we’ve seen in recent years.

Much of the same success came from the Home Affordable Modification Program. The HAMP program was designed to enable borrowers who meet eligibility requirements to avoid foreclosure by their modifying loans to a level that is affordable and maintainable. If borrowers were able to make their new payments for a trial period of three months, they would be placed into a permanent modification. Unfortunately, not all of the modifications were successful. Even though their mortgages were modified, some homeowners defaulted again on their newly modified loans because of continuing challenges such as unemployment, underemployment, or reduced income.

As we head into the second quarter of 2010, many mortgage servicers are placing a larger focus on determining whether borrowers will truly have the ability to maintain mortgage payments at their existing income levels. If borrowers are not able to make their mortgage payments, even at reduced amounts, servicers are beginning to explore other loss mitigation options available, such as short sales and deeds in lieu.

These alternatives allow the borrower to leave the property voluntarily, and in many cases, prevent the property from reverting to REO on the servicers’ books. Another option that is gaining momentum is allowing the homeowner to rent the property back from the servicer or investor following the foreclosure sale.

This innovative approach reduces abandoned or vacant properties, preserves property values within neighborhoods, and is a proactive program to keep borrowers in their homes, even if they are no longer the homeowner. At this time, Fannie Mae, Freddie Mac and various individual servicers are developing or managing rental programs in one form or another.

We are also seeing other players such as FHA/HUD and the private mortgage insurers taking a larger role in loss mitigation. In order to make partial claims more feasible, FHA has increased the amount of money available for partial claims. These funds can be used to assist the mortgagor in reinstating their loan or be used in conjunction with a special forbearance agreement. To borrow the funds, the mortgagor executes a promissory note and subordinate mortgage payable to HUD.

Mortgage insurers are also partnering with mortgage servicers to explore loss mitigation options prior to the foreclosure sale and providing capital to be used toward borrower workouts. Fannie Mae has made proactive steps by releasing a nine-page lender letter focusing on quality initiatives. This movement is to help rebuild market stability and reduce risk. Insuring data integrity and consistent feedback on policy compliance will aid lenders to make the right decisions within Fannie Mae’s guidelines, enabling the market to gradually revive. In his role as chief operations officer at Prommis Solutions, Brandon Barnett is responsible for the day-to-day management of the company’s operations within all of its strategic business units, including, but not limited to, foreclosure, bankruptcy, evictions and loss mitigation.