Borrowers delinquent on their mortgage payments are more likely to avoid foreclosure by receiving loan modifications when they attend counseling services, according to published reports.
By participating in counseling sessions, borrowers are able to remain in their homes, while servicers save millions of dollars on loans by not having to go through the foreclosure default process, perform a short sale or a deed-in-lieu of the property to the lender.
NeighborWorks America, a non-profit organization that helps create affordable rental housing in communities nationwide, released a study which found that homeowners who received National Foreclosure Mitigation Counseling were nearly twice as likely to obtain a mortgage modification than individuals that did not take part in this service.
According to the study, which was prepared by the Urban Institute that evaluated nearly 800,000 homeowners who were assisted by the NFMC program from January 2008 through December 2009, these same individuals also were 67% less likely to redefault on their mortgage nine months after receiving one.
“The NFMC program works incredibly well for homeowners and communities,” said Eileen Fitzgerald, CEO of Washington D.C.-based NeighborWorks America. “The personalized work nonprofit housing counselors do to help homeowners improve their overall financial situation had the greatest effect on a homeowner not falling behind again on their mortgages in the future.”
Urban Institute's report said homeowners who went through the NFMC program received an average mortgage modification of $176 per month, savings that is close to $2,100 annually.
Fitzgerald said counseling assistance is not only a win for a distressed borrower, but mortgage servicers too. She added that with fewer homeowners redefaulting after a modification is provided to them, servicers save time and added expenses by not having to manage these distressed borrowers properties as part of their portfolios.
Research by the Stratmor Group also supports the idea that counseling services prevent an at-risk default borrower from being foreclosed upon.
The Peachtree City, Ga.-based mortgage data provider released a white paper called “The Impact of Consumer Credit Counseling on Distressed Mortgage Loan Losses,” sponsored by Outreach Financial Services, which revealed that holistic financial counseling also improves the performance of a mortgage loan portfolio for servicers and investors.
While traditional borrower counseling in default servicing focuses on the monthly mortgage payment, holistic financial counselors help borrowers assess all the factors that go into their monthly spending, including credit card debt, car payments and discretionary spending. This report said holistic financial counseling could reduce losses on a 10,000-file portfolio by as much as $71.5 million.
“With an estimated six million plus home loans delinquent today, and the potential for another two to three million borrowers to default over the next three years, we believe we can help avoid foreclosure losses on well over one million homes,” said Bill Magro, president and CEO of Outreach Financial Services, Jacksonville, Fla. “That equates to saving the primary financial investment of their lifetimes for these families and tens of billions of dollars for the servicers of these mortgages and their investors in the mortgage-backed securities.”
Outreach Financial Services' holistic credit counseling approach engages certified credit counselors who work on behalf of borrowers to reduce not just delinquent mortgage payments, but all monthly consumer debt payment obligations. This approach in the loan modification process typically frees up hundreds of dollars monthly due to the lower debt payments and lifestyle spending reductions from the borrowers household, OFS said.
The white paper said the loan modification model of using credit counselors to work with homeowners on their lifestyle savings will reduce monthly spending by nearly $300 a month. In addition, there is also a $550 reduction on the monthly mortgage payment from the sample loan modification, resulting in an overall savings of $850 a month.
“The ‘meltdown' of the mortgage industry and the resulting tsunami of defaults and foreclosures has seen consumer counseling emerge as a major strategy both for ‘loss mitigation' and helping affected borrowers remain in their homes,” the report said.
Matthew Lind, who was the author of the white paper, said in the report that standard mortgage counseling limits losses and lowers the redefault rate on loan modifications, but holistic counseling helps save homeowners even more money to assist them in paying their mortgage. For borrowers receiving standard counseling, Lind's estimates annual losses at $3,894 per borrower on a $210,000 average loan balance. However, the annual benefit increases to anywhere from $ 5,754 to $7,147 if borrowers receive holistic counseling.
Applied across a portfolio of 10,000 loans, the holistic counseling savings would project into $71.47 million in losses avoided for borrowers. At the same time, the total economic benefit for investors and servicers of providing counseling for 10,000 borrowers is approximately $112 million, while those who did not receive counseling for their loans is about $73 million.
Lind's research was based on the Urban Institute's NFMC program study data, as well as 335,000 loans tracked by LPS Applied Analytics.
“It is clear that using a holistic financial counseling approach, with a focus on spending reduction, improved financial behaviors and adherence to a budget, can significantly reduce foreclosures,” Magro said.
