Aggressive borrower outreach was on the minds of the participants in the editorial roundtable at the SourceMedia Best Practices in Loss Mitigation Conference in Dallas that I chaired.
Participants discussed a wide range of loss mitigation efforts, including the government’s loan modification and short sales programs, as well as private industry loan mod efforts that in some cases are larger than the federal Home Affordable Mortgage Program effort.
But they were not sanguine the crisis will end anytime soon.
One participant said that the current servicing environment is like a hospital emergency room triage effort, trying to decide which patients to admit by severity of their problems.
The group included Fred Melgaard, executive vice president, DRI Management Systems; Jill Fuller, assistant vice president, loss mitigation retention, Sun Trust Mortgage; Scott Slifer, senior vice president of business development and marketing at Altisource; Mike Wileman, president and CEO of Orion Financial Group; and Wade Comeaux, president of Fay Financial and Fay Servicing.
Representing Mortgage Servicing News were myself and servicing and REO reporters Amilda Dymi and Jennifer Harmon.
MSN: Despite everything that’s happened, statistics show approximately 7 million homeowners are in danger of defaulting. How long do you think it’s going to take for this glut to be worked through? How long is it going to take to foreclose them?
Melgaard: About two years ago with the servicing show in Tampa, there was a panel and everyone was predicting one year to 18 months and I was the last person and I said, “Who was here during the savings and loans crisis? Who was here?” Everybody’s hand went up. How long did that take? Five, seven years? That was just savings and loans. This is everything, this is 10 years, and we’re what, three years into it now? We’re going to get so conservative until we retire and the next wave starts, the next optimism. I just see it’s going to be really hard to get a new home if you’re not FHA/VA. I see everything kind of squeezed down, new standards, higher standards which eventually the market will drive those back up and we’ll see the next payment option arm that will put us right back where we are today. Unfortunately, we had the perfect storm and we had a number of things come across us and housing was the leader in that and this is a long-term thing.
Slifer: The numbers are pretty staggering. I believe, noncurrent and of that like one point some odd million are actually are in some portion of the foreclosure process. Then you start to talk about the HAMP modifications that probably will redefault at some rate. I mean the numbers there are staggering. The 2008-09 vintage was 70% to 80%. The 2010 vintage is in the 60% range.
Wileman: Risk capital.
Slifer: That is a piece that hasn’t had as much focus yet and I think there’s a lot of political pressure with some of the state and local foreclosure moratoriums and everything is just getting backed up to where there will be…a day of reckoning where you’re going to have to address this from a process standpoint, from a capital standpoint and from an overall political standpoint.
Fuller: We’ve been charged with foreclosure avoidance.
Slifer: Absolutely, that’s exactly right. I think the numbers are staggering.
MSN: This all assumes that we’re on the road to recovery. What happens if we have a double dip in the recession?
Slifer: Which is very possible because of jobs.
Wileman: We’re still pushing. It’s almost like a snowplow pushing the last wave and we know another is coming. And we artificially cut supply, we have foreclosure moratoriums, we’ve got mandated number of contacts, we’ve had all these things to keep the supply from coming on the market to stabilize it. Yet we still have more coming and there’s a pile of snow we’re pushing. I hate to be Mr. Gloom, but I don’t see looking at supply and demand, unless risk capital saves us.
Slifer: I saw another study where just the “shadow inventory” alone, which again is loans that are not even being looked at this stage of the game as far as REO or any kind of disposition, there was roughly about a 33- or 39-month inventory of just shadow inventory that would need to be digested by a normalized market, assuming a normalized market. You take whatever timeframe we’re looking at now and you could basically add another three years to it just to get back to a normalized market.
Melgaard: I see some almost draconian rays of sunshine. Certainly a couple bigs who said they’re going to do deficiency judgments. What’s that going to do if you’re strategically defaulting? There may be a little ray of sunshine in returning to business as usual, which is, get busy, foreclose, list the property kind of mentality, now that we’ve saved what we could save, and I see us marching down that hierarchy of a triage process and potentially getting back to a business-as-usual process, it may be somewhat ugly, but it gets us back on a road where we can manage these volumes.
Fuller: Another issue to think about when you’re talking about REO being the wave of the future, what happens when lending dries up and people can’t get loans to purchase the REO properties? That’s another big picture of things that lenders and the government probably need to think about when they’re talking about tightening guidelines.
Wileman: And they’re booming right now. FHA and VA are pumping out loans.
Fuller: If people don’t have cash to buy houses these days, how are you going to move the REOs through once they’re there?
Slifer: And even more simply, credit scores.
Fuller: Absolutely.
Wileman: There you go, because now you’re getting the guy who becomes employed and he’s had how many months of not being able to pay bills, and now he doesn’t have a credit score.
Slifer: If you believe at least that 25% of the defaults are strategic defaults and you add another 10%, 15% on top of that for other reasons, people are…purposely taking credit hits, but yet have the capacity to still own a home and make a payment. So to Jill’s point, how do you absorb the inventory that’s out there if the standard credit score paradigms exist from a qualification standpoint? When in essence, almost a third of your potential eligible market has taken a hit in some way shape.
MSN: And we’re reporting that Fannie and Freddie…it’s only 11% of the loans that they bought last year were under 700 FICO.
Fuller: Not a lot of appetite.
MSN: It’s the FHA, but that explains what FHA is doing because that’s where that business is fallen now.
Malgaard: We will be more conservative for a decade or two. It’s going to be hard to get those loans.
Comeaux: The overall supply and demand situation is definitely perplexing because we’re going to continue to see Fannie, Freddie and FHA tighten their guidelines. You have already addressed deteriorating FICO scores and one must wonder from where all of the buyers are going to come. There are several studies showing most people are reluctant to buy for a variety of reasons. They don’t know if the home prices are going to continue to drop. They’re also concerned about their future employment. With the large amount of homes that are going to become available, you must have a proper number of buyers to take that supply off the market.
MSN: Also consider that we’re at record low interest rates. What happens if rates go up 100 or 200 basis points and fewer people will be able to qualify?
Comeaux: There is almost no demand now and rates are in the high threes and low fours. It is really an incredible situation that there is not more demand for homes.
MSN: Is it a good time for servicers or REO managers to deal with improving their processing capacity and quality to kind of be at a better place from their processing abilities perspective?
Fuller: Now is the time to start focusing on debt and credit counseling and budgeting. I think that we all kind of lived high on the hog. I say we, the proverbial we—consumers lived high on the hog for several years. And now when times get tight, we find that a lot of times people don’t want to give things up, they don’t want to get up their luxuries and their lifestyle. We talk about private school and whatnot. When we have more and more consumers coming to us and they’re not qualifying for the HAMP programs and we’re not showing affordability because when we look at the regular mod terms and we look at all their everyday living expenses, I think this is the time to really focus on getting back to the basics, if you will, for simple survival.
Comeaux: “Somehow we must get the borrowers to engage in honest conversations and gain their trust quickly because much of the information presented to them by servicers has not been completely accurate.
