The pain and necessary changes in the mortgage industry that stemmed from the housing crisis have forced many lenders and servicers to utilize operating strategies that are reactive in nature and fail to capture the longer-term intrinsic value of today's troubled borrowers. Many mortgage companies have been so busy addressing the immediate fires they face with delinquent borrowers that they are forgetting that this is a relationship business. As the economy recovers, lenders that take a holistic and long-term view by fostering relationships with these borrowers will be rewarded. The key to building those relationships is nothing new, but rather something more old-fashioned.
At the most fundamental level, servicers need to speak more with distressed borrowers. Driven by cost concerns, most servicers are trying to minimize the time their customer contact representatives speak with borrowers so that they can support more accounts per representative. This is one symptom of an industry scrambling for quick fixes and struggling with the challenges of new compliance demands and increasing cost structures. This solution is penny wise and pound foolish. This lack of productive communication with the borrower is driving continued re-defaults because the core problems are never identified or addressed. More verbal communication helps to both establish the source of the problem and, just as importantly, to build the trust and credibility that leads to engagement. Once the problem is clearly identified and the borrower is engaged, the likelihood of successfully rehabilitating the borrower multiplies.
Account managers should be encouraged to have longer calls because the value of a reperforming borrower (to both the borrower and asset holder) outweighs any efficiency gains of shorter handle times. For example, our Personal Budget Analysis consists of over 100 questions and can take more than 40 minutes to complete on the phone with a borrower. Servicing representatives should be encouraged to spend that time with the borrower to learn every potentially useful piece of information that could affect affordability while at the same time demonstrating to the borrower that their servicer is trying to understand the heart of the problem to achieve a mutually beneficial resolution.
When borrowers recognize their servicer is listening and attempting to understand the true cause of the problem, an amazing thing happens: they become engaged in the process. They realize that someone is finally trying to help them do more than apply a Band-Aid, and they see that someone actually wants to provide the cure - be it home retention or not. By taking a deeper dive into the borrower's situation, the servicer is able to develop a more informed and lasting loan resolution plan. Great information, superior planning and strong engagement all naturally lead to improved performance.
Taking a holistic approach may also lead to deploying new strategies. FHA's short refinance program is an example of a powerful loss mitigation tool that benefits both borrowers and lenders, but again, may require servicers to step outside of their standard operational approach as well as their standard compensation structure. Although it has not received much media attention, HUD recently announced that the short refinance program expiration was extended from 2014 to the end of 2016.
The coordinated effort required by the servicer with the originator is significant, which is likely the main reason this program has been slow to take off. However, in many cases the borrower's income has stabilized, and receiving principal forgiveness can make all the difference. Servicers with the right skillset, incentive structure and integration strategy with lenders can convert seriously delinquent borrowers into performing loans fairly quickly.
Helping the borrower evaluate spending decisions more carefully is another useful servicing approach that can pay dividends. Maybe the borrower can downsize the car, the cable plan, the phone plan, vacation costs or all of the above. Recognizing the effect items like these could have on monthly net disposable income is a valuable step borrowers can take to manage their loan affordability. By improving the financial health of the borrower, servicers help lenders increase customer loyalty and position themselves well to provide other products to the borrower in the future.
Before the housing crisis, most servicers were primarily focused on either processing payments or liquidating properties. In today's market, servicers willing to invest more time and energy in a well-rounded borrower relationship are driving value for lenders in the form of lower near-term severities and higher yielding long-term customers. The servicing industry has historically not been known for innovation, but the more that we can evolve into trusted advisers for our borrowers, the better off the borrower, lender and servicer will be.
Andy Laing is the chief operating officer of Fay Servicing.