Subprime Loan Servicers Step Up Loss Mitigation Efforts To Avoid Foreclosures.

[Moe Bedard]

Are they joking? This article came out in March and it quoted several lenders saying they were stepping up loss mitigation efforts. Here we are 5 months later and with foreclosures up 93%, are they failing at this "so called" EFFORT at assisting homeowners who are late on their mortgage.

I say they get a Fat "F"!

I am going to pull out several quotes from this Standard & Poor article, so they are on record here at LoanSafe.org.

In an effort to see how market participants are handling the rise in servicing challenges, Standard & Poor's Ratings Services recently talked with some prominent subprime and special mortgage loan servicers to gain insight into steps they're taking to address these mounting issues. We focused on the techniques they are employing to deal with the spike in delinquencies and other troubling market trends, especially first-payment and other early payment defaults on loans originated in 2006, and how they're preparing for the adjustable-rate mortgages (ARMs) that will see rate and payment changes in the months ahead.

We all know that what they say and what they do are two different things.

By and large, the responses we received are encouraging. Sound, proactive management, along with ingenuity, planning, and investment in staff and technology have put most servicers in a solid position to help borrowers work through the substantial difficulties they may be facing. All of the servicers we contacted said curtailing defaults and engaging in early-stage loss mitigation are paramount for minimizing investor losses and keeping borrowers in their homes. Many also noted the need to closely monitor all accounts for signs that a default could be imminent, even in cases where borrowers have never been delinquent. To meet this need, most firms have beefed up their calling and letter campaigns, and many have added staff to address the increased need.

Of course this report is encouraging but the reality of what really is happening is discouraging. There are loan modifications taking place but not nearly as sweet as they make this report sound.

Given the number of loans with interest rates that are scheduled to reset this year, many servicers have made early and proactive borrower contact a priority. Even in cases where borrowers have never been delinquent, servicers are starting their calling and writing campaigns as early as six months before an interest rate adjustment occurs.

We all know that they aren't calling for loan modifications! They are calling for refinances and if you don't qualify then you're out of luck. At least that is what my clients and people are telling me every day.

Making Contact Before "Payment Shock" Hits


Payment shock, the reaction some borrowers have when their monthly payments increase after their ARM interest rates are reset, is an issue that several large servicing firms are keenly aware of and are taking aggressive steps to curb. For example, Shane Ross, senior vice president in account management at Litton Loan Servicing, says his company has started a campaign to call and write all ARM borrowers six months before the rate is recalculated. He says this aggressive step helps the company ascertain whether upcoming interest rate changes have the potential to cause enough payment shock to result in a default or foreclosure.

Mr. Ross noted that once the company has a better sense of whether an upcoming rate change will be more than a borrower can handle, Litton will work with mortgagors who are committed to keeping their homes to find manageable payment options. These payment options are obtained primarily through loan modifications. Litton also partners with local consumer advocacy groups, foreclosure attorneys, and brokers to make contact with borrowers and offer loss mitigation packages.

"If a borrower is willing to remain in the property, we will work to restructure their loan so the payment is affordable," Mr. Ross added. "If a borrower does not have a desire to remain in the property, we provide advice on home selling as a means to prevent default. Mr. Ross said the other goal is to prevent further damage to the borrower's credit rating.
Mr. Ross added that in addition to monitoring ARM accounts for upcoming rate resets, Litton trains its customer service staff to listen for triggers that might suggest a need for loss mitigation when calling borrowers.

Agreeing with other active subprime and special servicers in the residential market, Mr. Ross says early and frequent contact is essential.
"We establish our calling schedules according to risk and take a number of factors into consideration, including loan-to-value ratios, occupancy status, previous borrower contact, and borrower characteristics," he said. "Additionally, we contract with external companies that assist with our contact efforts, and those firms help by conducting property inspections and by leaving messages with borrowers urging them to contact us so we can offer consultation and other assistance."

Litton is the only companies I know that is actively helping people and going beyond what other lenders and servicers are doing to help troubled borrowers. They have been subcontracting loss mitigation efforts and loan modifications to A2Z Field Services. I know this for a fact, so I belive they are one of the few lenders or servicers that are "really" trying to assist people who are need to stop foreclosure.

Tough Times Call For Tough Measures


In today's subprime loan environment, few can ignore the scenario facing the U.S. mortgage industry. When companies take all of the factors affecting today's market into consideration, most are quickly realizing that desperate times call for increased loss mitigation efforts and enhanced borrower contact campaigns.

Litigation, foreclosure proceedings, REO sales, and disposition are expensive for mortgage servicers and cause losses for investors. And these times are, of course, equally tough for many homeowners. Many took out loans that they shouldn't have, while others may not have comprehended the reality of an increased mortgage payment after an ARM reset. Regardless of the circumstance, most of these borrowers need assistance to help get the situation under control and to get out from under an unmanageable debt burden.

I haven't seen tough measures being implemented as of yet. When they were busy orginating these toxic ARM's they were spending millions monthly on advertising and staffing these loan centers to keep up with the demand. Now, they need to take that same money and place it in their loss mitigation departments to keep up with the demand there. Don't they realize that it will only help them in the long run and in turn help homeowners and the economy?

Competent mortgage servicers should focus their most seasoned default management personnel on loss mitigation negotiations, and that staff should receive continuous training. Senior management should closely monitor recidivism rates and forbearance break rates to ensure that the decisions being made by staff are sound and provide long-term solutions.

Competent mortgage servicers? I agree that they should focus on hiring quality people but that is far from what is happening. Sure there are great people that I have worked with but I would say the vast majority are of poor quality and have absolutely no desire to help.

So I give this Standard and Poor Report a big fat "F" because it's mostly just fluff and not reality. The loss mitigation departments are in a state of chaos and I see no end in sight unless congress steps in or they seriously start pumping money into these departments. They need to start subcontracting loan modification work out to other independent contractors to work with non-profits and homeowners to help stop foreclosures.

What do you think?