From Servicing Management
By Mitchell Oringer
Vice President Default Administration
GMAC Mortgage
As they become more flexible with product offerings and asset grades in order to generate business, today’s mortgage lenders are originating subprime loans on an increasingly frequent basis. Along with the inherent financial opportunity these loans represent to lenders, they also pose numerous risks -- most significantly, a higher likelihood for default. According to industry statistics, subprime lenders currently generate about one in five residential mortgage loans, yet foreclosure rates on subprime loans are ten times the average for all others. As a result, investors, regulatory agencies and GSEs (government-sponsored enterprises) have stepped in, mandating that mortgage servicers offer loss mitigation programs to help borrowers avoid foreclosure.
The U.S. Department of Housing and Urban Development (HUD), for one, is imposing greater penalties on residential mortgage servicers that fail to offer loss mitigation options for federally insured mortgages -- sometimes up to three times the claim amount of the mortgage. The U.S. Department of Veterans Affairs (VA) is also proposing to re-vamp its servicing requirements, delegating more responsibilities for loss mitigation to private servicers.
Servicers can choose to offer loss mitigation for the sake of compliance, or can redefine their loss mitigation programs to create a win-win situation for borrowers, investors and themselves, while simultaneously complying with all regulatory directives.
Building a Successful Loss Mitigation Program
The ultimate goal for any loss mitigation department is to mitigate, or minimize, the losses incurred to the borrower, investor and servicer when a borrower is no longer willing or able to maintain their mortgage payments. Losses are almost always avoided or mitigated when a loan goes from non-paying to cash flowing. Loss mitigation options are needed for the entire spectrum of asset grades -- from A, to Alt-A and subprime loans; however, as stated above, the need for loss mitigation, as well as its challenges, are greater for subprime loans.
Communication is Key
In the beginning of the delinquency process, the most fundamental aspect for subprime borrowers is closely-monitored communication. Since subprime borrowers can be hard to contact, servicers must make more frequent telephone calls -- day and night, at home, to work or even via mobile phone -- often employing skip tracing to obtain borrower phone numbers. As a reminder to continue making regular payments, servicers should begin calling subprime borrowers early in the payment cycle. The results of these calls will vary, but the key is to stay in touch with the borrower. Once a loan reaches the loss mitigation stage, if the borrower expresses an interest in keeping their property and an ability to make payments, there are increased chances that the loss mitigation path will be successful.
When a borrower does agree to a loss mitigation plan, servicers should place a renewed emphasis on re-performance, or tracking the performance of a given loss mitigation solution over time. By following up with subprime borrowers, a servicer can learn what does or does not work in the current economic environment, and strive to do better at matching borrowers with the loss mitigation option offering them the best chance for success. Frequent reminder calls ensure that borrowers adhere to their given payment arrangements.
Working with Subprime Borrowers: Loss Mitigation Options
The keys to a subprime borrower succeeding on a loss mitigation plan are analyzing the financials appropriately, establishing an arrangement that will create cash flow, creating a pattern of acceptable payment habits and resolving the underlying problem without repeated defaults. Servicers must resist the urge to try and collect all delinquent payments up front, or leave the borrower with too little cushion for living expenses; this will ultimately stretch the borrower too thin and lead to problems.
There are a number of loss mitigation options available to help keep subprime borrowers in their homes, generate cash flow and eventually bring their loans current. These include modifications, repayment plans, repayment plans that convert to modifications and special forbearance plans.
A loan modification is considered when a borrower experienced a hardship which is now over, and he or she has the ability to pay a monthly mortgage payment, but not the delinquency. Although many modification variations are available, there are four common ways mortgage terms are changed:
Another effective subprime loss mitigation option is a repayment plan. This is the same type of repayment plan used by servicers’ collection departments in their attempts to bring loans current. Used when a borrower can send multiple increased payment installments to bring his or her loan current, the repayment option only works if the borrower is able to make monthly payments in excess of their regular monthly payments. A repay can be done in loss mitigation only if one was not previously attempted by the collection department and the investor does not allow a loan modification.
A third subprime loss mitigation option is a combination modification-repayment. With modification-repayment, a loan modification is combined with a repayment plan. This plan reduces the monthly payment for four to six months to gauge the borrowers’ ability to make the required payments. Once borrowers have demonstrated their ability to pay during this timeframe, the loan is modified to reflect the new payment amount as the scheduled payment amount. The end result is a more timely and efficient resolution of the subprime borrower’s delinquency.
A final loss mitigation option for subprime borrowers is a special forbearance. A special forbearance plan allows a borrower to suspend mortgage payments or pay a reduced or negotiated payment for a specified amount of time. Servicers typically recommend this type of loss mitigation solution when borrowers are experiencing a temporary hardship, thus allowing them time to get back on their feet, or sell their property. At the conclusion of the forbearance, another loss mitigation option is completed to resolve or dispose of the delinquency. It’s important to note that forbearance can be used in conjunction with a loan modification to illustrate a borrower’s ability to afford modified payments.
If none of the four loss mitigation options is successful, servicers typically counsel subprime borrowers to sell their home at fair market value as determined by a realtor. If a subprime borrower cannot obtain fair market value for their home, servicers may advise them to obtain a short sale. Short sales occur when borrowers cannot afford their property, have it listed for sale and have received an offer to purchase their house for less than the principal balance.
Creative Solutions: Re-defining Loss Mitigation Programs
A recent panel discussion at the MBA National Mortgage Servicing Conference focused on how the servicing of subprime loans has become increasingly customer-centric. Panel discussions stressed the importance of servicing associates having the training, tools and technologies to ensure a “high-touch, high-contact” business, including 24/7 customer service websites and extended calling hours.
Another customer-centric offering for subprime borrowers is credit counseling. According to the MBA panel discussion, credit counseling can provide servicing firms with an updated, more complete borrower profile. This, in turn, can be applied toward achieving a mutually acceptable delinquency resolution. GMAC Mortgage, for example, has worked with a number of credit counseling agencies on behalf of investors to provide their subprime borrowers counseling services. GMAC Mortgage has piloted one of these unique programs for the past six months; it mandates that borrowers cannot get a loan modification unless they participate in credit counseling. Upon completion of credit counseling, the counseling agency notifies GMAC Mortgage that the borrowers have met this requirement, and servicers can then pursue a loan modification. Over the last twelve months, GMACM has successfully worked with over 6,000 borrowers to keep them in their homes.
Conclusion
From protecting subprime borrowers, to ensuring investor interests are upheld, loss mitigation programs work to find amenable solutions for everyone. They help subprime borrowers potentially reinstate their delinquency and remain in their home; avoid complicated foreclosures which could result in tax implications or possible legal action; avoid filing for bankruptcy; and maintain their credit rating. On the opposite end of the spectrum, an investor is able to reduce or eliminate marketing time and costs, reduce foreclose fees and possibly obtain a performing loan. As most servicers know, a satisfied borrower is a loyal borrower. By becoming more communicative and flexible in their approach to loss mitigation programs, servicers are doing themselves and their borrowers a great service: preventing complicated property foreclosures, while at the same time, helping subprime borrowers achieve what is quite possibly their first experience of financial success.