Workouts is suddenly a buzz word again in the mortgage industry.
Lenders that collect and process monthly mortgage payments, under pressure from investors and loan guarantors as delinquencies rise, are getting much more aggressive in negotiating with borrowers, to avoid foreclosures.
The mortgage companies are not themselves at risk from defaults, because they no longer hold the loans. But foreclosures are the most costly part of servicing, for which they receive fixed fees. A reduction in foreclosures can offset the added cost of aggressive collections.
Alan Gutterman, president of Response Professional Placement, said he has been fielding many more requests for workout experts.
"The last time I saw this much demand for workouts was during the savings-and-loan fiasco in 1988 and 1989, when the economy started going south. That, along with the Wall Street crash, resulted in higher defaults," said Mr. Gutterman, whose company provides workout personnel.
Some recent key developments:
*The Department of Housing and Urban Development now requires FHA servicers to do a workout with all delinquent borrowers, rather than permitting the companies to assign the task to HUD.
*Freddie Mac rolled out a software program in June that helps servicers determine if a delinquent borrower is a candidate for a loan workout.
*Countrywide Home Loans, one of the nation's biggest servicers, has expanded its workout staff to 68 employees, from just 26 a year ago.
*Demand for specialists in workouts has risen sharply this year, according to Cathy Sweeny, president of the SRS Group, Walnut Creek, Calif., a mortgage staffing company.
Both Fannie Mae and Freddie Mac now require servicers to attempt workouts on all delinquencies, but they also permit more latitude in how to handle delinquent borrowers.
"We want to do workouts rather than foreclose," said Phil Comeau, vice president of loss mitigation at Freddie Mac, formally the Federal Home Loan Mortgage Corp. But lenders are hesitant to devote resources to a workout that might not be successful, he said.
The largest mortgage insurer, Mortgage Guaranty Insurance Corp., Milwaukee, has also developed a score to determine a delinquent loan's likelihood of foreclosure or cure.
MGIC's Loss Mitigation Score, which will be available in the fall, is based on about 400,000 MGIC-insured loans that averaged 60 days past due. It compares the loan in question with the loans in the data base, and tells the servicer the likely outcome.
Workouts are becoming more common because delinquency rates are on the rise. Of all loans outstanding in March, 1% were 90 days or more past due or in foreclosure, according to Mortgage Information Corp., San Francisco. That was the highest level in three years, and up from 0.92% a year earlier.
Though performance of Fannie Mae's loans was better than the average, the agency also encourages servicers to do workouts rather than foreclose.
In May 1966, 0.55% of all outstanding Fannie Mae loans were delinquent. That is up from 0.48% in June 1995.
Mike Quinn, senior vice president for credit loss management at Fannie Mae, said the agency - formally the Federal National Mortgage Association - has sent out a series of announcements since 1994 asking servicers to contact borrowers and attempt to work out loans.
"We didn't have that emphasis in the past," Mr. Quinn said. Fannie Mae's new priority is a way to keep down losses on loans originated during the $1 trillion refinance boom in 1993, which are now coming into their prime default period.
Servicers now have three options to work out loans with delinquent Fannie Mae borrowers:
*Option one is to add the missed payments to the borrower's future monthly payments.
*If the borrower cannot afford to make higher payments for a few months, the servicer can opt for a modification. The missed payments are added to the outstanding principal and repaid over the life of the loan.
*A Fannie Mae servicer should have a preforeclosure sale if the borrower is unable to repay the mortgage.
Fannie Mae pays servicers a fee for every loan worked out. A servicer receives $500 for a loan cured through modification and $1,000 for a preforeclosure sale to offset the servicer's cost, Mr. Quinn said.
In response to the increased pressure to work out more loans, some lenders have hired more workout specialists, while others have detailed plans in place ready to launch when the need arises.
"We have a team of people to make a special effort (to work out loans), and continue to expand that," said Tom Boone, Countrywide's managing director of loan administration.
Delinquencies at Countrywide have increased, but the increase is in proportion with portfolio growth, Mr. Boone said. A large percentage of company's servicing portfolio was originated during the 1993 refinance boom. Those loans are reaching their third year, when loans tend to become delinquent.
The chore of seeking out the specialized employees to handle workouts often falls to employment recruiters.
"The focus now is to sit down in each case, rather than when borrowers want to work it out," but not all servicing employees have these skills, said SRS's Ms. Sweeny.
People trained for the job usually move on to other lines of mortgage- related work when the demand for workouts declines, Ms. Sweeny said. Most workout specialists have servicing somewhere in their background, she said, but it requires special skills to work through a loan with a financially troubled borrower.
Paul Colombe, senior vice president for foreclosures at Old Kent Mortgage Co., Grand Rapids, Mich., said his company is proactive with delinquent borrowers, as many bank-owned units tend to be, to nurture the customer relationship.
Although Old Kent's delinquency rate is relatively low, because the majority of its originations are conforming loans in the Midwest, it does more workouts than in the past, he said.
But with the recent purchase of National Pacific Mortgage Corp., Anaheim, Calif., Old Kent will be originating loans in California, which tends to have a higher delinquency rate.
"We're now going through a paradigm shift, because the nature of our clients is changing dramatically," Mr. Colombe said. He has a plan of action ready to go once he needs it, he said.