Freddie Mac's decision to hire specialist firms such as Ocwen Financial Corp. to work out seriously delinquent mortgages is another sign that servicers are being overwhelmed by the volume of defaults.
The government-sponsored enterprise said Tuesday that it will turn over to Ocwen roughly 5,000 low-documentation loans that are at least 60 days delinquent. Freddie said these alternative-A loans represent a fraction of its total single-family loan portfolio but accounted for half of its seriously delinquent mortgages.
"What this says is they have default servicing capacity constraints, and this is one of the ways they're trying to alleviate it," said Kevin Kanouff, a founder of Statebridge Co., a servicing start-up in Denver.
For more than a year, such constraints have received much of the blame for the sluggish pace of modifications. Some borrowers have told members of Congress that they made several attempts to contact their servicer but were unable to get through even after hours of waiting on the phone, and ultimately were pushed into foreclosure without ever having contact with their servicer.
Last year Freddie doubled the compensation to servicers that made loan modifications to $800 per loan. Hence Ocwen stands to collect millions in fees that might otherwise have gone to the companies that have been servicing the alt-A loans. Freddie said the program could be expanded to include more loans and other special servicers.
A spokesman for Freddie Mac would not say whether the loans in the program were being transferred to Ocwen with the consent of the existing servicers. Ocwen did not return calls for this story.
Ingrid Beckles, Freddie's senior vice president of default asset management, said in a press release that workout strategies are "only as successful as the number of knowledgeable counselors available to answer the phone."
Freddie is trying to "help servicers cope with today's unprecedented call volume by directing calls to a specialist with the specific staff and technical resources for handling a high volume of borrowers with these types of mortgages," she said.
Rick Seehausen, the president of LenderLive Network Inc., a Glendale, Colo., provider of mortgage outsourcing services, said effective workout strategies begin with what he called "scalable counseling efforts."
Many servicers are "collection-oriented," he said, and focus on bringing loans current or recovering a property for "the lowest possible costs to the investor."
Ocwen and a few others use loan counselors who are better versed at loan origination, so they can determine what monthly payments a borrower is capable of making, Mr. Seehausen said. Doing so tends to reduce the chances that the borrower will default again, he said.
Ocwen, of West Palm Beach, Fla., has been one of the few servicers to actively offer delinquent borrowers principal reductions. Many servicers have claimed their hands are tied because investors who own the loans have refused to reduce any principal.
Rod Dubitsky, the head of Credit Suisse Group's asset-backed securities research division, wrote last year that Ocwen was responsible for 70% of modifications that reduced principal. He attributed Ocwen's actions to its need "to alleviate servicing advance expenses." These are the principal and interest payments that Ocwen fronts to investors while the borrower is delinquent; the servicer recoups the advance when a loan is modified or foreclosed.
On Wednesday Ocwen said it had recently renewed two credit facilities totaling $500 million that it draws on to make advances.