To stem the tide of foreclosures, Fannie Mae has begun paying incentive fees to foreclosure lawyers who qualify delinquent borrowers for repayment plans or loan modifications.
Michael A. Quinn, a senior vice president and the single-family risk officer at the government-sponsored enterprise, said in an interview this week that the program, which began informally this summer, is designed to address a long-standing industry problem: Foreclosure lawyers usually receive high fees and high “scorecard” ratings for every loan in foreclosure, but they typically earn nothing if a loan gets cured.
“A foreclosure attorney makes the most money if a loan goes into foreclosure, so we’re trying to design something where they’re paid more if they do a workout,” Mr. Quinn said.
Gerald Alt, the president and chief operating officer of Logs Group LLC, a Northbrook, Ill., network of law firms and title agencies, said that foreclosure lawyers usually are judged and compensated solely according to how fast they can foreclose, and that they rarely receive incentives to work out loans.
Though lenders and servicers often talk about the need to help borrowers stay in their homes, Mr. Alt said, there “has been no coordination of the pre- and post-foreclosure effort.”
First American Corp. of Santa Ana, Calif., said in September that its national default title service is developing a different lawyer scorecard based on loan workouts.
Fannie’s servicing guide requires that the foreclosure process for most loans begin within 105 days, or roughly three months, after the first delinquent payment. By contrast, Freddie Mac refers loans to foreclosure lawyers after 150 days, or after five mortgage payments have been missed.
A lawyer who represents servicers, who spoke on the condition of anonymity, said that Fannie has discussed extending its time line to match Freddie’s. Mr Quinn would not say whether that was true. However, Fannie’s servicing guide does permit “postponements to facilitate loss mitigation,” and Mr. Quinn said that servicers “can take as much time as they want” to encourage loan workouts, and that they “are not held to a specific foreclosure process time frame.” He would not say how long that has been the case.
David Dill, the president of Saxon Mortgage Services Inc., a Fort Worth unit of Morgan Stanley, said that foreclosure time lines do not reflect the actual time it takes to foreclose on a property in many places, because the courts are so backlogged.
Falling housing prices have left many homeowners with no equity to refinance into a lower-rate mortgage, and fewer products are available for them, he said. “The typical outlets for financing are gone or changed. Now if a loan is 90 days delinquent, the borrower probably is not going to be able to come back from that.”
Saxon typically begins the process of referring a borrower to a foreclosure lawyer after a loan is 75 to 110 days delinquent, though the time line varies by product, Mr. Dill said. Conforming loans get the longest lead time, 150 days, he said.
“The whole objective is to mitigate before foreclosure, and because of the volumes we’re seeing, you can’t really take a blanket approach,” Mr. Dill said. “It’s not uncommon for us to have a foreclosure attorney on the courthouse steps, and we call on the cell phone and have them stop the foreclosure process” because the borrower agreed to new terms.
Mr. Alt said that by offering incentive fees to lawyers, Fannie may be trying to head off an expected rash of foreclosures in the first half of next year, when the majority of adjustable-rate mortgages will reset.
The peak delinquency rate typically occurs within 18 to 24 months after a loan is written, and Mr. Dill agreed that the majority of ARMs are likely to reset in the first half.
Fannie has not released any foreclosed property data for this year, though such data is expected to be made available today, when the GSE files its first three quarterly financial statements for the year with the Securities and Exchange Commission.
Last year the number of single-family mortgages in foreclosure that Fannie guaranteed or owned rose 12%, after falling 1% in 2005, according to its 2006 annual report.
Brad German, a spokesman for Freddie, said that this year it rolled out an “early intervention program” with large servicers in which it agreed to pay a credit counseling agency in Atlanta and one in San Francisco to contact borrowers after 45 days of delinquency. The program has helped 5,700 borrowers avoid foreclosure, Mr. German said.
