Default rates are high in the subprime mortgage arena, but contrary to what many expected as the market took off, that has not prompted a resort to hardball collection tactics.
Subprime borrowers, who have experienced credit trouble, tend to be unresponsive to threats, so respectful negotiations produce much better results, said speakers at a subprime mortgage forum here organized by New York-based World Research Group.
Larry Litton Jr., a senior vice president at Litton Loan Servicing, advocates a "sales rather than collection mentality" once a loan is 90 days past due.
"We're not in a moral position to prevent default; we're out to make money," said Mr. Litton, whose firm works for investors and lenders who hold the residual risk of securitized loans. "You don't sell a guy by yelling," he said.
John B. Plum Jr., director of business development at Ocwen Financial Corp., said the nonperforming loan specialist, which also lends and services subprime mortgages, encourages people in its loss-mitigation area "to act as credit counselors, rather than hard-core collectors" - and achieves far better results than the industry as a whole.
One key to success, these speakers said, is the use of computer modeling to establish the net present value of the loan assuming foreclosure, and select the best alternative that can be worked out with the borrower.
Among the alternatives: a deed in lieu of foreclosure, in which the borrower gives up the property in exchange for a reduction in debt; a short sale, in which a sale of the property to a third party is arranged; a modification, or change of terms, that allows the borrower to get back onto a payment schedule; and forbearance, or forgiveness of a portion of the debt.
Mr. Plum said Ocwen's system, which it plans to market to other lenders and investors later this year, lets its loan resolution counselors instantly access loan documents. It also enables the firm to have documents ready for foreclosure within a day after a loan goes into default, speeding the foreclosure process if alternatives fail.
Shunning hardball tactics does not mean negotiating from weakness.
"Slow payers have low respect for servicers," but that changes when the servicer is able to respond quickly with accurate information about the loan, Mr. Plum said. It reminds them "Big Brother is watching."
He also said that Ocwen engages in a game of good cop/bad cop with the borrower. While the counselor is working with the borrower on a mutually beneficial solution, the borrower is made aware that Ocwen's lawyers are getting ready to foreclose.
Mr. Litton noted that the kinder, gentler strategy of negotiating with delinquent borrowers requires establishing contact with the borrowers, who are often unreachable by phone.
One tactic that has been effective, he said, has been to send out educational videos once loans reach 90 days past due, to convey the lender's willingness to work with borrowers.
Another tactic is what Mr. Litton called the "page two letter." Borrowers receive what appears to be the second page of a letter. "We make it look like there is something really interesting on page one," Mr. Litton said. About 20% of those who receive page two letters call in.