Since mortgage modifications got underway about two years ago, servicers have undertaken the extraordinary and unprecedented task of reaching out to each of their delinquent borrowers and loan owners, hoping to help find a mutually workable plan that would keep people in their homes.
It has been, at best, a mixed performance, as employment conditions, home valuations and debt loads keep changing during the process.
Despite our best efforts, the redefault rate on modified loans has been high and will probably remain so.
There are two main reasons: the many homeowners with negative equity and the peristently weak job market.
Loan modification is one tool in the servicer's toolbox, but it is not the answer for every situation.
Quite often, after all the effort expended, even the borrower will decide it is not in his or her best interest to remain in the house and will look for a "graceful exit."
In many cases, departure is preferable to accepting an unrealistic modification doomed to collapse into a redefault, and eventual foreclosure.
It makes no sense to perpetuate a questionable situation by keeping borrowers in homes they cannot afford.
As an industry and society we all need to have an honest discussion about whether some households have unsustainable debt and how best to address this reality in a respectful way. There is no need to be adversarial about it. We want to help borrowers, but their life situations may have changed since their loans were originated.
We believe that short sales and deeds-in-lieu of foreclosure, included in the new Home Affordable Foreclosure Alternatives Program, are the best ways to go in such a scenario. There's a difference between keeping the borrower in the home and preventing foreclosure.
But you cannot just let the homeowner abandon the property, which produces all kinds of REO challenges.
You need to give the borrower incentive to keep up the property. Let them depart under mutually agreeable terms, with a better credit record than in a foreclosure.
Short sales and deeds-in-lieu also move the process along faster. The property goes on the market sooner and usually in better condition. This means better prices. It's a win-win.
We work with several private mortgage investors who are buying subperforming and nonperforming loans. They are offering flexible foreclosure alternatives to borrowers that are often more generous than the rate breaks under the Home Affordable Modification Program.
These investors often do not want to do modifications under Hamp, whose processes are often a challenge to navigate. Instead, they offer deals that may be as good, if not more attractive to the borrower, as an interest rate modification, for example, a principal reduction.
These investors would rather offer a deal with a better degree of flexibility. The investors we work with want to work quickly.
Small, specialized servicers can focus on this challenge better than large servicers, which are like big ships unable to turn quickly.
Our single point of contact means the borrower is always talking to the person assigned to their file. This gives borrowers a comfort level that big servicers cannot offer. We can usually offer a resolution in 24 to 48 hours.
This is crucial in today's environment because servicing must be done cooperatively.
From the servicer's perspective, the borrower who wants to communicate is worth a lot.
If the borrower is actively engaged in dialogue with the servicer, that conversation can be turned into something productive rather than a straight move to foreclosure. Nobody wants a foreclosure, mostly because in today's climate, foreclosure timelines have been stretched to unreasonable lengths, sometimes two or three years. But there also must be a happy medium between borrower and lender.
You must give the borrower an incentive to keep paying, but this may not always be fair to the bank or investor.
It may also create a moral hazard for borrowers who are current on their loans but may now be inclined not to pay because others got a break.
As a specialty servicer we recognize this delicate balance and can propose options for navigating the intricate process that involves mortgage investors, financial providers and borrowers.
The best way to avoid bad endings and remove bottlenecks is to have proper and prompt decision-making.
Specialty servicers have the advantage because they can more clearly determine the best asset resolution choices and have the authority to say "yes" or "no."
In the end, all parties to the mortgage transaction realize that we are in this problem together, searching for the best solutions.