IMGCAP(1)]
This story appears in the May 2009 issue of Collections & Credit Risk.
The recent rollout of the government's $75 billion housing rescue plan was welcomed by lenders and mortgage servicers alike as a sign that a real cure for the nation's housing ills is finally coming into focus.
Still unclear, however, is how servicers are handling the workload to rewrite millions of mortgages, and whether traditional collection practices will change. Meanwhile, legislation is winding its way through Congress to give judges the power to modify mortgages of those in bankruptcy, known as cramdowns, a big sore point with lenders.
The new rescue plan will help stabilize the housing market, says J. Brian King, senior vice president and practice executive of mortgage lending and retail banking at BenchMark Consulting in Atlanta. But, he adds, "It's still a difficult situation. Borrowers are having trouble and banks are still hurting."
The government's Homeowner Affordability and Stability Plan announced in mid-February aims to help more homeowners refinance their mortgages with low interest rates. The plan also provides incentives to lenders and servicers to restructure mortgages.
Though not available to all borrowers, the plan could help as many as 5 million homeowners, according to the Obama Administration. The huge number of potential refinancings means that mortgage servicers and lenders have their work cut out for them.
Servicers reported heavy phone call volume when the program was announced. "Call centers are overwhelmed," says Scott Stern, CEO at St. Louis-based Lender's One Mortgage Cooperative, a national alliance of mortgage bankers. Consumers want to know if they qualify for the program, and how they can apply.
At the same time, servicers and lenders are scrambling to implement program guidelines and even establish new departments to handle the workload. In some cases, collectors are being shifted into new rolls to support underwriters. Other lenders are hiring new staff.
Lenders and servicers are retooling their collections programs too. Instead of making traditional collections calls, lenders are focusing most of their efforts on devising payment plans for borrowers to keep them in their homes.
The Homeowner Affordability and Stability Plan has been generally well received by financial institutions. Bank of America, Citigroup, and JP Morgan Chase all said in statements that they backed the government's new program. "Servicers are supportive of the new plan," says Paul Leonard, vice president of government affairs and housing policy at the Financial Services Roundtable, a group that represents mortgage lenders and insurers. "But adjusting to the volume (of work) is an issue." Implementing the program is a "significant undertaking" for the industry, he adds.
Despite earlier voluntary mortgage rescue initiatives such as Hope Now and Hope for Homeowners, foreclosures and delinquencies have continued to rise. U.S. foreclosure filings spiked by 81% in 2008, with more than 860,000 families losing their homes to foreclosure last year, according to RealtyTrac. In fact, more than one out of every 54 households received a foreclosure notice last year. Foreclosures rose 30% in February from the year prior and increased 6% from January.
Even mortgages that have been modified pose a high risk of redefault, raising concerns about borrowers who refinance under the government's new program. Last December, the U.S. Controller of the Currency released data that showed nearly 53% of borrowers who had their loans modified had redefaulted after eight months.
Before the new government rescue program was announced, lenders and servicers had been trying to modify loans at their own pace with their own rules, says Kathleen Tillwitz, senior vice president at ratings agency DBRS, New York. "The new program is cut and dried. You fit into the program or you don't."
Tillwitz echoes the concerns of others in the industry, noting that the plan doesn't cover some borrowers. The program applies only to Fannie Mae and Freddie Mac backed loans. Jumbo mortgages are not included. The unpaid principal can amount to no more than $729,750 for a single-family home. And the new mortgage cannot exceed 105% of the value of the home, leaving out many homes in hard hit areas where values have dropped significantly.
One goal of the recovery plan is to get ahead of the problem and rewrite risky adjustable rate mortgages due to reset in 2009-2011. By one estimate, about $60 to $70 billion of option ARM and Alt-A mortgages are due to reset during the second quarter of 2009. "We need to clear the pipeline of risky loans," says Stern at Lender's One Mortgage Cooperative.
An important element of the plan is that it offers an incentive to servicers of $1,000 per loan modification and payments of $1,000 a year for three years if the borrower stays current. A payment of $1,500 is made to mortgage holders and $500 to servicers for modifications of loans that are current, but at risk.
Borrowers also get a principal reduction of $1,000 a year for five years for remaining current on the modified loan. Lenders are required to modify the rate on the loan so it is no more than 38% of the borrower's income. The government will split the cost of lowering interest payments to a 31% debt-to-income ratio to make the loans more affordable.
"It becomes a whole different way of looking at (recoveries)," says Tillwitz at DBRS. More staffers will be cross trained to handle both collections and traditional servicing, she says. The emphasis will be on customer service instead of straight collections.
JP Morgan, one of the largest mortgage servicers, continues to staff up to handle the demand for mortgage loan modifications. The bank hired 300 people in the last two months of 2008, bringing its staff of loan counselors to 2,500, according to a bank spokesperson. (Actual collections are handled by a different department.)
The old days of sending out a letter when a borrower misses a payment are over, says Stern at Lender's One. "Servicing efforts are based on solving problems rather than collections," he says. He reports that servicers are already having trouble keeping up with the volume of calls. And, for the time being, few outbound calls are being made as servicers concentrate on inbound calls from borrowers seeking help from the new program.
Pre-collections activities will become more important in order to keep borrowers out of default. After all, under the new program, the incentives for the servicer grow if the borrower stays current. Collections practices will focus on keeping a default from becoming a foreclosure. As a result, more coordination will be needed across the default management cycle, notes Elizabeth A. Jordan, senior manager in the risk strategy and analytics practice at consulting and accounting firm Deloitte & Touche, Charlotte. "Lenders are already adjusting for this," she says.
In order to manage the volume of work, more servicers will use predictive analytics, Jordan notes. These software programs will help identify borrowers who qualify for the program as well as those most likely to stay current. "The sheer magnitude of the problem is unlike anything I have ever seen," she adds.
Still, despite the flood of calls, most industry observers don't think servicers will outsource a lot of the work to collections agencies. Lenders are more inclined to shift workers from another area, such as loan underwriting. Servicers can't afford to hire a lot of new staffers either, says Tillwitz at DBRS. "This wave (of work) will come and go," she notes."Lean and mean is still the motto at every firm."
Some accounts are being outsourced to third party collectors. Nationwide Credit handles collections on second mortgages. Its volume is picking up though it's too soon to tell exactly how the changes from the new government program will impact its collection approaches, says Sam Grey, vice president of operations at Nationwide Credit. The company doubled its staff in India over the last two months to handle more mortgage work there.
Redefaults remain a concern. The whole model of loss mitigation will change, Jordan predicts. "Servicers will need a remediation unit," she says. Servicers will have to stay close to their customers and to know what is going on, such as whether the borrower has lost a job, or taken a pay cut.
Meanwhile, lenders are closely watching proposed legislation on so-called cramdowns that would allow a bankruptcy judge to reduce the principal amount of the loan and the interest rate. If the bill passes, Tillwitz at DBRS expects an increase in personal bankruptcies. And in an effort to prevent borrowers from declaring bankruptcy, she says, "Servicers will be more aggressive in using principal forgiveness modifications, if the servicer is notified prior to a bankruptcy filing."
###
