Subprime Servicers Prepared for Resets

Standard & Poor’s recently talked with some prominent subprime and special mortgage loan servicers to gain insight into what they are doing to deal with the spike in delinquencies, and early payment defaults on loans originated in 2006 and how they are preparing for upcoming resets in adjustable-rate mortgages.

“By and large, the responses we received are encouraging,” said S&P analyst Robert Mackey in the report Subprime Loan Servicers Step Up Loss Mitigation Efforts to Avoid Foreclosures. “Sound, proactive management, along with ingenuity, planning, and investment in staff and technology have put most servicers in a solid position to help borrowers work through the substantial difficulties they may be facing.”

“Many [borrowers] took out loans that they shouldn’t have, while others may not have comprehended the reality of an increased mortgage payment after an ARM reset,” S&P said in a report. “When companies take all of the factors affecting today’s market into consideration, most are quickly realizing that desperate times call for increased loss mitigation efforts and enhanced borrower contact campaigns.”

All of the servicers S&P contacted, which included GMAC ResCap, Saxon Mortgage Services Inc. and Option One Mortgage, said “curtailing defaults and engaging in early-stage loss mitigation are paramount for minimizing investor losses and keeping borrowers in their homes,” according to the report. “Many also noted the need to closely monitor all accounts for signs that a default could be imminent, even in cases where borrowers have never been delinquent.”

As a result, most of the firms have added staff to monitor accounts and beefed up their calling and letter campaigns, S&P said. Servicers have also placed a renewed emphasis on associate training, with many giving collection and customer service personnel extra training to help spot problems in conversations with borrowers.

Response Analytics Inc. today announced the launch of the a new service focused on solving “the current delinquency and default crisis” by helping lenders identify and proactively create packages to help reduce delinquency. The tool creates a predictive model for delinquencies that derives a Delinquency Likelihood Index for each loan in a portfolio and an optimal revised offer for each at-risk borrower.

According to Response, about 4 percent of all subprime loans are in foreclosure and 12.5 percent are delinquent, and 19 percent of all subprime loans originated in the last two years will end in foreclosure.

“We’ve created a very open solution enabling the lender to use either their own prediction model, the Response Analytics model, or both,” stated Frank Bria, a Response vice president, in the announcement. “The results are specific recommendations to mitigate potential lender losses, and convert potential problem borrowers into long-term customers.”

GMAC ResCap’s early loss mitigation practices oftentimes involve local outreach efforts, such as sending staff to cities that have high foreclosure rates, according to S&P’s report. Early borrower contact frequently requires verifying borrower information, authorizing “skip-tracing even while a new loan is being boarded to its system,” and, based on risk, calling borrowers as early as the second day of default.

Additionally, GMAC uses the HOPE partnership it established with the City of Chicago, Neighborhood Housing Services of Chicago, the Federal Reserve Bank of Chicago, and other parties to prevent foreclosures through local “on the ground” loss mitigation personnel. The HOPE group, which has expanded to additional primary markets nationwide, also participates in local workshops and financial literacy campaigns for consumers.

Servicers are also contacting ARM borrowers as early as six months prior to the scheduled rate adjustment to avoid payment shock and gain insight into whether a borrower will be able to afford the loan after the reset, enabling servicers to find short-term solutions or help borrowers sell their homes prior to defaulting, the report said.

Servicers have additionally developed ways to categorize the risk profiles of its borrowers, based on borrower characteristics and loan types, to help loan administrators make early contact with borrowers with specific risks.

Litton Loan Servicing says it offers manageable payment options, primarily through loan modifications, for ARM borrowers committed to keeping their home. The company also partners with local consumer advocacy groups, foreclosure attorneys, and brokers to make contact with borrowers and offer loss mitigation packages.

“If a borrower is willing to remain in the property, we will work to restructure their loan so the payment is affordable,” a Litton account management executive reportedly told S&P. “If a borrower does not have a desire to remain in the property, we provide advice on home selling as a means to prevent default.”

“We establish our calling schedules according to risk and take a number of factors into consideration, including loan-to-value ratios, occupancy status, previous borrower contact, and borrower characteristics,” the Litton executive added. “Additionally, we contract with external companies that assist with our contact efforts, and those firms help by conducting property inspections and by leaving messages with borrowers urging them to contact us so we can offer consultation and other assistance.“

Saxon said it begins “assertive and proactive” loss mitigation strategies in the early stages of payment default, is further refining its “already robust” calling strategies based on risk, borrower characteristics, and loan type, and continues to focus on strategies to mitigate delinquencies through “delinquency think tank sessions.“

“We have definitely increased our efforts to reach out to all of our delinquent borrowers, even to the point where our staff is attempting contact every other day until the customer is reached and a status on the account is obtained and hopefully a payment taken or a short-term repayment plan established a promise-to-pay is made,” a Saxon executive reportedly said. “The other area that we’ve enhanced is default management, which has even involved reducing the number of accounts each agent has at a given time” to allow more time to be devoted to borrowers in need of consultation and more diligence toward early loss modification solutions.

In cases where phone contact has not been made during the first 30 days of delinquency, Saxon, like Litton, uses third-party vendors to do property inspections and leave messages at borrowers’ homes urging them to contact the loss mitigation department. In addition to contacting ARM borrowers six months prior to adjustments, Saxon does mailing and calling campaigns for escrow shortages that increase the monthly payment past an internal threshold. Borrowers with shortages are offered repayment plans beyond the traditional 12-month period. A final step before referring any case to a foreclosure attorney involves a review of the delinquent loan by a Saxon committee to ensure every possible step has been taken to mitigate a loss and stave off foreclosure.

Irvine, Calif.-based Option One said all if its loans, including ones with first-payment defaults, are eligible for loss mitigation, thereby it focuses on having highly trained staff on the front lines of its early intervention campaigns. To broaden its direct contact and provide local service, Option One has opened satellite offices in areas with high foreclosure rates: Detroit, Columbus, Ohio, Atlanta, Houston and Philadelphia. The company also engages in an Expanded Reach program and foreclosure prevention seminars, and many of its satellite associates are active members of many nonprofit organizations that promote fair lending, including HOPE.

Nonetheless, “the hard work being done by the servicing industry, along with all of the innovative strategies being devised to curb the issues facing the subprime sector, are in no way a silver-bullet, cure-all set of solutions,” S&P said. “Rather, they should be viewed as an effectual component of a solution. For example, if the forbearance plans and loan modifications that borrowers enter into are not prudently underwritten, delinquencies will only worsen.”

The ratings agency said servicers should focus their most seasoned default management personnel on loss mitigation negotiations, provide this staff with continuous training, and should closely monitor recidivism rates and forbearance break rates to ensure the decisions being made by staff are sound and provide long-term solutions.

“We are confident that servicers are taking proactive measures to battle the current wave of first-payment and other early payment defaults,” S&P said. “The loss mitigation efforts that are under way have borrowers’ best interests in mind and seek to preserve homeownership whenever possible.”