Focus on Loss Mitigation

Focus on Loss Mitigation

By Jennifer Harmon

NEW YORK--As lenders and investors face the prospect of having a flood of REO on their hands, the market is starting to see a focus more on loss mitigation and creative ways to prevent foreclosure.

A study by the Center for Responsible Lending predicts that 2.2 million American households will lose their homes, which equals as much as $164 billion in foreclosures in the subprime mortgage market alone. The study projects that almost 20% of subprime loans issued during 2005-06 will fail.

Sanjay Raghavan, director, mortgage and financial services, at Santa Clara, Calif.-based Tavant Technologies, says the subprime market has been a constant source of worry for the Fed. "Eighty percent of subprime borrowers received risky loans or ARM products, many that they don't understand. Their ARMs are resetting and borrowers won't be able to make the commitment."

This is now the decade of loss mitigation, says Mr. Raghavan. "People are doing whatever they can to get creative and prevent foreclosure. The market is starting to see news about how loans that are being originated are not even staying current in the first three to six months. That is costing the market considerable amounts. Having these loans not perform at the very beginning causes serious concern from a capital market concern as well."

Brokers are selling products to people beyond capacity, he said, and often there is not proper document verification. "We're seeing a spiraling effect into servicing in loss mitigation and foreclosure. There's a lot of pressure to turn around an REO property and get it into the market."

Servicers have looked at the problem of managing defaults. There is an opportunity to produce higher cure rates for those who understand the loss mitigation world. From a technology perspective, a comprehensive suite of workout plans for loss mitigation helps enable servicers to improve loan performance. The most important thing is the workflow orchestration, which tracks all of the tasks that need to be performed.

Servicers should understand the borrower's financials early on in order to make the right determination during the loss mitigation period. "There are a lot of people who are not as good as they should be in today's market situation. In collections, it depends on how good you are at early mitigation, profiling and scoring your loans."

For lenders and servicers today, much of their success lies with managing the fluctuations happening every month. On a period basis, that means keeping track of property inspections, valuations and statistical data on the market for specific locations and geographic regions. Servicers must look at what they stand to lose if the property goes into REO and if they should alleviate the situation by doing a short sale or a deed-in-lieu. Are they on the short track to foreclosure and REO?

Servicers should look at the borrower's past delinquency history, credit reporting information, geographic information, and if they live in a judicial or non-judicial state for REO timelines. All of these aspects are thrown into the mix when determining what does the lender stand to lose if the property goes into REO.

In order to turn the REO around quickly, asset managers need the right valuation tools to prepare for the REO sale. Technology assists asset managers, eviction coordinators and outside REO agents, and manages a plethora of activities such as getting the eviction process going. Managers must determine the best way to market the property and price it.

Properties are assigned to a team of associates, including asset managers, and all of the external parties. Through workflow orchestrations, everyone can see what activities need to be completed today on a specific property. Priority cures are given and managed by the system, showing agents and managers which loan should be worked on.

It is important to have a good document management system in place to look at documents that are scanned and stored. Through the system, tasks can be sent to asset managers, such as showing that an offer is coming in for a specific property. REO brokers can log onto the system and get approvals for accepting a certain offer.

"We believe technology allows you to add more productivity to what is going on in a department. Through dashboards and scorecards, you can track each task. When management comes in they see which properties are in this condition in which states. No one has to scurry around and send faxes and you do away with all the paper reports."

In some markets, property prices are holding, and asset managers can do some repairs and get a better value on a property. Through workflow, a manager can run a scenario analysis, and see if it would be beneficial to make the changes within a given timeframe. With the help of technology and trend analysis, REO managers can turn around a property quickly and not go through three cycles of reducing prices.

Mr. Raghavan says ratings agencies are looking at how well companies service their portfolios, including managing defaults and eventually REOs. In terms of loss mitigation, servicers can really make a difference to cash flow interruptions. "If you can cure more loans, and bring borrowers back to current status, that is key. Through loan mods or whatever technique is in your tool box, help them from going into foreclosure and REO," he said.

"Default management was taken seriously before, but it's getting another look, especially by those with subrpime portfolios. There are benefits for shortening the timeframe to REO if you're going to lose 40%-50%. It may be better to do a short sale early on."

There is more implication on originator groups focused on how they can originate more properties. But they have to look at the implication of doing a loan that can't sustain three payments. "It is not a game of volumes, but a game of quality going forward. Too many loans that are nonperforming are not useful. Lenders are looking at technology to better manage the risk. It is not fine-tuned for managing subprime loans."