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With the recent increase in delinquent loans, servicers are stepping up their loss mitigation activities, particularly in the subprime sector, where foreclosure activity is most pronounced and is expected to in-crease further as adjustable-rate mortgages (ARMs) reset. They are expanding out-reach activities to homeowners at risk of or already in default, hoping to “work out” problems before they reach foreclosure stage. Some servicers are reorganizing or expanding their loss mitigation sections and some subprime servicers are adjusting the mix of loss mitigation tools they use in response to the current mortgage crisis.
Outreach activities. In more than half of the cases where mortgages are foreclosed, borrowers have had no contact with their loan servicers; in many cases, these borrowers have not responded to attempts by the servicer to reach them.1 Borrower contact, either directly or through an intermediary such as a housing counseling agency, is the necessary first step in loss mitigation and servicers have undertaken a variety of outreach initiatives in an effort to improve their contact rates, several of which are described here.
A number of servicers, including Citi, JPMorgan Chase, Litton Loan Servicing, and Wells Fargo Home Mortgage, are contacting borrowers with ARMs multiple times, beginning as early as six months before the interest rates are scheduled to reset, with the goal of identifying and working to resolve potential problems before they occur. While such efforts tend to be national in scope, other forms of outreach are geographically targeted. Some servicers place outreach staff in communities where the default level is high or expected to become so. For example, through its Keychain Alliance (formerly called HOPE), GMAC-ResCap has outreach staff in 12 metropolitan areas, including Philadelphia, who not only work with other organizations involved in foreclosure prevention but also meet one-on-one with borrowers to explore their options. 2 Another model is provided by EMC Mortgage Corporation, whose 50-member “Mod Squad,” a team of loan modification experts, visits cities where loan delinquencies are rising to work face-to-face with delinquent borrowers.3
Expanding loss mitigation strategies in the subprime sector. The degree to which specific loss mitigation strategies have been used has differed for the prime and subprime sectors, even among servicers who work in both areas. In particular, loan modification has been much more commonly used for prime than for subprime loans. A majority of subprime loans are pooled, securitized as private-label securities, and sold to investors,4 and the low use of loan modifications in this sector has reflected, in part, a belief among servicers that pooling and servicing agreements (PSAs) put strict limits on the conditions under which this loss mitigation tool may be used.
In light of specific factors contributing to the ongoing foreclosure crisis, the effectiveness of loan modification for loss mitigation is likely to grow relative to other tools more commonly used for subprime workouts, according to a recent analysis by Fitch Ratings.5 For example, implicit in the use of forbearance and repayment plans is the assumption that home-owners, despite possible short-term economic setbacks, have the long-term ability to make their stipulated mortgage payments. However, it is anticipated that after interest rates reset on ARMs, many homeowners will lack the financial resources needed to cover the higher payment amounts on an ongoing basis. Some, though not all, of these owners may be able to maintain ownership with a loan modification.6
In response to the current situation, modification of subprime loans is becoming more common. Litton Loan Servicing, which has modified subprime loans in the past, is now using this option in a higher percentage of cases than previously. GMAC-ResCap, which had not previously used loan modification for subprime loans, recently established a team within its loss mitigation unit expressly for this purpose.
In addition, as a result of the current subprime situation, the degree to which PSAs allow for loan modification has received greater scrutiny. The American Securitization Forum issued guidelines on this issue in June 2007 in order to “facilitate wider and more effective use of loan modifications in appropriate circumstances.” 7 The guidelines stress that most PSAs allow for loan modification when a loan is in default or when default is “reasonably foreseeable.” They also address servicer concerns about the amount of a securitized subprime loan pool that may be modified. Joseph Ohayon of Wells Fargo Home Mortgage believes that because these guidelines provide consistent direction to servicers, they will further encourage the use of loan modification as a loss mitigation tool for subprime loans.
Servicers have also expanded their range of loss mitigation activities in other ways. Wells Fargo Home Mortgage has created new units within its loss mitigation department that specialize in second liens and short sales. JPMorgan Chase provides a cash for keys program in which consumers may receive financial assistance in the transition to a new dwelling when they cannot maintain ownership. In Citi’s Ownership Loss Mitigation Program, a particular loss mitigation specialist is assigned to a subprime borrower who is in default, increasing consistency in the workout process for both the borrower and Citi itself. Citi has also developed stop-gap programs to slow foreclosure in states where it would otherwise proceed very rapidly, allowing more time for loss mitigation activities.
Loss mitigation does not guarantee that borrowers will retain their homes. A 2007 survey of servicers indicated that the percentage of loss mitigations that resulted in either short sales or deeds-in-lieu ranged from less than 10 percent to more than 35 percent.8 However, even when loss mitigation leads to outcomes in which borrowers do not keep their properties, the costs to them and their communities are likely to be lower than had there been a foreclosure.
A glossary of terms used in this article is available for reference.