Regular HW readers know I come from the default management trenches -- knowledge that I suppose right now is more in demand than ever. (Yet, here I am blogging something completely free for you to read; but that's a story for another day). With that in mind, I read a story by Kate Berry at American Banker today with intense interest -- Fannie Mae is now apparently incenting its foreclosure attorneys to pursue workouts versus merely hitting a timeline:
Michael A. Quinn, a senior vice president and the single-family risk officer at the government-sponsored enterprise, said in an interview this week that the program, which began informally this summer, is designed to address a long-standing industry problem: Foreclosure lawyers usually receive high fees and high “scorecard� ratings for every loan in foreclosure, but they typically earn nothing if a loan gets cured. “A foreclosure attorney makes the most money if a loan goes into foreclosure, so we're trying to design something where they're paid more if they do a workout,� Mr. Quinn said. Gerald Alt, the president and chief operating officer of Logs Group LLC, a Northbrook, Ill., network of law firms and title agencies, said that foreclosure lawyers usually are judged and compensated solely according to how fast they can foreclose, and that they rarely receive incentives to work out loans. Though lenders and servicers often talk about the need to help borrowers stay in their homes, Mr. Alt said, there “has been no coordination of the pre- and post-foreclosure effort.� First American Corp. of Santa Ana, Calif., said in September that its national default title service is developing a different lawyer scorecard based on loan workouts.
Paid subscribers can read the rest of the story. While it isn't exactly true that a foreclosure attorney makes "nothing" in the event of a cure - partial fees are often recovered when we're talking about curing on the courthouse steps, for example - it is true that foreclosure attorneys are strongly incented to reach the end game as quickly as possible. I've spoken with Gerry Alt many times in the past, and I'm guessing that he probably told Ms. Berry much more than what was printed; compensation in the foreclosure and REO business for lawyers, for the most past, is on a per file basis at a pre-negotiated flat fee rate. In other words, it's a volume business taken on either because there are economies of scale to be had (in markets like Michigan and Ohio) or because the flat rate work is often tied by mortgage servicers to more lucrative litigation work (which is, of course, charged at the more attorney-like hourly rate). The fact that Fannie is actually offering financial incentives for its attorneys to reach workouts rather than a speedy foreclosure is a great idea -- and the fact that First American is altering its attorney scorecards to account for workout activity is also extremely interesting, perhaps moreso than what's going on at Fannie. Here's why: First American's default operations answer to someone else, whereas with Fannie the buck stops with them. The fact that First American saw a need to make its attorneys more than just timeline whores means that maybe -- just maybe -- some investors and trustees in the secondary market are beginning to see the light in terms of what it means to minimize loss severity. It's a human problem as much as it is a matter of financial carry costs. The best solution to a foreclosure, an REO sale, or even an eviction isn't usually captured in a simple standardized measure of time, although for years that's been the benchmark for industry-wide "success." Default management firms for years have marketed themselves around how they can kick the holy hell out of an investor's foreclosure or REO timelines. I've seen first hand attorneys pushing through with foreclosure sales that they knew were bad merely because if they didn't do so, someone on the investor's side would be pissed off that they missed some timeline -- and possibly assign future work elsewhere. I've also listened to attorneys argue about evictions that could have been avoided, and potential damage to property averted, if they weren't held to a blind timeline. Apparently, it's taken the worst default surge in at least a decade (perhaps longer) to get investors and other secondary market participants to wake up to the concept of actually protecting value -- and yes, that's something that is possible, even in the default business.