American Banker's Kate Berry, in a story published last week, looks at how repayment plans are used to manage default roll rates. "Roll rates," for the non-industry folk out there, are industry-speak used to describe how many 30+day past dues "roll into" 60+day past dues, and so forth. The rating agencies use all sort of roll rate analyses to determine how efficient a servicing operation is -- particularly in loss mitigation, foreclosure and REO disposition. Berry zeroes in on the games that can be played with repayment plans:
According to these observers, widespread use of repayment plans is keeping serious delinquency rates artificially low. For example, a loan classified as 30 days past due will not progress to the 60-day category as long as it is on a repayment plan; a 60-day delinquency put on a plan will not move to the 90-day category, and so on ... Kevin Kanouff, the president of the Clayton Holdings Inc. unit, said servicers are using repayment plans as "one way to reduce default rolls." Repayment plans are "only a temporary fix for the servicers if they do not fit the borrowers' capabilities to repay," he said. "Eventually the real numbers will come out on bad plans." ... Cheryl Lang, the president of Integrated Mortgage Solutions, a Houston consulting firm, said, "Many times, repayment plans are used to minimize or mask the 90-day-plus category of delinquencies."
Of course, and as Berry also noted in her story, the flip side of this coin is that servicers are so swamped and understaffed, repayment plans end up being an effective form of "triaging" troubled borrowers. Regardless, there are two things to keep in mind about repayment plans: one, their use isn't usually constrained by a Pooling & Servicing Agreement, as is the case with loan modifications; two, there isn't usually a whole heck of a lot of information on repayment plan activity reported on by most servicers. Which means that a loss mitgation department's heavy reliance on repayment plans -- either to keep roll rates acceptable or to manage a steadily increasing volume of calls from troubled borrowers, depending on which camp you're in -- could be setting up some servicers, and their investors, for a nasty surprise.