Prior to the 2007 crisis, custom mortgage loan modifications were offered in certain cases, but they were left to the discretion of the loan servicer. Some have characterized this period as the “Wild West” of loss mitigation. There wasn’t always an appropriate level of investment to make the gathering of updated information about the borrower an efficient task, and the re-underwriting of the loan was equally challenging. In addition, the rapid rise in home prices in the early to mid-2000s meant borrowers with financial troubles could simply tap equity for relief.
Then the crisis hit. Nothing on such a scale had challenged loan servicers before, and the discretionary process was no longer viable. One result was the Home Affordable Mortgage Program – a more standardized, measurable approach servicers could follow and have some guarantee of safe harbor, with all servicers taking the same actions, using the same calculations and resetting loans with hopefully satisfactory outcomes for borrowers in dire financial straits.
Fast forward to today and serious delinquency and foreclosure rates are now at their lowest levels since the Great Recession, according to the Loan Performance Insights Report from CoreLogic.
A new loss mitigation option called Flex Modification – mandated by the Federal Housing Finance Agency -- is filling the vacuum created by the expiration of HAMP in 2016.
Flex Mod, as it is commonly called, incorporates key features that were generated from the Mortgage Bankers Association’s Future of Loss Mitigation Task Force -- accessibility, affordability, accountability, sustainability and transparency. As you plan your adoption of Flex Mod, here is a framework to help smooth the transition.
- Accessibility: By streamlining the qualifying criteria, Flex Mod provides relief to a sizable portion of borrowers whose mortgages are at least 60 days delinquent. It is important to note that servicers must send a notification to borrowers at 90 days delinquency offering assistance through Flex Mod. Borrower outreach and communication is a critical component – consider how people generally learn and are informed in today’s fast-moving world; while some borrowers are comfortable with newer technology, there are still some who prefer a phone call. In either case, you will need to develop scripts to explain the program features and benefits.
- Affordability: HAMP conclusively proved a modest reduction in a distressed borrower’s housing payment would consistently reduce re-default. The Flex Mod program embraces the same concept of payment reduction to 20 percent, and this focus on affordability provides a better outcome for both servicer and investor – avoiding a foreclosure and eviction process that is both extremely distressing for the borrower and costly for the investor. While servicers have little influence on the affordability of the Flex Mod program, servicers can support the program goal of affordability. Understanding the program fundamentals, educated staff can help borrowers through the process, keeping them on track.
- Accountability: It is essential to review internal systems, so that servicing systems have the ability to guide staff, perform accurate calculations and track pending tasks as well as measure for compliance and success. A sound program will also have excellent no-gap oversight and dashboard reporting, effectiveness reporting and measure payment re-performance. Greater clarity around data is the key to program oversight, and the ability to “show your math” at every touchpoint with borrowers is essential. Staff responsible for customer contact should clearly understand the policy goals and receive coaching to maintain adherence.
- Sustainability: The math involved in the Flex Mod program is straightforward, as it involves amortizing the existing unpaid loan balances and extending the term of the loan out to 40 years to achieve a significant reduction in monthly payments. Included in the program are additional features, such as forbearance, which addresses sustainability. As a result, Flex Mod can be a viable long-term solution for the borrower as well as the servicer and investor. This long-term approach avoids the disruption and churn that can accompany focusing on repayment plans and more complicated approaches. As a loan servicer, you can ensure you are using technology that gives you the long-term tracking along with the upfront qualification and processing elements. Both are keys to understanding how a portfolio is impacted by Flex Mod.
- Transparency: Servicers can incorporate newer technology to assist with not just payment calculations but also reaching out to borrowers and educating them about their options. Being this transparent is a key theme learned from HAMP. Make the process easy to understand with infographics and easy-to-follow videos on borrower self-service websites. Provide education to internal staff and empower them with easy to access reference tools so they can assist borrowers with questions.
The most recent data available, for Q1 2016, shows that approximately 319,000 homeowners received non-foreclosure solutions with permanent loan modifications totaling approximately 86,000 and formal repayment plans totaling 118,000, according to HOPE NOW. Homeowners need and want assurances that mortgage companies are prepared to work with them when the chips are down.
Focus on delighting your borrower
While much work remains to be done in the default space, we join the calls for streamlining the variation in foreclosure and other default actions. That work will require more input from servicers, investors – the whole housing industry. Tremendous strides have been made in the past decade. During the financial crisis the industry’s image morphed from one of a benign service provider... to vile headline news... to more recently family happiness and financial well-being.
Now that the industry has stabilized, the challenge is to provide affordable mortgage relief, while enhancing the customer experience and differentiating a company’s brand.
With the right blend of communication and technology, servicers can quickly and accurately evaluate borrower information and present the appropriate loan modification package, thereby reducing default risk and greatly improving borrower satisfaction. The speed of technological evolution and accelerating innovation tells us that additional tools to make the next great leap forward in defaulted loan management are just around the corner.