Lee Howlett is president of ISGN's servicing practice, where he oversees many of the company’s initiatives, including the new RESET equity forgiveness program. Lee has been in the industry for several decades and is a frequent speaker and presenter at industry conferences and trade shows. For this episode of In This Corner, Lee sits down to discuss new ways we can get out of the current mess, how the far government programs are going to carry us and why we're ultimately going to succeed.
Everyone is on the lookout for a government-sponsored program for principal forgiveness. Is this just a pipe dream or is it coming down the pipe?
There well may be a government sponsored principal forgiveness program in the future, but not until the government has exhausted efforts to force the lending industry and mortgage investors to absorb such losses through a maximization of loan modification, short sale and “cash for keys” programs. The latest HAFA incarnation is certainly suggesting the industry must step up and be more aggressive in helping consumers exit properties without experiencing the emotional stress of foreclosure.
Is there any benefit to the lender in a loan reduction that a short sale and a foreclosure doesn't provide?
Yes, there is. Theoretically, by implementing a combination of principal forgiveness within the loan modification, forbearance, and a new form of future equity option sharing through a program like ISGN’s RESET, the lender will realize a higher net present value on each property than with the nuclear options of short sale and foreclosure. Additionally, keeping the consumer in the property and avoiding a flood of distressed sales that can further deteriorate local markets is good for all parties—lenders as well as borrowers.
How prevalent is equity sharing? Is it going to become a growing trend?
Equity sharing has not been prevalent primarily because there was no real need for it in the industry. As we proceed into the thick of the mortgage crisis, I think we will see more “outside the box” programs like equity sharing. I strongly believe that programs like RESET—where the lender and consumer enter into an equal partnership to forgive some debt, while also each retaining economic rights in the property for future recovery—are important ways to keep all parties aligned and avoid a growing problem with strategic default.
But why is strategic default even an option for borrowers?
Traditionally, the stigma and moral hazard associated with mortgage default were enough of an emotional barrier to keep consumers from walking away from their obligations, but with the level of distress among borrowers these days, those barriers are slowly eroding. Like it or not, the reality is that in any recovery effort, both parties in a mortgage transaction need to come to the table to have an effective outcome.
The servicing business seems to have shifted away from just collecting monthly checks to fighting to keep people in their homes. How has such a drastic change in operational focus affected balance sheets for these companies? Who will survive, and who won't?
As with any crisis—be it the current economic decline or natural hazards such as hurricane Katrina or the Haitian earthquake—the landscape of our world is forever altered. The mortgage crisis is no different, and certainly, lenders and servicers are having to make adjustments like investing in more people and more powerful technologies—expenditures that weren’t previously necessary. That said, we have to account for the will to prevail. We need to remember, that the people caught in the midst of any crisis or catastrophic event—the victims as well as the responders—ultimately find within themselves that indomitable human spirit and uniquely American “can do” outlook, despite the fact that they may have been initially unprepared to immediately solve the needs of the marketplace. The lessons learned from this housing crisis will lead to better lending, more robust servicing organizations, and a much deeper understanding that we cannot allow the market to get so out of balance ever again.