Mortgage lenders, servicers and insurers should ensure a reliable, two-way connection to homeowners. This vital link can influence delinquency and foreclosure rates long before payment problems occur, according to Frank Pallotta, managing partner of Loan Value Group
. He explains to HousingWire what the industry can do now to save itself from increasing losses and avoid unnecessary defaults by simply establishing a connection with their homeowners.
Why is there a gulf, a lack of connectivity, between servicers and borrowers; and how is this is contributing to the increase in strategic defaults and foreclosures?
A number of factors contribute to the lack of connectivity between servicers and homeowners. It starts with the fact that there was never a need to reach out to a homeowner who had remained current. As such, their borrowers’ contact data becomes stale, or outdated. The costs associated with continually updating homeowner contact information were never considered. As mortgage delinquency rates in the United States have grown dramatically over the past five years as a result unemployment, substandard underwriting, and other issues so has the degree of difficulty in reaching these borrowers. As a result, we have reached a record number of households in foreclosure and unprecedented levels of strategic default. With nearly one out of four homes in the U.S. underwater, strategic default is fast becoming an option desperate homeowners may consider. In tackling the growing epidemic of strategic default, banks and servicers share some common operational challenges, which include loss-mitigation efforts that are largely reactive or nonexistent. Unfortunately, their efforts are almost exclusively focused on loans that have already hit the 30- to 60-day delinquent stage.
With the increase in defaults and foreclosures and regulators forcing servicers to address these problems, what do lenders and servicers need to do?
The most successful banks and owners of residential mortgage risk will offer a positive experience that the homeowner will understand and embrace – especially during times of hardship. These visionaries will also address these challenges by rolling out proactive strategies that hedge their expected losses, especially around loan portfolios that are at the highest risk of strategic default. In today’s environment, it is not enough for servicers to have merely a monthly paper statement and an occasional call to define their relationship with the homeowner. Increased saliency, connectivity and an ongoing positive connection with the homeowner will provide these financial institutions with a tremendous competitive advantage over the others.
Are the industry’s reactions worsening the mortgage crisis and leading to a deterioration of the borrower relationship?
Despite the fact that most of the future losses on mortgage portfolios will derive from today’s high CLTV currents going delinquent, many financial institutions’ strategies address only loans that have already fallen into delinquency. Many others have no plan to address high risk current loans at all. There is little focus on loss-mitigation efforts for current loans, as these homeowners typically pay. As a result, the vast majority of these homeowners are left with no other option than to become “the squeaky wheel” by becoming delinquent in order to receive a call from their servicer. This is particularly dangerous because as current data suggests, approximately 10% of the borrowers that are more than 60 days delinquent return to current status on their own. Banks and owners of risk face a daunting challenge in 2011 and beyond as they look to address a myriad of problems in today’s housing market. From meeting governmental or internal quotas to dealing with increased foreclosures and REO inventory, there is no shortage of obstacles that need to be overcome. With these numerous challenges, it is vital to have a laser focus on attaining meaningful, tangible wins. Hedging future losses by merely improving connectivity to all homeowners represent low hanging fruit. Moving the dial on this issue — even slightly — can be the difference between profitable and nonprofitable quarters for most financial institutions.
Why are current servicing operations not equipped to handle the large number of defaults and foreclosures? Where did the system break down?
Historically, large banks’ and servicers’ backend systems are a network of legacy systems that have amassed over the years as a result of bank acquisitions and industry consolidation. At the housing peak in the mid-2000s, loan servicing was a low margin, high volume operation which would satisfy their occasional increased volume needs by simply hiring temporary help. Underlying systems performed all the same functions and required little need for change. As a result, there was minimal investment in or focus on mortgage technology and systems innovation. Today, servicers are now tracking a multitude of new products as well as executing numerous, tailored, public and private programs (such as the Home Affordable Modification Program or Home Affordable Refinance Program) to address a record number of loss-mitigation and servicing activities. Systems that sufficed only five years ago are now obsolete and overwhelmed, along with associated consumer contact methodologies and tools.
Have someone perfect for In This Corner? E-mail the editor.