Early Workouts Central to Game Plan for 2011
Freddie Mac is in the process of transforming the way it measures mortgage servicer performance and one imminent change is designed to push servicers to help more delinquent borrowers within 60 days of the first missed payment.
How? By retooling our 15-year-old Servicer Performance Profile metrics to create a new, robust balanced scorecard to motivate servicers to make very early contact when borrowers are delinquent. How early? I'm talking about making contact by the third day of delinquency.
Intensifying our focus on early intervention complements our ongoing efforts to streamline our loan workout programs and processes so they are easier for servicers to implement and borrowers to understand. As a result servicers will have the time to find out enough about the borrower's financial challenge and the tools to diagnose the right foreclosure alternative. (Or in a situation where a solution cannot be found, help the borrower achieve a graceful exit and minimize our credit losses.)
To achieve these goals, we're making two significant shifts through our new balanced scorecard approach
First, we're changing our yardstick for measuring how well servicers manage delinquent borrowers. The new metrics will emphasize "the human connection" – early and frequent borrower contact to keep the loans current or determine the issues within the first 30 days of default. (Statistical analysis consistently shows that the longer the delinquency, the lower the odds of a successful workout.)
Consequently, we're replacing broad measures, like a servicer's ratio of workouts to foreclosed properties, and placing the most emphasis upon activities (workouts, collections) that keep 30-day delinquent loans from becoming 60-day or 90-day delinquent loans. To do this we will focus heavily on "roll rates" – the rates at which 30-day delinquencies become workouts or 60-day delinquencies, and the rate at which 60-day delinquencies become workouts or seriously delinquent (90 or more days overdue) loans.
Over 60 percent of the emphasis in our new scorecard will be based on how servicers organize themselves to support early borrower contact and get to a foreclosure alternative – for example, by ensuring their call centers, email/chat centers and mail response centers are adequately staffed and supervised so workflow patterns are tightly controlled. (The remaining 40 percent of the scorecard, by the way, will be related to data integrity, default timeline management, and other administrative processes.)
The second component of our new approach is to sit down with our servicers and set individualized objectives for their achieving foreclosure alternative goals – including stretch goals to motivate the delivery of steadily improving results. Then, once the goals are set – the game plan, if you will – we will review their servicing files to see how they used their people, processes and systems to achieve their objectives.
As perhaps the single most important element of our new, balanced approach, the file reviews are where the right questions are asked. Did they work to avoid foreclosures or, if a foreclosure referral occurred, give the borrower time to take action that would avoid the final foreclosure sale? If not what are the issues and what will it take to achieve our mutual goals?
Think of it as a football team that wants to win going over the post-game tapes. At this stage of the game we all know the stakes. More successful early contacts can increase the odds for successful workouts, more stable communities and fewer losses to Freddie Mac – and by extension, the taxpayers who support our work.
* Anthony Renzi left his position at Freddie Mac in May 2012.
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