New Tools for Tackling Foreclosures
Mortgage servicing will never be the same again. The unprecedented volume of delinquent loans over the past three years has triggered within the industry a sweeping re-examination and re-engineering of its delinquency and loss mitigation management practices.
While the ultimate impact of this incredible period of financial stress, distended unemployment and evaporating equity has yet to be fully revealed, I believe the way the servicing industry has responded will significantly enhance its ability to react expediently and comprehensively to future downturns.
Here's why I say that.
Traditionally, foreclosure prevention efforts have been targeted towards borrowers who have already become delinquent. President Obama's Making Home Affordable (MHA) initiative attempts to go beyond this by providing refinance and imminent default options to help borrowers who are "underwater" (their mortgage amount exceeds the market value of their home) but not yet delinquent. As such, the MHA program has driven the first serious industry-wide effort to standardize the imminent default and delinquent mortgage modification process. This is no small feat.
For approximately ten years now, Freddie Mac has required our servicers to use the solutions we've developed to help delinquent borrowers avoid foreclosure. But servicers generally manage portfolios for multiple investors, meaning they have to juggle the different loan modification do's and don'ts each investor prescribes. The range of investor-specific requirements made it that much harder for servicing staffs to handle the avalanche of delinquencies that began in 2007.
One year after MHA's launch, the individual servicer processes and investor requirements are beginning to converge into a standardized, industry-wide "waterfall" of workout options, borrower eligibility and documentation requirements, greater transparency, and performance benchmarks.
Daily workgroups led by the servicing industry, the Administration, and the financial community are exploring more solutions to address different areas impacted by the crises. Freddie Mac participates in these robust discussions.
At the same time, we see servicers integrating longstanding origination practices and skills to meet current demands for workouts. Servicing shops, once virtually paperless, are deploying imaging and other technologies to enable more effective document fulfillment in this new, document-intensive loss mitigation environment.
These processes are evolutionary and still a work in progress given the scope of the crisis and its impact on servicer and investor operations. But the move towards a more predictable and consistent foreclosure avoidance process across the industry is happening and has the potential to benefit borrowers, servicers, and investors alike – whether aid is offered under MHA or traditional foreclosure avoidance efforts.
Another important trend triggered by the industry's year-old effort to implement MHA has been a burst of experiments in ways to identify, contact, and help delinquent borrowers navigate the workout process. Current efforts include targeted marketing campaigns, in-person home counseling, walk-in events, and permanent help centers where delinquent borrowers can sit down with a trained counselor or a representative from their servicer.
The goals of these experiments are straightforward: 1) to encourage distressed and or discouraged borrowers to talk with an expert, in-person, who can offer individualized support in understanding the process, completing the paperwork, and gathering their documents – the same kind of service the borrower probably experienced when they first obtained their home mortgage; and 2) to help reinvigorate the link between borrower and servicer, which is critical for the long-term success of the modification.
Freddie Mac, for example, has joined with our non-profit partners to launch eleven pilot walk-in counseling centers in areas with significant concentrations of at-risk borrowers in Phoenix, Las Vegas, Chicago, Washington, DC, and California. These centers go beyond traditional mortgage counseling to provide borrowers with holistic credit counseling that assesses all of the debt and credit issues affecting their ability to pay their mortgage, and seeks to find a sustainable solution to aid borrowers in restoring their financial health.
The goal of putting the pilot centers in each community is to leverage trusted resources available to the borrowers in the hope of reducing the shattering impact of an avoidable foreclosure on personal lives and local communities. We are seeing encouraging signs. Since their launch in January 2010, the centers have contacted in excess of 17,000 borrowers and are now helping more than 5,000 families explore their options for a home-retention workout or a termination of their mortgage obligations through a short sale or deed-in-lieu.
Other innovative efforts underway include:
- Door-knocking campaigns in which authorized counselors visit delinquent borrowers at their homes to help them finalize workout applications;
- Delinquent borrower events sponsored by the U.S. Department of the Treasury and lenders in target markets;
- National phone hotlines, like Freddie Mac's Borrower Help Network, that proactively contact delinquent borrowers and try to engage them in the workout process;
- Giving foreclosure attorneys financial incentives to help borrowers targeted for foreclosure secure an eleventh hour workout from their servicer, as opposed to driving only towards the foreclosure sale. We began paying incentives to our 19-state network of designated counsel in 2007 to talk with borrowers about foreclosure avoidance alternatives and help them navigate the workout process once the loan has been referred to the foreclosure attorney. This effort is now generating hundreds of workouts.
Last year, Freddie Mac helped more than 272,000 borrowers avoid foreclosure – more than three times the number of borrowers we assisted in 2008. We achieved this through a strong focus on traditional and MHA loan modifications combined with forbearances and repayment plans for borrowers with less-severe short-term hardships, and graceful exits for those who were no longer interested or able to keep their homes.
This evolution in default servicing is a positive trend with the potential to produce lasting and beneficial change in foreclosure avoidance efforts at Freddie Mac and across the industry. As today's innovations are tested, studied and refined, I believe that many will become tomorrow's standard loss mitigation tools. And the result will be a servicing industry with the skill and experience to help more delinquent borrowers before they reach the crisis stage.
* Ingrid Beckles left her position at Freddie Mac in June 2010.
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