We have been monitoring progress regarding the administrations initiative established for modifying or refinancing over 9 million consumer mortgages, and have drawn specific observations and conclusions. We sincerely hope that you find them useful.
1. There has been a tendency to apply generic strategies to circumstances that instead compel the applicable parties to identify more personalized solutions. This is not a “one size fits all” situation and cannot be remedied through the application of non-specific solutions.
Every consumer has a different set of reasons that is driving their existing challenge. There may be a loss of earnings or reduction in household income as one or multiple borrowers may be unemployed or under employed. It could be an interest rate adjustment that was not anticipated and the increase of payments exceeds existing capacity.
These and a host of other reasons are the origin for the delinquency, which demands that each circumstance be investigated and new details on lifestyle be vetted to identify alternatives to foreclosure. Each transaction must be investigated to determine the borrower’s capacity and willingness to pay. These details need to be incorporated to determine what the consumer’s household can manage monthly and then an evaluation needs to be performed to compare the various modification options that may exist against the least appealing alternative, foreclosure.
Employing Net Present Value assessment to these alternatives is the fiscally responsible approach but can only be effectively accomplished through the deployment of a highly sophisticated data acquisition effort.
2. Both the banking and mortgage loan servicing industry are under-equipped to institute an “all-inclusive” tactic. Their existing staffing models and competencies were designed to manage “business as usual”. Unfortunately, our current environment is not at all “usual”.
To identify, recruit, employ, train and allocate the required resources is time consuming and incredibly cost ineffective. These issues have resulted in the application of more generic programs which, as mentioned previously, have proven to be unproductive.
A more practical method for distributing responsibility and competencies would be a partnership where deployment of a specialized workforce is focused specifically on delinquency resolutions, while their partners (the financial institutions) are concentrating on identifying and mitigating potential or future challenges. Cure yesterday’s problems while preventing tomorrows from occurring, simple logic, challenging execution.
3. Some of the delays experienced in the introduction and implementation of modification programs have been due to the importance of ensuring a comprehensive understanding of the alternatives. Defining internal procedures, developing technological automation and integration, designing specific programs for execution and then implementing accordingly, are time consuming and arduous tasks.
Whether your strategy is to deploy the Home Affordable Modification Program exclusively, an internal customized technique, or a combination of both, until you can ensure that the resulting output complies with objectives, you cannot perform.
A more functional option would be to rely on what already exists and proven to be effective. Avoid the confusion and delay in execution by identifying industry accepted and demonstrated alternatives in combination with internal expertise and proficiencies.
The technology, human capital, processes, policies and functionality exists, though proper deployment and utilization is lacking; again delaying effective implementation of programs that will address and supply relief to this damaged marketplace. This situation needs to be tackled with emphasis on immediate implementation mandated to ensure these problems can be mitigated.
4. What are the ideal alternatives? A compelling question that requires an equally interesting and convincing answer. Any program, internal or according to administration policies, has to be designed so that the resulting output benefits all impacted parties.
The Bank or Servicer wants to ensure that the applicable option is fiscally responsible and the consumer has to have incentive to re-instate the obligation, which may not exclusively be an affordable payment.
The extent to which most consumers have experienced “home price depreciation” that has caused their mortgages to be in excess of 140% of the collateralized properties current market value, has produced an undeniable predicament. Principal forbearance was envisioned as a method to address these circumstances.
At “face value” that approach had merit and was well intended. But, it requires a consumer to believe that they will experience an equally rapid market appreciation as they had the reverse depreciation. That perception may be unrealistic as most experts agree the hope for a market turn around is unlikely to occur within the next 7 to 15 years.
As new policies are contemplated, the concept of Principal Forgiveness has to be a variable that receives consideration. Though difficult and less appealing to the banking and servicing community, a future strategy that includes a degree of re-imbursement for every dollar of principal forgiven, will in many circumstances have a considerably more impactful effect and could provide the foundation to achieving anticipated results.
5. The banking and servicing community has a notable challenge to ensure they deploy methodologies that manage cash flows on loans that cure without intervention (Cure Risk) and establish fact-based alternatives to circumvent re-default (Re-Default Risk).
This concern requires that each transaction be handled individually and that solutions are determined as a result of close investigation and review of current realities.
Short-term consumer challenges, where absolute re-stabilization of household incomes is anticipated, must be met with short term solutions that provide for the applicable time relief required to allow the consumer to get back on their financial feet. Consumer circumstances that demand extended remedies must achieve expectations that they can be maintained over an extended period, avoiding the unforeseen or undesired potential for re-default.
6. The existing tactics the market place has implemented appear to have either a technology or human capital approach or a unique combination of both. Some have opted to use automation as the method to identify alternatives. Others have decided to add human capital to deploy and attack the ever-growing problem. Others yet have introduced a combined approach, yet the human capital elected to participate often does not possess the required proficiencies to manage the issues complexity.
Though each of these solutions is admirable, they do not appear to have had the envisioned impact. As future conversation and deliberation occur, emphasis on remediating the problem through tactical application of automation with the inclusion of human capital that is technically proficient and competent needs to be the focus.
In conclusion and given these realities, the US Government has an opportunity to influence future decisions made on behalf of the market places’ effort to resolve this looming and economically impactful predicament. The Government’s emphasis that the market support their chosen solution will create greater conformance and improve the probability the application will achieve its anticipated results. Additionally, the market will work in unison to evaluate outcome, and create an environment where modified procedures are shared throughout. As new information and knowledge is acquired, everyone benefits and it simplifies and provides assurances that the application of new procedures is introduced throughout the marketplace.
The Government is trying desperately to play the lead role in getting the ball moving. This is the right approach and will result in (a) an increased number of home owners retaining their most prized possession and the American Dream (b) a stabilization of the underlying real estate market through a reduction in foreclosure activity, and (c) maximization of cash flows on loan portfolios over the long-term.
NEXT UP: SERVICER CAPITALIZATION’S EFFECT ON LOAN MODIFICATION EFFORTS
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