GSEs Use Technology to Assist Lenders with Loss Mitigation
by William Reeves, manager, community development lending, OCC
Today's loss mitigation philosophy stresses the importance of working out problems whenever possible—a reasonable goal given that roughly half of mortgage loans sold to the GSE's that become seriously delinquent are worked out. With the proper tools, mortgage servicers can increase the frequency of their workouts and lower their foreclosure costs. Which is why the major secondary market players offer mortgage servicers a host of loss mitigation tools to use when they work with borrowers to prevent foreclosures.
A major driver behind increased workout volume is technology. Starting as early as the first missed payment and continuing through loss mitigation and, when necessary, on to foreclosure, mortgage servicers will find that technology can help with workflow, decision-making, and process management.
While many borrowers will be late with a payment, few are actually in serious trouble. Freddie Mac's EarlyIndicator®, a Microsoft® Windows-based software application and Fannie Mae's Risk Profiler®, a Web-based system, help servicers distinguish between those who typically pay late and those who are likely in real trouble. Using statistical models, the programs predict the likelihood that a delinquent loan will be resolved, or that it will advance through to a loss-producing state and ultimately to real estate owned (REO). The systems score delinquent loans to help loan servicers prioritize collection calls and other loss mitigation work to focus on the borrowers at greatest risk.
Once it is clear that a borrower has not merely forgotten to mail in a payment, other technology helps the servicer decide what to do next. The first step must always be to determine whether the borrower has both the ability and the willingness to continue making mortgage payments and retain the home. Has the borrower faced a temporary loss of income due to medical bills or a layoff? Has the problem arisen because of financial mismanagement or because the original loan was too big of a fiscal stretch?
Borrowers capable of keeping a home are given different mitigation options than those who do not have the ability to continue making payments. Tools such as Freddie Mac's Workout Prospector® and Fannie Mae's Workout Profiler™, analyze the borrower's arrearage, financial situation, income and expenses and models a workout option that can be offered to the borrower (see sidebar Loss Mitigation Glossary). For instance, if the condition that caused the borrower's hardship is permanent and the borrower's income is fixed, Workout Prospector® might suggest lowering the note rate to keep the borrower in the house. But if the borrower cannot manage the payment even with loss mitigation assistance, the programs steer the servicer through the foreclosure process as quickly as possible, including suggesting programs, such as a deed-in-lieu of foreclosure, a short sale, or loan assumption.
Fannie Mae has built extra servicing support into its programs targeting first-time homebuyers who have attended homeownership classes as a condition of receiving certain Fannie Mae mortgage products, such as a Fannie Mae MyCommunityMortgage™, Fannie 97®, Fannie 3/2™, or the Community Home Buyer's Program.™
Post-purchase, if a borrower with one of Fannie Mae's community loan products is 10 days late, the servicer must offer early delinquency counseling (EDC). In EDC, the servicer helps the borrower identify why the mortgage payment was not on time and what can be done to resolve the problem. Unlike traditional mortgage collection efforts, EDC addresses broader financial issues, such as family budgeting.
Freddie Mac has a similar requirement with its HomePossible™ Suite of affordable mortgage products, which also require pre- and post-purchase counseling.
Can't Get Through
While technology offers many solutions to the challenge servicers face in dealing with delinquencies, there is one problem that it cannot easily overcome: borrowers who are unwilling to communicate with the servicer.
In at least half of all foreclosures, the borrower simply does not respond to calls or letters sent by a servicer. According to a 2005 Freddie Mac-sponsored survey, nearly two-thirds of the respondents were unaware of their workout options. In addition, a significant percentage declined to contact their lenders because of some combination of fear, embarrassment, or denial. Both Fannie Mae and Freddie Mac are tackling this issue with pilot programs that use trusted, reputable housing counseling groups to improve contact rates with borrowers. The hope is that borrowers who haven't responded to their servicer might respond when a nonprofit, third party organization contacts them.
Freddie Mac is piloting separate efforts with counseling groups and PMI Mortgage Insurance Company (see sidebar below) to keep more borrowers in their homes. Under one of these initiatives, Freddie Mac last June began paying groups, such as the Consumer Credit Counseling Service of San Francisco, to contact borrowers who meet three qualifications: (1) they are 45 days late; (2) they meet U.S. Department of Housing and Urban Development (HUD) affordable housing qualifying goals; and (3) they have had no contact with their servicer.
Freddie Mac plans to compare the success rate of housing counselors in contacting those borrowers and completing loan workouts to the success rate of a control group of loans handled only by the servicer using standard programs. As discussed elsewhere in this issue, both Citigroup and JP Morgan Chase have had success in using nonprofit housing counseling agencies to make similar connections between delinquent homeowners and their loan servicer.
Fannie Mae is also working with nonprofits nationwide, including affiliates of ACORN, the National Council of La Raza, and NeighborWorks®. Tools available in Fannie Mae's free housing counseling application, Home Counselor Online™, offers counselors a variety of ways to assist borrowers pre- and post-purchase. A budgeting program helps counselors to assist borrowers to manage future finances. A loan analysis and amortization program can compare three different loan programs, including adjustable-rate loans, hybrids, and negatively amortizing loans and balloons. A third tool helps borrowers understand how long it will take to pay off current debts and makes suggestions about the order in which to pay off debt. Fannie Mae resources also include fact sheets on loss mitigation, private mortgage insurance cancellation, and home repairs.
While these tools were designed for nonprofits, any Fannie Mae servicer can access them by signing up at the company's Web site, http://www.efanniemae.com/ and clicking on Housing Counselors. Fannie Mae's consumer resource center, which financial institutions can reach by calling (800)-7FANNIE, can help lenders find local nonprofits capable of assisting in contacting borrowers and doing loss mitigation work. Experts in Fannie Mae's 55 community business centers can also point servicers to local housing counselors.
Wave of the Future
While the technology supporting loss mitigation programs has been proven effective, the idea of using community groups and housing counselors to contact borrowers who are difficult to reach has just begun to take hold. Many issues still need to be resolved before borrowers are routinely transferred to outside counselors.
First, lenders must overcome privacy issues. Data transmission between lenders, secondary market partners, and housing counselors presents another challenge. But with a number of pilot programs underway, it's just a matter of time before best practices are created and economies of scale appear.
"It's an emerging area that conceivably could be systemized over time," says Fannie Mae Vice President of Community Technology Robert Sahadi. "In an ideal world, people [at closings] would sign a consent form to have files shared with a counseling agency if they become delinquent, and files would be electronically shared with nonprofits. That's an area the industry is considering."
For additional information, please contact William Reeves at (202) 874-5165, firstname.lastname@example.org
PMI's Homeowner Assistance Program
Over the past year, PMI Mortgage Insurance Company has been working through nonprofit housing counseling organizations to connect borrowers who were more than 90 days late on their mortgage payments with lenders in order to develop a workout plan. Through PMI's "Homeownership Assistance Program," these nonprofit organizations have enabled borrowers to develop workouts with their lender in 40 percent of the cases they have been assigned.