High Tech Solutions

Technology helps the lender be proactive from keeping the property from going into foreclosure.

Faced with an increasing number of foreclosures and potential losses, lenders and servicers are looking long and hard and which loss mitigation measure will work to keep families in their homes.

There is a significant amount of loss if a lender has to take a property back. On average, lenders are losing $50,000 on each subprime loan that goes into foreclosure and $30,000 to $50,000 on loans in the prime market, according to Duke Olrich, founder, president and chief executive officer of DRI Management Systems in Newport Beach, Calif.

As a way to stop foreclosure from happening, lenders are now turning to scripted interviews where borrowers are taken through a group of prescribed questions. The interview is kept short and to the point, lasing about 10-15 minutes, with time to counsel clients. "It helps the borrower get out of the bind they are in," said Mr. Olrich. "These interviews help create a solution."

For many borrowers their monthly mortgage payments have marched away from them. Perhaps they started with a payment of $800 with a low interest rate. Close to the market, the adjustable rate mortgage does not have a low interest rate anymore, and the payment is $1200 a month. "This has happened especially in the North and Midwest where people have lost their jobs and plants are closing," he said. "For many people, their payments have been raised significantly. They have an income but can they cover the increase? I think the industry has been very progressive in the last five years. But now more attention is focused on finding solutions because of the potential losses."

Through scripted interviews, lenders and servicers can determine the intention of the borrower. Do they want to stay in their property or not? The biggest question every investor wants to know is, what is their financial ability to pay on the loan?

The borrower's information is pushed through an economic model. The typical way many servicers go is to offer the borrower a payment plan, which varies in length. The payments are rearranged, and the fees, costs and late charges are tallied. If the borrower owes $3,000, the plan might be made to pay $3,000 over a year-long period. This could mean paying $200 a month along with the regular payment.

If that money is not there, the lender may take out a forebearance plan and accept something less than what is owed in order to keep the loan in current status. This is something that happens a great deal in the FHA arena, he said.

Loan modification plans are getting the most play now, allowing lenders to float the borrower a new loan at a lower interest rate, making the payments something they can afford. "This is the best option for those who are sure to go into foreclosure," said Mr. Olrich. "Sure, the lender is making less interest but they are facing a $50,000 loss."

Some borrowers have homes where the value of the property is less than the value of the loan. A short sale is an option here. The lender puts it up for sale at the market value and accepts reduced payment to satisfy the debt. The borrower has no foreclosure on their through this option. "The lender has a loss but it is less than what is forecast if they waited."

The real estate market has gone from flat to backwards, Mr. Olrich adds. "Even in hot markets like California, it has gone flat to backwards. Borrowers have refinanced to get better loans if the value went up. If it hasn't they can't get into another loan. Homes have gone backwards in value in many cases. I think it will be the end of 2008 before it turns around. We've still got a year or so of rough road."

Mortgage Hub, which recently acquired Fair Isaac's mortgage products, says technology helps the lender be proactive from keeping the property from going into foreclosure. The most important piece is to have a good system in place that moves data and borrower information without having to rekey data, says Dave Demster, president, mortgage products division, MortgageHub. "You want the data to flow continuously. No re-entry, one version of the truth," he said. "No rekeying makes the handling of data much smoother even if you have a third party or outsourcer."

Powerful integration components allow lenders to gather the financial information and credit information on a borrower. When the loan rolls into default, MortgageHub can present the user the current position of the borrower, helping to create a resolution they can present to the borrower. The industry players and lenders don't have the bandwidth to deal with it. MortgageHub's automated system connects all the key players with a single, seamless system.

"We plug right in and have as many of the other vendor systems integrated with our own servicing system. It includes connectivity to vendors, servicing referrals with attorneys and valuations, property preservation, and county systems. Through technology, we can notify lenders so they can take the appropriate action."

Technology streamlines the process, helps control it, and assists the lender sell the property faster. "Once it goes into foreclosure, the lender has lost 40% of the value from the top. We want to reduce the costs and losses once they get there. We can't stop it from happening," said Mr. Demster. "At the point in early default, borrowers need to be proactive. Counseling and loan modifications can help keep borrowers in their homes. That is the key point."

Tracking information with the help of technology tools help the lender decide how the borrower can keep the cash flowing. Even before they talk to the borrower, the lender can look at property values and have a solution in mind when they get the borrower on the phone. "The loss mitigation process is about working together to make the optimum decision or best decision for the borrower."