I think you have conflated some of the comments.

My friends are very much involved with affordable housing. One buddy does leadership counseling (pro bono) with some of the leading mortgage counseling groups. He has also worked with banks that have actually made money doing community development. He has a LOT of contacts with people who have been trying to come up with remedies to the housing mess. He has put me on to some of them directly. And the ones I have spoken to aren’t as airy fairy as the press makes them out to be.

So no, my comments are not based on negative experiences from friends who had a bad time with their servicer, this is from mortgage counselors and people at banks that do low-income mortgage lending (yes, there are not-for-profit lenders to the subprime types who have done it very successfully, and have default/loss rates like old-style prime loans because, lo and behold, they actually screened the borrowers and helped them put together a budget to see if they could really afford the house).

So my sources are people on the front line, and I take what they say seriously. They were involved in the Hope Now discussions, BTW, and were pretty disappointed with how it was handled.

Your friends are able to afford their homes and are having difficulties with servicers – I’m guessing that’s something along the lines of receiving an NOD while looking at one’s tidy stack of cancelled checks? Their pursuit of redress won’t place them in contact with loss mitigation staff, i.e., they’re not trying to negotiate a short sale, a reduction of principal or a reduced interest figure if their homes are ‘affordable’ – or are they?

Some of the commenters here are equating servicers with loss mitigation. They’re not the same pair of shoes, as I feel certain you know.

Worse, I am speaking on a first time panel of econbloggers at the Milken Conference next week. This sort of thing never happens at a good time, but this is particularly badly timed.

If you have any ideas, aside from getting off Blogger and raising hell in Mountain View, they’d be very much appreciated.

Please keep checking back….

As I noted over at CR – servicers lack of response to mods couldn’t have anything to do with the fact that they (servicers), depending on the wording of the PSAs, profit more the longer a borrower is kept in default status could it?

Again, depending on the PSA, the servicer may also get to keep any mod fees as additional servicing compensation. But once a servicer mods a loan, it’s no longer in default and therefore the servicer’s cash cow is cut off.

I’m not at all above believing that servicers are refraining from modifying loans for as long as possible simply in order to suck a borrower as dry as possible before modifying the loan…. But that’s just me and I’m cynical as hell – probably due to fighting an illegal foreclosure initiated by Fairbanks Capital n/k/a Select Portfolio Servicing. Probably why I don’t hold a very high opinion of Hope Now either….

I don’t have such a generous view of servicers; their existence is part of a business model that has proven to be badly flawed. We are going to have to limp along with them as best we can.

I will read the report, and I may be making a mistake by giving you my take first and reading the report second, but here goes (I sent much of this to reader Steve who was also kind enough to send along a paper by Joseph Mason).

I’ll see if Mason gets at this, but my issue is that the failure of mods as currently practiced is not necessarily an indictment of mods in general. My suspicions go up when the prevailing practice in every past real estate downturn is suddenly declared no longer to work.

Yes, in the current environment, probably only a fairly small percentage of defaulting borrowers might be salvageable. But my guess would be that that percentage is actually something like 20%. It might be even as high as 30%.

Why? The loss severity on the real estate. The fact that servicers are not foreclosing says they know the losses on a sale would be pretty bad, or the properties would be close to unsaleable. So they are getting NO cash flow,, zip, nada. And if the borrower/occupant is not paying the taxes, it becomes a lien on the property. No savings to the investors of expenses by keeping the deadbeat in place (save property maintenance), mere deferral.

With that fact set, the investors ought to be wiling to take a major writedown on the loan balance (or effective by keeping the nominal loan balance but having the rate be the one that would apply to a much reduced balance). It the loss severity would be 60% or more, that says writing the loan down 40-50% in economic terms would still be a win, particularly since the bank would escape the tax and insurance liabilities.

So why aren’t they doing that? My guess is because investors and far more important, the bank parent have to take bigger writedowns on MBS and REO.

Other big impediment is the loan servicers (I have been told this repeatedly) have NO knowledge of the borrower’s financial situation due to lack of due diligence when loan was extended, plus lousy loan files (ie, what little may have been known was not documented properly). So the servicer would have to gather info on the borrower (who is unlikely to trust the servicer) when they don’t have the skills (they don’t have a credit function) and the personnel who can engage in high touch. I’ve been told by multiple sources they are all losing money now big time; the last thing they want to do is incur more costs (but note here their interest differs from that of the investor).

That means the borrowers are right to be upset with an impersonal process. Unless the servicer demanded and got W2s, recent tax returns, or other proof of income (ie, all that stuff they failed to do initially), the servicer is using either stale, unreliable info on the borrower and/or FICO, which we now know is of limited value.

So the current process, as far as I am concerned, is garbage in, garbage out. Bad/non-existent info on the borrower, plus unwillingness to offer as generous a mod as they could given the alternatives (at least in the markets with serious declines), leads to mods probably being extended to the wrong people AND servicers trying to squeeze blood from a turnip, when more generous terms might work.

Consider: given the costs of doing a mod, the servicer can be argued to have an incentive to see them fail on a small scale to prove they aren’t worth doing. However, that view is a bit too suspicious (never attribute to malice what can be explained by incompetence). But the point is I see far more downside (in terms of costs) than upside (pulling out fees for longer) from doing mods. Therefore, I see no reason for them to try to do them at all, or if pressured, particularly well.

And if the lender is worried about giving the store away, have the reduction in payments be for 3-5 years, with them going back to the old level unless the borrower opens his kimono and agrees to whatever rate is devised then based on disclosure. Not on a blanket basis; the rate and length of the reduction would be borrower/property specific. But that takes work and involves costs.

This is just a very rough idea, but an old-fashioned bank could implement something like that, a systems-driven one would find it impossible.

I’m not coming at this from a bleeding heart liberal perspective; I’m looking at this from a historical perspective. Mods worked when banks knew their borrowers. It seem that THAT is what is missing in this equation.

It made clear to me that applicants for mitigation and their counselors may not receive much more than the information contained in a notice of adverse action if their efforts to request mods fail. They’re entitled to their opinions, surely, and I can hardly blame them for finding the experience difficult, formal, impersonal.

They may actually be getting fair treatment (or foul) at the hands of the servicer, but I’m not sure how they would know in either case.

The short answer is that if you are not eligible for Chapter 7 (in most states, that means your income is above median), and the mortgage is non-recourse (true with firsts in most states, not true with refis) it is easier to walk from your house than your credit card debt.

bob,

Did you read further? The customer can (should) correct it. If he inflated his income, the mod will come up with a payment schedule he can’t afford. or more likely, that no mod is warranted (ie, according to what he said, he ought to be able to pay). The borrower has an incentive to cooperate if he wants a mod.

I have heard that servicers are too automated, for want of a better word, from people who have every incentive to say otherwise, namely, people in affordable housing (and they have been very skeptical that Bush & Co. would do anything to intervene, so this isn’t a posture to force Federal intervention). The ones I have spoken to are very knowledgeable about MBS contracts and servicer procedures, so I take what they say seriously.

I can’t recall in what context this came up (maybe an early version of the Hope Now discussion, when it appeared it might be more sweeping than it turned out to be) but Tanta said it would take six months of systems work to put it into effect.

Maybe you haven’t dealt with credit card operations or other financial services processing businesses, but they ARE rigid, process-driven. If they do something different, they have to invent (well, get approved, nothing is simple) near-manual procedures. In a high volume environment, that is prone to error.

And they lack the skills. How does a servicer determine who might be able to pay and who not? They don’t have a credit function. That was on the origination side (to the extent any assessment was done at all, now we know it wasn’t). There is scantly little information in these banks that would allow them to ascertain who might make it, once they have gone underwater, and who not. That may be why the record per Steve above is so lousy. My understanding is mortgage counselors have a better success record, but they do a lot in person and some of it is subjective assessment based on experience, just like in old-fashioned banking. That also doesn’t fit in a highly procedural environment.