A Hopeful Sign on the Mortgage Workout Front

We have criticized many of the well-meaning but misguided proposals to try to force mortgage servicers to do more workouts. Even though economically it should be a superior strategy for investors, in many cases the servicer faces restrictions (or at least serious ambiguities) in their ability to do “mods.”

But now that the situation in the industry is getting more grim, it appears too that industry participants are taking more aggressive steps to make the workout option more viable. Paul Jackson at Housing Wire, citing an article in American Banker, informs us that Fannie Mae is changing its incentives to foreclosure attorneys to encourage them to do more workouts:

From American Banker:

Michael A. Quinn, a senior vice president and the single-family risk officer at the government-sponsored enterprise, said in an interview this week that the program, which began informally this summer, is designed to address a long-standing industry problem: Foreclosure lawyers usually receive high fees and high “scorecard” ratings for every loan in foreclosure, but they typically earn nothing if a loan gets cured.

“A foreclosure attorney makes the most money if a loan goes into foreclosure, so we’re trying to design something where they’re paid more if they do a workout,” Mr. Quinn said.

Gerald Alt, the president and chief operating officer of Logs Group LLC, a Northbrook, Ill., network of law firms and title agencies, said that foreclosure lawyers usually are judged and compensated solely according to how fast they can foreclose, and that they rarely receive incentives to work out loans.

Though lenders and servicers often talk about the need to help borrowers stay in their homes, Mr. Alt said, there “has been no coordination of the pre- and post-foreclosure effort.”

First American Corp. of Santa Ana, Calif., said in September that its national default title service is developing a different lawyer scorecard based on loan workouts.

Jackson sees the move by First American as potentially more significant than than the policy change at Fannie:

First American’s default operations answer to someone else, whereas with Fannie the buck stops with them. The fact that First American saw a need to make its attorneys more than just timeline whores means that maybe — just maybe — some investors and trustees in the secondary market are beginning to see the light in terms of what it means to minimize loss severity.

It’s a human problem as much as it is a matter of financial carry costs.

The best solution to a foreclosure, an REO sale, or even an eviction isn’t usually captured in a simple standardized measure of time, although for years that’s been the benchmark for industry-wide “success.” Default management firms for years have marketed themselves around how they can kick the holy hell out of an investor’s foreclosure or REO timelines.

I’ve seen first hand attorneys pushing through with foreclosure sales that they knew were bad merely because if they didn’t do so, someone on the investor’s side would be pissed off that they missed some timeline — and possibly assign future work elsewhere. I’ve also listened to attorneys argue about evictions that could have been avoided, and potential damage to property averted, if they weren’t held to a blind timeline.

Apparently, it’s taken the worst default surge in at least a decade (perhaps longer) to get investors and other secondary market participants to wake up to the concept of actually protecting value — and yes, that’s something that is possible, even in the default business.

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  1. a

    Call me a cynic, but I think this is just trying to make the proto-homeowner the bagholder, as he gets stuck with an overvalued house rather than walking free and clear.

  2. Anonymous

    changing incentives is a good sign… still, we all must remember that there’s an issue of skill, attitude and orientation…. a lawyer long habituated to fast foreclosures is not likely to instantaneously learn the ropes of more nuanced approaches… the incentive change will help that process… but the effects take time and the question of capacity to make these behavior and skill changes remain an open question

  3. Anonymous

    “”If you are getting $750,000 in cash, you are only getting $350,000 after taxes if you are in the top tax bracket,” says Michael Karp, chief executive at Options Group, an executive-search firm based in New York.”

    Yeah, that hardly seems worth getting out of bed and flogging the servants for.

    Presumably since this will affect at least some of the people who had a hand in creating the mess in the first place, they’re probably still going to be getting a better deal than they deserve.

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