Editor’s note: With the collapse of the subprime lending market leading to tightened credit, many are wondering what happens to the millions of loans that are expected to default or more importantly, what happens to the homes and the people who bought them. In this four-part series, Inman News looks at what the lending industry is doing to help people get out of loans or get back on their feet and how some real estate agents are making this their specialty. We’ll go in-depth on short sales, REOs and forbearance programs. (Read Part 2, Part 3 and Part 4.)
If experts can’t seem to agree on the impact of the subprime lending crisis, maybe it’s because nobody can predict the future.
While many lenders are making headlines as they crash and burn, what may be more important is how the loans they made perform when they’re gone — and whether home buyers will still have access to credit.
One of the keys to loan performance is home prices. Former Federal Reserve Chairman Alan Greenspan observed in March that, if home prices went up 10 percent, “the subprime mortgage problem would disappear.”
That’s because home-price appreciation helps borrowers who purchase homes using adjustable-rate mortgages to refinance their loans before their monthly payments reset.
In one of the most recent and comprehensive studies of the issue, First American CoreLogic Inc. researcher Christopher L. Cagan predicted 1.1 million foreclosures among ARM loans originated between 2004 and 2006. But each 1 percent change in home prices could increase or decrease that number by 70,000 homes.
If home prices fall by 5 percent — which Banc of America Securities analysts predict is the likely outcome of tightened lending standards — that’s another 350,000 homes on the market.
Considering that more than 7 million homes are bought and sold each year, Cagan and other experts say foreclosures alone won’t put enough additional inventory on the market to do serious harm.
But the latest forecast from the Anderson School of Management at University of California, Los Angeles, predicts that the “credit crunch” now underway as lenders tighten their standards will trigger a “second leg” of reduced housing production and prices.
Although home prices are expected to have a major impact on loan performance, there’s another important factor that’s just as difficult to forecast — the willingness of lenders to work with borrowers in distress.
As consumer groups call for a crackdown on abusive lending practices and Congress considers tighter regulations, lenders have been arguing that market forces are already putting a damper on the use of some of the riskiest loans. And, they say, the delinquency and foreclosure numbers are not as dire as they seem because lenders have financial incentives to keep borrowers in their homes.
Foreclosing on a property can lead to expenses and losses of 30 percent to 60 percent of a loan’s outstanding balance, groups like the Mortgage Bankers Association have told Congress. Lenders say they would often rather bring a delinquent loan back into compliance than take possession of the property that secures it.
In some cases, mortgage lenders are working with borrowers to modify loan terms, lowering interest rates or extending terms to lower monthly payments.
In instances where borrowers are coping with temporary job losses or health problems, lenders may show temporary “forbearance” by suspending payments for up to 90 days.
In other cases, lenders are negotiating longer-term repayment plans that give delinquent borrowers a set time period, such as 18 months, to catch up on their payments.
As a last resort, lenders are often agreeing to “short sales” in which they collect all of the proceeds from the sale of a distressed property, in exchange for letting borrowers off the hook even if the sale price doesn’t repay their loan in full (see parts 2 and 3).
Although statistics are hard to come by, there’s plenty of anecdotal evidence that some lenders are working with borrowers to avoid foreclosure.
The Department of Housing and Urban Development requires lenders who service FHA-guaranteed loans to employ loss-mitigation strategies, academics Joseph R. Mason and Joshua Rosner wrote in a recent paper, “How Resilient Are Mortgage Backed Securities to Collateralized Debt Obligation Market Disruptions?”
Government-sponsored mortgage repurchasers Fannie Mae and Freddie Mac have claimed a nearly 50 percent success rate in efforts to work with troubled borrowers, Mason and Rosner said. Subprime loan servicers have implemented “some of the most aggressive approaches to servicing delinquent loans,” they said, and probably have similar success rates.
But studies suggest the rate of re-default FHA loans with modified terms may be as high as 25 percent, Mason and Rosner noted, an issue recognized by analysts at Standard and Poor’s.
When analysts at Standard & Poor’s Ratings Services talked to loan servicers for a report last month, they found several, including Saxon Mortgage Services Inc., GMAC ResCap, and Option One Mortgage, were taking a proactive approach.
Without prudent underwriting, workouts with borrowers will only worsen the problem of delinquencies, the Standard & Poor’s analysts said, recommending that servicers “focus their most seasoned default management personnel on loss-mitigation negotiations.”
Senior managers, the report concluded, should “closely monitor recidivism rates and forbearance break rates to ensure that the decisions being made by staff are sound and provide long-term solutions.
Prudent underwriting is the basis of the approach to workouts at Wells Fargo Home Mortgage, said Mary Coffin, executive vice president of loan servicing.
“The important thing is you have to look at each situation individually, so you’re not prolonging the inevitable,” Coffin said. “We have to make sure we can get them back on a performing loan.”
Wells Fargo services $1.34 trillion in mortgages held by 7.6 million customers, Coffin said — including 1.3 million loans originated by Washington Mutual that Wells Fargo took over servicing last summer.
To keep track of those loans, Wells Fargo employs about 6,000 workers at seven servicing centers distributed across the nation’s time zones.
The company is constantly analyzing the loans it services, and in cases where ARMs are scheduled to adjust borrowers are notified at least 45 days in advance that their payments will soon be going up.
“We know that the sooner we work with a customer, the higher percentage the workout solution,” Coffin said. “Getting the customer to call us immediately and work with us is most important thing.”
Agents who work with customers can call up electronic records of their loan terms and payment history, and input information on their current financial state to “help them make the best decision” on how to proceed, Coffin said.
“If that payment is not plausible, we’re being proactive in helping them before they become delinquent so we can protect their credit,” Coffin said.
Some borrowers have complained that their attempts to do workouts with lenders have been complicated by the fact that no single person takes charge of their case. Servicing agents may be located in overseas call centers, borrowers say, handle large caseloads, and lack decision-making authority.
Coffin said Wells Fargo does “everything in house,” and hasn’t been outsourcing work to overseas subcontractors because the company has been “aggressively staffing up.”
“We were able to predict through the origination volume, the volume we would need to handle in the back end,” Coffin said. It takes three to six months to hire and train additional staff, she said, “Because you don’t put a brand-new, untrained person on a loss-mitigation call.”
Vicki Vidal, senior director of Residential Loan Administration for the Mortgage Bankers Association, said many subprime lenders are also “well staffed for the delinquency factor.”
In some cases where homeowners perceive that lenders aren’t willing to work with them on a workout, they may have unrealistic expectations, Vidal said.
If a borrower doesn’t have the income to make the payments under a workout, there’s no point in postponing the inevitable.
“You have to be able to prove you can afford whatever the new payment plan is,” Vidal said. “You can’t just say, ‘Drop my rate 1 percent,’ and then I still can’t make the payment.”
Most mortgage loans are pooled and sold to Wall Street investors, who may place contractual limitations on loan modifications or short sales. Workouts may also have tax implications for the holders of such investments.
The third-party companies servicing such loans must abide by the agreements for each loan pool. While the agreements may give them some leeway for workouts, some steps are subject to the approval of investors.
“It’s not because they don’t want to work with borrowers,” that a workout can’t always be arranged, Vidal said.
Although keeping track of more than 7 million mortgage loans might seem like a logistical nightmare, the same sort of technology that allowed lenders to increase their origination volume is now helping them service them.
Wells Fargo uses software that tracks every document, every payment and every phone call electronically. The system not only keeps an electronic record of when a call is made, but stores a digital recording of what was said. The “100 percent monitoring” of phone calls helps the company spot trends, better train its loan servicers, and accurately assess what’s transpired with individual loans.
How well are the company’s efforts working? Coffin offered Wells Fargo’s historical foreclosure rate of .49 percent — compared with .67 percent for the industry as a whole — as proof that they are succeeding.
Although Wells Fargo never originated the “exotic” pay-option ARM and interest-only loans that have proved especially troublesome for some borrowers, about half of the loans originated by WaMu were backed by the FHA or another government agency. Those loans have traditionally had higher foreclosure rates.
“We are now 33 percent of the FHA, government lending, and to take that large a piece and stay below the industry average speaks to our ability to work with customers early and as often as we can,” Coffin said.
Melissa A. Huelsman, a Seattle-based attorney who represents borrowers in disputes with lenders, said workouts can be “a complete waste of time,” for her clients.
One client that had arranged a workout with Countrywide Home Loans discovered their property remained in the foreclosure process, even after they had made three monthly payments, she said.
“In the middle of January, we get a letter from Countrywide, saying they don’t take personal checks,” Huelsman said. Although one payment had been a few days late, the company had previously accepted two personal checks.
“Now they say they don’t take personal checks, and give them a number to call,” Huelsman said. “So we call, and in the mean time, they’ve sold their house in foreclosure. People think the sale has stopped, and unless the (borrower) knows to go stand on the courthouse steps, they never know that it’s only been continued.”
Countrywide did not respond to a request for comment.
Huelsman says she sees similar problems with repayment or forbearance agreements, “all the time” and believes lenders don’t always want them to succeed.
“This attitude (by lenders) that the bank doesn’t want your house is a bunch of crap,” Huelsman said. “The whole system is set up to get your house.”
Huelsman recommends that borrowers get the terms of a workout in writing, and to ask for a legal document indicating that the foreclosure process has been halted.
For borrowers who can’t show that they’re able to make payments under a workout plan, there’s always the short sale.
Sean Purcell, the founder of CQ Financial Group in San Diego, said most subprime lenders “have come around” to the idea of the short sale.
“On some, you even have the lenders out front, saying here’s what we’ll take,” Purcell said. “You never saw that two months ago.”
The number of real estate-owned properties lenders have taken back through the foreclosure process has skyrocketed, Purcell said, “and there’s only so much they can have on their books.”
“The A-paper lenders,” Purcell said, “I’m not sure they see the situation for what it is,” noting that many real estate professionals in Southern California have reported problems negotiating short sales with Wells Fargo.
“We can do short sales,” Coffin responded, but said Wells Fargo has not seen an increase in preforeclosure transactions.
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