Magazine article Mortgage Banking

Loan Workout-The New Mortgage Channel?

Magazine article Mortgage Banking

Loan Workout-The New Mortgage Channel?

Article excerpt

From the front page of the June 28, 2009, New York Times to friends struggling with keeping their homes, this loan workout dilemma isn't getting better. The New York Times says it's a paper shuffle that is swamping the process and drowning both the servicer and the borrower. Friends say trying to work with loan servicers is a lot like speed dating: You get three to five minutes with someone on the phone and then you start all over again from scratch.

Even if these instances are considered anecdotal, most accounts direct their frustrations at known servicers that historically have had a responsive track record. And despite the best efforts of the very many servicers working on this, loan modifications and other workout options are hard to come by. Part of the dilemma is defining a "loan workout."

In taking a hard look at the Obama administration's Making Home Affordable program offerings, a loan workout is not loan servicing any more than a HOPE for Homeowners "refi" is a typical originations channel refinance. A repayment plan may be more akin to a servicer's set of functions, but principal forgiveness--a key element to many of the Obama plan workout considerations--is not native to any originations channel, or capital markets, or servicing.

Volumes could be written about why this isn't working, but it is easier to write about what will work.

If indeed frustration is the mother of invention, then the depth and breadth of the distressed-borrower dilemma is making the obscure clearer and clearer: Helping the borrower facing or experiencing distress requires a new mortgage channel.

To get the borrower into the right workout program the first time, while aligning borrower/servicer/investor/third-party interests, this new channel must pull from the best features from existing constituencies. For example:

* Retail: Effective loan workouts leverage retail pipeline management as well as the hand-holding and overall relationship management associated with this channel. Loan workout visionaries recognize the need for specific forms of licensing to do lending and servicing in all states as needed. As is true across all origination channels, underwriting is a key part of the process, with clear stipulations and messaging to complete the transaction. Automation and integration with multiple data and information providers (e.g., credit services well beyond FICO[R]) are a must.

* Direct lending: The best loan workout entities rely upon extensive telephone and Internet interactions with the borrower, and a very effective pipeline-management process to drive to completion.

* Wholesale: The complexity of loan workouts may require borrower information and document gathering by third-party sources (e.g., HOPE NOW, NeighborWorks[R] or the Consumer Credit Counseling Service [CCCS]) as a key part of the process.

* Correspondent: Loan workouts require the ability to aggregate large numbers of loans, and quickly assimilate large amounts of data and documents into a product-pricing-eligibility decisioning process.

* Capital markets: Effective loan workouts incorporate product, pricing and eligibility management functionality as well as investor-relationship management and attentiveness down to the deal level.

* Post-closing and delivery: Many loan workout programs require a level of scrutiny usually associated with these functions to ensure workout alignment with the investor, lender, servicer and third parties such as mortgage insurance (MI) companies. For loan workouts, this functionality must be carried out as part of the workout--not after the modification is done.

* Loan administration: A loan workout most closely resembles the outsourcing of legally boundaried functions (such as bankruptcy and foreclosure) to experts in all nuances of the process as well as their relevant metrics (e.g., time frames and value preservation). Like many servicing processes, loan workouts rely on a high degree of automation and interfaces to a wide variety of information and data sources. …

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