Magazine article Mortgage Banking

Loan Workout Programs: A Best Business Practice

Magazine article Mortgage Banking

Loan Workout Programs: A Best Business Practice

Article excerpt

AS I'VE OFTEN REMARKED, I CAN'T think of a business I'd rather be in than mortgage banking. It assists individuals to realize financial rewards and personal dreams of homeownership, and at the same time it can be profitable. Very few businesses can honestly make such a claim.

As an industry, we should be proud of the role we've played in our nation's achievement of a record rate of homeownership. But originating a home loan is just the beginning. We must also commit ourselves to ensuring borrowers keep their homes.

When the Mortgage Bankers Association of America (MBA) released the results of its National Delinquency Survey for fourth-quarter 1999, there was real cause for celebration. The survey reported the lowest combined delinquency and foreclosure rate since 1973. Yet this accomplishment can be improved upon, especially in light of the foreclosure figures. While conventional loans in foreclosure declined, government loans in foreclosure measured a small increase.

Curing delinquencies and preventing foreclosures by utilizing all available workout options should be a goal of every loan servicer. Helping borrowers keep their homes through workout programs is not just the right thing to do; it is good business.

Today, loan servicers have access to a variety of tools and programs that make loan modification, forbearance and other workout methods savvy, cost-effective business strategies.

Foreclosure vs. workout expenses

Servicers, mortgage insurers and investors variously share expenses totaling approximately $2,500 on average in a foreclosure. Conversely, the expenses associated with loan modification or a repayment program total only about $200. Although neither of these figures accounts for administrative overhead, our experience at Countrywide Home Loans indicates that administrative costs of workouts are lower than those of foreclosures, as well.

To the high expenses of a foreclosure, add the fact that servicers may find themselves advancing corporate funds to pay principal and interest and escrow deficits as the time-consuming foreclosure process plods toward its sad conclusion.

Preventing foreclosure through a workout offers additional benefits for servicers. Repurchase demands and their associated costs are eliminated. Government and investor support and incentive programs also make workouts the obvious first choice for servicers.

Support from HUD and GSEs

In the last two years, the Department of Housing and Urban Development (HUD), Fannie Mae and Freddie Mac have instituted incentive fee programs that encourage servicers to pursue workout options. The success of these programs is undeniable.

Fannie Mae's Home Saver Solutions program offers an excellent illustration of the value of foreclosure prevention. In 1999, for the first time, there were more loan workouts than foreclosures in Fannie Mae's loan inventory. Approved servicers utilized repayment and loan modifications for nearly 15,000 problem loans--as compared with about 7,700 in 1997.

In partnership with servicers, insurers and community organizations, HUD and the government-sponsored enterprises (GSEs) are also participating in regionally based counseling programs aimed at preventing foreclosures. …

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