The following is an excerpt from:
RESIDENTIAL MORTGAGE SPECIAL SERVICING
by Bill Coppedge, Senior Managing Director, Fay Financial, LLC
Default Management before 2007 and through the Housing Crisis
Before 2007, as home prices rose, bill collection was largely a process with little regard for the borrower. Given that most mortgages tended to have positive equity, the borrower could sell his home if he could no longer afford the mortgage payment. The world was a binary place: collectors simply told borrowers to pay or sell the home, and borrowers would do so.
Then came the Housing Crisis in 2008. By the end of 2008, 18% of U.S. homeowners experienced negative equity in their homes http://bit.ly/1SjGBDt. Selling the home was, for many delinquent borrowers, no longer an option and things were getting worse. By 2010, 23% of U.S. homeowners had negative equity in their homes. As the housing crisis spread, an evolution took place in the loss mitigation process. Managers in Payment Resolutions, Non-Retention Resolutions, and REO had to expand their skill sets in order to maximize cash flows for their investors. Rather than relying on full repayment or REO sales as servicing did pre-2008), Payment and Non-Retention Resolutions became more flexible, evolving into more borrower-friendly resolutions. Loan resolution at earlier stages of delinquency aligned the best interests of both investor and borrower.
Default Management in 2015
The introduction of SPOC (single point of contact) requirements in 2013 grew by 2015 to encourage a more collaborative relationship with the borrower. Unless the borrower has abandoned the house or refuses to communicate, borrower buy-in greatly increases the best resolution outcome for both borrower and investor. The loss mitigation process is increasingly focused on giving the SPOC tools for support and borrower engagement.
Default Management beyond 2015
Post crisis, underwriting guidelines have been more restrictive, with fewer borrowers qualifying for mortgage loans. Repurchase demands from FHA and the GSEs have made lenders more reluctant to lend.
Efforts have been made to make lending less restrictive to broaden homeownership. Both easing of underwriting guidelines and efforts to provide clarity of repurchase demands are attempts to encourage a lending increase to millennials, lower-income borrowers, and other groups who have been denied entry into homeownership.
In order to broaden homeownership, both FHA and the GSEs have loan programs accepting 3% to 3.5% down payments. Fannie Mae stopped requiring pay stubs. Credit bureaus are using “trended credit data” to broaden numbers of people that can qualify for a mortgage. Extended families living together can pool income to broaden income qualification.
Home-price appreciation and low unemployment are required to keep default rates low. If severe home price depreciation occurs, many of these newer loans will be among loans to experience large increases in default rates and will need special servicing.
Predictions: The definition of SPOC will continue to evolve toward more collaboration with the borrower. Home price stabilization or appreciation is necessary to keep default rates low.
REO “Value-Add” Market Creates a New Profit Opportunity for Investors:
§ As a special servicer we have seen first-hand how much value is lost at REO sale, as many REO managers have sold properties “as is.”
§ With proper management, it is possible to capture the ‘fix and flip’ profits rather than see these profits captured by REO investors.
§ A rehab-intensive approach strives to capture the ‘fix & flip’ value creation for our clients as if it were our own investment.
§ Unlike traditional REO firms, we view selling “as is” as a last choice and we prefer to retail properties post-rehab.
Glenn Brooks, SVP, Fay Servicing and head of the REO division has the following thoughts on adding value to REO utilizing rehab:
“At the beginning of the mortgage crisis, large amounts of REO came to market, overwhelming industry capacity. A focus was placed on liquidation speeds and not on maximizing asset values for clients. REO departments were forced to manage volumes, hit timelines, minimize holding costs, and maximize liquidity. Why focus on rehab when housing prices were rapidly falling? This created fantastic opportunities for REO investors.
Despite REO inventories coming down, as-is sales direct to investors remain high compared to pre-crisis levels. REO managers that can apply a rehab focus and retain some of those ‘fix and flip’ profits for their clients are better positioned than others who maintain their focus on speed. Rehabs are not a cookie cutter business. The asset manager should know its markets well and have a sense for the broad range of enhancements that can positively impact the sale, which can vary by neighborhood. Some areas can add value with granite countertops and stainless steel appliances. Older areas might see a value rise by turning a small extra bedroom into a master bath and walk-in closet. Many neighborhoods can increase the buyer pool substantially by bring a property up to FHA standards. The REO manager must understand all these dynamics, in order to maximize post-rehab REO value to be realized by the investor.”
Insights from Fay Servicing managers for Function #3 – Default Management
§ Post 2009, increasing numbers of people over time wanted loan modifications as the HAMP program became more widely known. House price appreciation has encouraged more short sales. Continuous changes to HAMP have helped more borrowers to modify.
§ HAFA now encourages short sales with a $3,000 to $10,000 payment directly to the homeowner.
§ Some sub-servicers have exited the business because they improperly priced their product and suffered penalties by not strictly following loss mitigation timelines from FHA and the GSEs.
§ Accurate data maximizes timeline efficiency of each resolution stage.
Read the rest of this chapter in The Mortgage Professional's Handbook!
About the Author
Bill Coppedge is a Senior Managing Director of Business Development at Fay Financial, a residential mortgage Special Servicer. Bill has been actively involved in the mortgage finance industry for 39 years, 31 of which were spent at large investment banks (Kidder Peabody, PaineWebber, Oppenheimer, Bank of America) in institutional mortgage sales covering large mortgage originators and REITS in the areas of RMBS (agency and non-agency), pipeline hedging, servicing hedging, and residential whole loan transactions. Bill also worked at a large regional bank in the purchase and sale of whole loan consumer assets, maintaining contact with over 150 commercial banks, regional dealers, private equity and hedge funds, servicers, and money managers in the performing and non-performing space.
For the past 5 years, he has had the opportunity to learn the finer points of default management at Fay Financial. Bill is also the editor of FayMortgageNews.com, a mortgage blog read by senior management in all areas of mortgage acquisition, distribution, and securitization.