Scotsman Guide - May 2010 Residential Edition

By Joe Dombrowski Executive consultant Fiserv

Workouts: Where You Fit s W er ou Fit
Understanding modification programs and options is the first step to a new niche

Mortgage brokers and the rest of the residential lending com- munity have experienced a tumultuous past few years. Home equity has taken a major hit, and although it appears new foreclosures may be slowing, it’s unlikely the frenetic lending atmosphere of earlier this decade will return any time soon. This, however, isn’t necessarily cause for despair.

Mortgage brokers can find new opportunities in the defaulted-loan space. You may wonder how you can do business with borrowers who are underwater or having problems making their loan payments. You also may wonder how you can tap into a somewhat-con-fusing set of programs aimed at stemming foreclosures.

Brokers can serve as workout agents, prepare documents and collect data necessary to pursue workouts for borrowers. Generally, this information is the same as information used to originate loans.

As you consider your options, realize that loss mitigation includes processes similar to those involved with standard loan origination. The difference is that loss mitigation focuses on qualifying borrowers for programs that can help them avoid losing their home. From a loan servicer’s perspective, finding workable options often is crucial amid widespread legal moratoria on foreclosures.

Illustration: Dennis Wunsch

Brokers can serve as a trusted information source and provide critically important handholding. These roles often resemble the tasks you already complete. The same skills and tools you use to write purchase loans equip you to guide borrowers through loss mitigation.

You can do this in the employ of a loan servicer or broaden your business — after checking with state licensing laws — to include financial guidance or counseling services for troubled borrowers. Another option is to seek full financial-planning certification to help clients with basic budgeting and financial strategies.

Retention or liquidation

Any loss-mitigation effort can be called a workout. You can think of it as a fact-based decision about the viability of loan retention versus loan liquidation. Here’s the difference:

Loan retention: • These workouts allow borrowers to keep their home, and they usually involve a type of modified repayment agreement and adjustment to loan balances, terms or both. Refinancing existing loan terms is another retention option.

Loan liquidation: • These workouts result in borrowers losing their home through a negotiated process instead of through foreclosure. Liquidation options may range from selling the home for less than the loan balances the borrower owes — also called a short sale — to another borrower assuming the loan.

Every workout option begins by establishing borrowers’ financial picture and the home’s realistic value. The next step is determining the options for borrowers’ specific situation.

The process of loss mitigation parallels the loan-origination process — except with loss mitigation, you’re typically dealing with unhappy borrowers and lenders.

Available workout options include the government’s Making Home Affordable programs, which include the Home Affordable Refinance Program (H. A.R.P.) and the Home Affordable Modification Program (HAMP). Other programs of note include the Second Lien Modification Program (2MP) and the Home Affordable Foreclosure Alternatives Program (HAFA).

Servicers with loans that Fannie Mae or Freddie Mac own or guarantee must participate in the Making Home Affordable programs, and other servicers are highly encouraged to follow suit. Just like purchase-money loans, all of these programs have qualification stipulations and require disclosures and mandatory documents and signatures.

Path of a workout

The path of a loan workout generally includes the following steps:

A workout agent obtains 1. and verifies borrowers’ identity and contact data.

The agent determines 2. the home’s value, amount owed, and borrowers’ income and other obligations when determining the borrowers’ ability to repay.

The agent starts 3. matching the bor-
rowers’ situation to workout pro-
grams’ qualifications
If borrowers are still earning income
and want to keep their home, the work-
out agent will look at H. A.R.P. options
for refinancing the loan and HAMP rules
for modifying the loan. If there also is a
second lien in the mix, the agent can
determine if 2MP can be used to modify
the second lien and help improve bor-
rowers’ cash flow and ability to make
on-time payments.

If borrowers don’t want to keep the home or aren’t financially solvent enough to do so, the agent will explore HAFA alternatives to foreclosure. These can include a short sale or deed-in-lieu of foreclosure.

After program selection, the activities of disclosure, documentation collection and closing parallel a purchase-money loan closely.

In many cases, loan servicers struggle to keep up with modification-pro-gram changes and to meet the high demand from borrowers who may be eligible for workouts. This presents an opportunity for mortgage brokers who can engage with borrowers to prepare the various documents servicers require for program consideration.

How it works

Servicers typically attempt to qualify borrowers into a cascading series of programs. They start with HAMP, which requires short-term trial payments then permanent loan modification. If borrowers fail to keep up with the trial payments and the loan gets increasingly delinquent, the next step is HAFA, which involves a possible short sale.

Each program has several milestones that require re-evaluating borrower qualifications. By understanding the process and managing it from beginning to end, brokers can guide borrowers down the best path.

Often, borrowers who know they have HAMP and HAFA incentives coming will gladly pay the fees necessary to brokers who can ensure smooth workouts. Brokers accustomed to dealing with complex loan programs and qualification matrixes should have no problem working through the details of any of the programs.

Mortgage brokers can create a niche by entering the world of distressed loans. Many brokers will find past clients in need and can market to their past-customer lists. As with other loan products, you must understand the requirements, guide borrowers patiently, gather and manage documents, and re-lay submissions to servicers. •

Joe Dombrowski, an executive consultant with Fiserv, is a seasoned executive with 24 years’ experience in the mortgage-servicing industry. With his broad background in servicing and systems management, Dombrowski consults with financial organizations to identify ways to generate real savings and enhanced productivity using streamlined business processes and appropriate technologies. Contact Dombrowski at joe.dombrowski@fiserv.com or by calling (574) 229-2306.