Improving the Odds: Making Workouts Work.(Point of View)

Byline: Clayton Baker

Mortgage lenders and servicers continue to announce sweeping loan workout and modification programs. Fannie Mae recently unveiled a plan aimed at preventing foreclosures by streamlining the short-sales process. While these efforts have their place, institutions still need more effective methods for working consistently with tens of millions of borrowers in trouble.

Unfortunately, as new programs and approaches are introduced, many lenders and servicers still rely on old methods for dealing with mounting volume. They continue to throw bodies at the problem - hiring legions of staff to try to keep pace. With this influx of new hires, the premium on borrower contact higher than ever and a surge in schemes to "game" the system, executives must have the right tools available to enable front-line employees to maximize every interaction.

Lenders and servicers should look to several areas to ensure they are doing everything possible to achieve timely and successful resolutions. First, they must identify troubled borrowers and those likely to end up that way as soon as possible, through early intervention programs and processes. Second, they need nontraditional outreach methods for making contact with borrowers reluctant to communicate via standard channels. Third, they need systematic, technology-driven approaches to working with these borrowers in a way that channels them to the right options and reports the outcomes to management.

Many organizations are very proficient at pinpointing borrowers delinquent for 60 days or more and offering solutions, but they are not nearly as adept at early intervention. Servicers often prolong the inevitable by allowing borrowers to roll to later stages of delinquency, missing the opportunity to make the most of a valued contact before the situation deteriorates beyond repair. According to the Mortgage Bankers Association, residential delinquency rates were hovering around 7% at the end of the third quarter of 2008. This figure is almost certain to rise in 2009. These days, smart institutions augment traditional risk-scoring models, such as Early Indicator, with more robust information, such as credit bureau data, FICO scores and geographic valuation indices, to create a richer profile of individual borrowers in their portfolios. This approach must be designed to cross various customer touch-points - telephone, Web and branch office - in order to be effective.

Many organizations are still searching for the proper strategies to deal with a borrower who is approaching but not yet in default. Some shops continue to rely on the historical adage on this, advising borrowers who call in with a hardship to "miss a payment before we can help you." Protocols should be established to evaluate the financial circumstances and life events impacting such borrowers, and solutions that will identify steps to mitigate a potential calamity (i.e., foreclosure) should be in place long before it happens. A prudent start would be a formal process to evaluate the borrower's circumstances, to refer him or her to collections or a debt-counseling partner for assistance and to monitor the account for routine follow-up.

To maximize well-planned strategies for early intervention, mortgage lenders and servicers need to rethink the ways they contact borrowers, some of whom may be actively avoiding contact out of fear or embarrassment. Today, a traditional collections program finds and makes contact with about 20% of delinquent borrowers in any given month. The rest of the borrowers typically roll over to the next phase of delinquency. In some institutions, one-third or more of the borrowers who reach the foreclosure stage have never had any contact with the lender.