Rising REO Burden Puts Focus on Loss Mitigation.(Survey)

NEW YORK -- As lenders and investors face the prospect of having a flood of REO on their hands, the market is starting to see a focus more on loss mitigation and creative ways to prevent foreclosure.

A study by the Center for Responsible Lending predicts that 2.2 million American households will lose their homes, which equals as much as $164 billion in foreclosures in the subprime mortgage market alone. The study projects that almost 20% of subprime loans issued during 2005-06 will fail.

Sanjay Raghavan, director, mortgage and financial services, at Santa Clara, Calif.-based Tavant Technologies, says the subprime market has been a constant source of worry for the Fed. "Eighty percent of subprime borrowers received risky loans or ARM products, many that they don't understand. Their ARMs are resetting and borrowers won't be able to make the commitment."

This is now the decade of loss mitigation, says Mr. Raghavan. "People are doing whatever they can to get creative and prevent foreclosure. The market is starting to see news about how loans that are being originated are not even staying current in the first three to six months. That is costing the market considerable amounts. Having these loans not perform at the very beginning causes serious concern from a capital market concern as well."

Brokers are selling products to people beyond capacity, he said, and often there is not proper document verification. "We're seeing a spiraling effect into servicing in loss mitigation and foreclosure. There's a lot of pressure to turn around an REO property and get it into the market."

Servicers have looked at the problem of managing defaults. There is an opportunity to produce higher cure rates for those who understand the loss mitigation world. From a technology perspective, a comprehensive suite of workout plans for loss mitigation helps enable servicers to improve loan performance. The most important thing is the workflow orchestration, which tracks all of the tasks that need to be performed.

Servicers should understand the borrower's financials early on in order to make the right determination during the loss mitigation period. "There are a lot of people who are not as good as they should be in today's market situation. In collections, it depends on how good you are at early mitigation, profiling and scoring your loans."