Litton Warns of Potential Pitfalls in Mortgage Recovery.

New York -- Larry Litton, CEO of nonprime servicing specialist Litton Loan Services, knows a thing or two about scratch and dent loans.

Mr. Litton has been a strong advocate of loan modifications and forbearance to keep as many borrowers in their homes as possible in these troubled times, but he is also realistic enough not to put too rosy an outlook on the prospects for a quick recovery in the mortgage sector.

In fact, Mr. Litton said that even as loan defaults skyrocket in the nonprime sector, servicers face some continued threats down the road that could complicate efforts to modify loans.

Speaking at SourceMedias Mortgage Outlook 2008 Conference here, Mr. Litton said advances that servicers make to cover insurance and tax payments on behalf of their customers could threaten to push more borrowers into default. Many scratch-and-dent loans do not have escrow accounts to cover insurance payments.

He notes that Litton, which makes some $1 billion of advances a month, has seen a growing number of borrowers who are current on their home loans neglect to make property tax and homeowners insurance bills.

If the borrower cant make insurance and tax payments on their current loan, how are they going to make these obligations on a modification? Mr. Litton asked. Requiring borrowers to repay delinquent tax and insurance bills right away could explode the loan and create a bigger problem, he said.

In addition, the growing volume of advances on defaulted and current loans is a burden for servicers.