Investors Grow Flexible on Mods.

Washington -- Servicers are quickly adopting new strategies and tactics as they try to balance borrower and investor interests, according to several servicing executives who are trying almost anything to stem rising defaults and foreclosures.

In the past, servicers would put a borrower into an 18-month repayment. But those plans don't work anymore and generally the borrower starts falling behind by the seventh month, according to Deborah Oakley, senior vice president of home preservation at National City Mortgage.

"Investors realize that," she said told a Consumer Bankers Association conference. So now the borrowers are being pushed into a loan modification if it looks like a prepayment plan isn't going to work after three or four months.

And investors are more willing to accept interest rate reductions and delegate that authority.

"If it's at 8%, bring it down to 6%. If that doesn't work, bring it down until it works," the NCM executive said. Ms. Oakley is based in Cypress, Texas.

Servicers also are extending terms and reducing the principal, she said. Some are using balloon modifications where the balance is written down to fair market value. This negative equity is placed in an interest-free balloon that comes due when the note is paid off.

In addition, servicers are using a combination of loss mitigation tools and filing advance claims with the mortgage insurer. "Things are being put in combination to make it work," Ms. Oakley said.