Friday, November 29, 2013

The New Mortgage Collections Environment

Collection efforts for mortgage collections that worked well in times of easy credit may not be appropriate today. The factors changing the collection environment include tight credit, high collection volume, complexity in the mortgage industry and underwater mortgages. Many consumers have to choose which debts they resolve. It takes skill to keep mortgage debt in the priority category. In some cases, such as underwater mortgages, consumers are tempted to walk away from the debt.

New Regulations
The Servicer Alignment Initiative (SAI) effective October 1, 2011 and the Home
Affordable Modification Program (HAMP) implemented in 2009, help homeowners modify mortgages to stay in their homes. Added to this is the highly publicized robo-signing of foreclosures by major banks and it’s a new world for mortgage collections.

The FNMA (Federal National Mortgage Association), FHLMC (Federal Home Loan Mortgage Corporation) and SAI are targeted to align servicing requirements in four areas: (1) borrower contact (2) delinquency management practices (3) loan modifications (4) foreclosure timelines. 
As detailed at:, the FHLMC almost mirrors these guidelines. The differences are based on the interpretation of their respective servicing initiatives. Borrower contact is specified and may be a pre-cursor of things to come with the updating of FDCPA on the part of the new Consumer Financial Protection Bureau (CFPB).

Strategic Default      

Despite the negative publicity of robo-signing, foreclosures and problems with HAMP, the facts reveal that half of underwater homeowners walk away from homes without notifying the loan servicer. This has created a new area referred to as strategic default.

“It is largely based on the individual’s (conducting strategic default) financial savvy,” said Kevin Lateko, a mortgage servicer in a collection division in Texas. “The debtor either purposely defaults on debt to improve his debt-paying ability instead of paying on his mortgage or is in a negative equity scenario and the market value of the property is below loan value. Either way the borrower lacks the motivation to pay on a worthwhile debt.”

Lateko provided an example when he spoke with Collection Advisor: “Take an individual who defaults on his/her mortgage payment since it is his/her largest debt. Let us presume the mortgage payment is $3,000 and his/her total monthly household net income is $5,000 with $2,700 in expenses each month; thus making the disposable income negative $700 monthly. By circumstance they live in a State in which the standard foreclosure timeline is seven months from date of default (or nine months from last paid installment). Imagine what you could do with the “extra” disposable income you have: pay off your other outstanding debts or even save up for a deposit on a new property that is in a negative equity scenario. Now the debtor can pay for an investment that has a higher equity potential. Fairly similar, but I believe the defining characteristic between the two is either for default or hardship. Some had to “strategically” default due to job loss to ensure the welfare of their family.”

Foreclosure Timeline:
4 – 19 Months

In 2009 the Home Affordable Modification Program (HAMP) was revolutionary. According to Laketo: “It came during a period where the focus on assisting the homeowner was very rare with banks and servicers. Although the qualifications for borrowers and the implementation of the program are continually changing, it’s largely unsuccessful. The mentality of banks or servicers is not readily able to adapt to changes in the program and loss mitigation must be conducted.”

Each State has a specific foreclosure timeframe that certain investors and guarantors require servicers to adhere to, due to the potential loss acquired while in the foreclosure process. FNMA’s “maximum number of allowable days” between referral to attorney (or trustee) and foreclosure sale date ranges from 120 days in Missouri to a maximum of 570 days in New York City. FNMA’s suggested foreclosure time lines can be found at the following link:

“These maximum allowable days to foreclose can slow or hinder any given property from being foreclosed on,” Laketo suggested. FNMA incentivizes or penalizes mortgage servicers based on their performance since FNMA takes the loss.”

No Rush To Foreclose

Unfortunately, somewhere along the line, the general perception came about that mortgage companies are in a rush to foreclose on defaulted homeowners.

“Nothing could be further from the truth,” according to a mortgage collection attorney. “More vacant properties exist because of homeowner abandonment than as a result of foreclosure actions against homeowners in occupancy. Foreclosure is the last resort when loan modifications, short sales, and other efforts to help borrowers are not viable.”

The Mortgage Bankers Association of America (MBA) reported that in 2010 more than 1.5 million homeowners received loan modifications. During that same period, RealtyTrac reported that one million homes were foreclosed. The estimate by MBA as of December 1 is that 11-12% of all mortgages in the U.S. are past due.

“There is a reason why 50 percent more homeowners received loan modifications than experienced foreclosure,” the mortgage collection attorney explained. “It is in everyone’s interest to keep borrowers in their homes. Occupied properties are safer and maintain their value better than vacant ones. Unfortunately, all too often, homeowners in default simply abandon their homes, without ever making contact with their loan servicers to attempt a modification, short sale, or other resolution.”

“The highest level of property preservation services cannot protect a vacant property to the same degree that an occupied property is overseen,” according to Robert Klein, CEO of Safeguard Properties. “As long as a property is in default and prior to foreclosure, the rights of the servicer to maintain that property are limited. The rights remain in favor of the homeowner, even one who is no longer there. That is why collecting on past due mortgage payments is so important.”

“Until that property can move through the foreclosure process, servicers winterize properties to prevent pipes from freezing; they cut the grass and discard yard debris,” Klein said. “They remove hazardous materials and food items, as well as address pest infestations, roof leaks, basement flooding, and other issues that can be harmful to the structure and surrounding properties. Each property costs servicers thousands of dollars for continued inspections and maintenance until the property moves through the foreclosure process. During that time, he property will lack proper heating or ventilation to protect the structure from extreme weather. Even though the home will be secured and inspected regularly, without an occupant it will be more susceptible to squatters, vandals, and teens looking for a place to party.”

The foreclosure process can take over a year to conclude, and regulators haven’t created a mechanism to distinguish between occupied and vacant properties. Unless this happens, requirements will simply be tightened across the board, increasing the likelihood that the most vulnerable properties will remain at risk for longer periods. To date, Colorado is the only state that differentiates between vacant and occupied properties.

 A point often overlooked in the robo-signing controversy has been the fact that the delinquency status of the loans was never in question. Rather, the issues concern whether servicers had the proper documentation and standing to foreclose. This is a significant point, because tighter standards aren’t likely to result in fewer foreclosures. Instead, they could create another unintended consequence: a delayed housing recovery.

Collection Strategy

Heavy–handed collection techniques that alienate the consumer are a bad idea when you are competing with other creditors for the consumer’s limited resources. So, what do you need to do differently? Here are three general principles:

 - Be creative in the collection process to identify and contact the right customers at the right time.

- Maintain a constructive relationship with the debtor during the collection process.

- Empower your collectors to work effectively based on the most recent customer data available in your databases.

Some campaigns will require your most experienced collectors, while others may be candidates for proactive SMS notification and IVR interaction. Be sure to match agent skill sets, create scripts, and design the overall call routing and strategy for the best results.

For example, a company specializing in mortgage collections reaches out to customers when they are as little as three days late with a payment. This gives them time to assess the customer’s financial situation and intentions and explore options.

Another strategy is to segment customers by the collection effort involved and design specific campaigns and strategies for each group. For example, divide collection accounts by size and use different strategies for each. For accounts with smaller balances, use predictive dialing, so the collector sees the customer record only when the call connects. The collector is then able to work through considerable volume, with up to 50 minutes of talk time per hour.

For accounts with higher balances, leverage more skilled collectors and progressive dialing, which gives collectors the chance to review the customer information and prepare before speaking with the customer.

Collections Is A Difficult Job

Collector turnover is common, which increases collection costs because more time and effort is required to train new collectors. To reduce turnover, utilize scripts, supervisor monitoring and regularly update training to support your collectors and help them develop their skills.

For job variety, blend inbound and outbound calls which lets you shift collectors to inbound when volumes are high and to outbound when volumes are lighter. Outbound collection calling is more stressful. Therefore, mixing in inbound calls gives collectors a chance to work with customers who are willingly calling in to resolve their debt. In mortgage collections, blending helps make agents more interested in their work. The result is higher collector retention.

In today’s mortgage collection environment, you may be one of several creditors competing for a debtor’s limited financial resources. It is more important than ever to have higher skilled collectors manage riskier debts. Because customers are taking longer to settle their debts, a debtor who has to interact with several different collectors loses any trust or understanding he may have established with a skilled collector. A debtor who works with the same collector throughout the collection process benefits from a closer, “consultative” collection process designed to deliver higher success rates in this economy.

Debtor Choices

You want to be able to interact with the debtor when and how they want to pay such as by e-mail or Web chat options. In addition, self–service options for debtors to make payments are effective when debtors are embarrassed to speak with an agent. Offering payment options through the Web or an IVR lets these customers clear debt without talking to anyone. Data research company, Gartner Inc., estimates that the cost of the average Web self–service session is $1.10 per query, compared to $6–$10 for a call.

When it comes to mortgage collect-ions today, when everyone’s collection volumes are up and you are competing with other creditors for your debtor’s goodwill and limited resources, it all comes down to call routing, outbound dialing technologies and happy, skilled collection professionals.


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