The purpose of this report is to present findings from our second round of
reconnaissance interviews for the evaluation of the National Foreclosure Mitigation Counseling (NFMC) program, administered by NeighborWorks® (NW) America, and, based on these findings, to suggest potential topics for in-depth study through follow-up case studies. The proposed topics for the case studies will be finalized based on information from a web-based survey of NFMC Grantees and Subgrantees, to be completed in summer 2010.
As we did in the summer of 2008 for our first round of reconnaissance interviews, we selected industry participants and observers of the mortgage lending and foreclosure counseling markets to gain an understanding of the context in which NFMC is operating. Through April 30, 2010, we completed interviews with 13 people, representing lenders, servicers, regulators, researchers, NW America staff, and NFMC Grantees. We asked key informants questions about the issues that are driving continued mortgage performance problems, challenges faced by counselors when seeking outcomes for their clients that are preferable to foreclosure, changes made by servicers and counselors to handle the demand for foreclosure counseling and changes in the foreclosure environment, and the impact of the Making Homes Affordable Program. The following highlights the key findings from our interviews, followed by suggested topics for further investigation through case studies.
A decline in income is the primary sources of mortgage performance problems for homeowners entering counseling
Two years ago, key informants said that mortgage performance issues were largely a function of subprime loans that were originated (perhaps in a predatory manner) to borrowers who could not afford payments, in part due to resetting interest rates. The environment has changed dramatically since then: key informants now say that mortgage delinquencies are driven by income losses resulting from higher unemployment or reductions in hours worked by people who still have jobs. This view is consistent with the Treasury Department’s analysis of Making Home Affordable loan modifications, which indicated that 59 percent of permanent loan modification recipients required a lower payment because of a job loss, a reduction in hours and/or wages.1
Key informants said delinquent borrowers commonly have fixed-rate prime mortgages, compared to two years ago when many homeowners in trouble had adjustable rate subprime
1
U.S. Department of the Treasury. 2010. Making Home Affordable Program Servicer Performance Report Through March 2010. Report.
http://www.makinghomeaffordable.gov/docs/Mar%20MHA%20Public%20041410%20TO%20CLEAR.PDF. Last accessed May 4, 2010.
mortgages. As a result, the current problems for borrowers relate more to overall debt (both with second mortgages and non-mortgage debt) than with first-lien mortgages, which already had relatively low interest rates.
Lack of income and negative equity for borrowers and insufficient servicer capacity are main challenges to foreclosure prevention counselors
Borrower circumstances
Two years ago, a typical delinquent borrower had a job with a steady income, but could not afford his/her monthly mortgage payment because the interest rate was too high. Moreover, many delinquent borrowers still had equity in their homes, and so wished to remain in their houses, albeit with a more affordable payment. Under these circumstances, a counselor would attempt to negotiate a loan modification with the homeowner’s loan servicer to make the loan payment affordable, given the homeowner’s income.
The typical scenario for a delinquent borrower is, according to key informants, very different today and it creates new challenges for counselors. First, as discussed above, many delinquent borrowers have either little or no income due to unemployment or under-
employment. Absent employment (or minimal income from unemployment insurance, or limited income from a second earner), a homeowner cannot afford any payment, even if a mortgage’s interest rate is reduced to 0 percent. Second, owners with negative equity are likely to be less willing to consider a loan modification, as renting may be less expensive than a modified mortgage. And, third, even with a reduced payment, homeowners with large amounts of non- housing related debt (or second mortgages) may not be able to afford their mortgages, given the amount of income dedicated for debt service. Increased credit card payment minimums are a specific complicating factor, along with medical costs for people who, when they had jobs, had insurance but no longer do.
Because of these three issues, key informants indicated that helping delinquent borrowers with little or no income is extremely challenging. Higher debt burdens increase the likelihood that a borrower will not be able to remain current on a modified mortgage, providing a disincentive to servicers to modify a loan. Consequently, particularly in areas where many owners have negative equity, counseling agencies are increasing their efforts to negotiate short sales or deed-in-lieu transactions that allow an owner to move out of his/her home without going through the foreclosure process.
A few states, notably Pennsylvania and North Carolina, have programs designed to give unemployed workers extended loan assistance while they seek training and work. Informants familiar with these programs see them as effective, but successes are rare.
Servicer capacity
Nonetheless, many delinquent owners continue to seek loan modifications and prefer to remain in their homes, if at all possible. Unfortunately, many of the same process-related difficulties faced by homeowners that were identified two years ago remain, despite key
informants’ acknowledgement of servicers increasing their capacity to process loan modification requests since 2008.
Key informants indicated that, because of the consolidation of the lending industry in the wake of the financial crisis (for example, Bank of America acquiring Countrywide), companies had the difficult task of integrating disparate loss mitigation and servicing systems and
procedures. In many cases, legacy systems had to be upgraded and coordinated with newer technologies. Moreover, some of the consolidation within the industry resulted in combining companies that traditionally originated or serviced prime mortgages with lenders that focused on subprime lending; the different types of lending required distinct loss litigation and servicing strategies and procedures.
In general, key informants said that lenders and servicers that consolidated in 2007- 2008 have successfully integrated their systems, and have also hired additional staff to respond to the additional volume of work. In some cases, servicers have established “escalators,” that is, persons who counselors can contact about a loan modification requests that have been in process for more than 45 days. Despite this progress, key informants still reported difficulties in reaching loss mitigation staff, being able to deal with the same person over time, getting
consistent answers to questions, and finding servicer staff with sufficient authority to make decisions and provide some flexibility where appropriate.
The problem appears to be that the demand for loan modifications has increased even beyond the expanded industry capacity to process these requests. Staffing is still inadequate, and many new loss mitigation staff, who have been transferred or hired from other positions, were not adequately trained to carry out their responsibilities. Moreover, many servicers continue to rely on out-dated technology, such as fax machines, to accept loan modification requests, which often require documentation in excess of 100 pages. As a result, key informants said that homeowners seeking loan modifications (and their counselors) face a frustrating process of faxing materials to a servicer, who oftentimes misplace the application, and so require that the owner re-send documentation. In the meantime, the owner’s income may have changed, which requires sending additional information that can re-set the clock for a servicer to consider a loan modification. The fact that both servicers and counselors use a diverse set of application and related loan modification documents, rather than standardized ones, further complicates the process at both ends.
Because of the cumbersome practices used by servicers to process loan modification requests, key informants said that it typically takes between 3-8 months for a servicer to review and approve a loan modification request. The time required to process a loan modification
request may be reduced by a portal developed by HopeNow, which is starting to be used by more loan servicers and counselors, that allows clients to upload loan modification applications and their supporting documents via the web. But key informants said that it is too early to know if the portal will have its intended effect of making it easier for owners and servicers to manage a loan modification request. Thus far the pilot efforts are promising, but not all key players have signed on to participate in a full roll-out.
When asked why the industry still has not made it easier for owners to apply for loan modifications, most key informants suggested that servicers do not have the financial incentives to invest in systems that would allow them to process all of the potential requests for loan modification. Some respondents pointed out that servicers, before the crisis, were designed to process payments; and their 25-basis-points fee provided revenues to support relatively straightforward payment processing, with comparatively few loan modification requests. The fees do not support investments in capacity that would be required to handle the current volume of loan modification requests. Moreover, even if it did support such investment, the servicers realize that the crisis is temporary; and any build-up would result in over-capacity as the economic crisis starts to ebb and the demand for loan modifications subsides.
Some key informants, however, suggested that the problem is not related to insufficient funding and asserted that servicers have the funding to ramp-up their loss mitigation activities. The problem, according to these key informants, is that servicers do not have the requisite knowledgebase to implement cost-effective systems that would allow for processing and implementing an increased number of loan modification requests. Servicers may overestimate costs required to develop and implement the required systems and be unaware of tools that are not excessively expensive and could be implemented with some training, perhaps provided by a more experienced third-party.
Nonetheless, servicers do seem to be pursuing some revised practices that appear useful. Expanding outreach, using local field offices to work with borrowers in person, and providing downloadable and uploadable forms in their own document-flow systems, and establishing borrower advocacy and escalator staff are among the improvements noted by the key informants.
NFMC grantees have adopted strategies to handle increased demand for their services and to overcome industry challenges
Whatever the reasons for the servicing industry’s inability to scale-up its capacity to process loan modification requests, counseling agencies still have to face this problem when serving their clients. As a result, counseling agencies use a number of strategies to increase their effectiveness, given problems with servicers. Key informants said that counseling agencies maintain direct contact information (phone numbers, fax numbers and emails) for
servicers, which allows counselors to bypass 1-800 telephone numbers and get a decision- maker on the phone relatively quickly. Agencies share this type of information on the
NeighborWorks’ listserv, which also provides other best practices that can be replicated across agencies.
Even after an initial contact, homeowners oftentimes have to send updated information to a servicer, and perform frequent follow-ups with a servicer to ensure that a loan modification request not stall in process. Therefore, counseling agency staff members, according to key informants, instruct their clients to maintain contact with their mortgage servicer after submitting an application. In addition, given the volume of documents that are required to support a loan modification request, counseling agencies have purchased additional fax machines and
scanners, the latter with the help of grants from the Rockefeller Foundation in response to new non-fax digital systems development.
To handle increased demand for foreclosure services, key informants reported that counseling agencies have implemented some changes to their production throughput
processes. In particular, some agencies are providing basic information to clients through group workshops and, using criteria established by an agency, triaging cases so that clients in
imminent danger of foreclosure are seen relatively quickly by counselors. In addition, some counseling agencies, through experience, have come to realize that a different set of skills are required for effective counseling, which requires discussing options with distressed clients, and for negotiating with the client’s mortgage servicers. As a result, some organizations are dividing responsibility for meeting with a client and developing an action plan to a staff member, who, after developing a plan, passes the client’s file to a negotiator, who is responsible for contacting the servicer and advocating a loan modification request on behalf of the client.
Key informants stressed, however, that the strategies discussed above supplement the major factor agencies use to achieve good outcomes: well-trained counselors who oftentimes work under extremely stressful conditions created, in part, due to the ongoing lack of servicer capacity to process loan modification requests. Key informants acknowledged NFMC’s
importance in providing funds to support and train counselors, and NeighborWorks’ initiatives to provide training and best practices to organizations providing such services. Some urged expanded use of fee for service models paid for lenders/servicers in order to ease the funding crunch and enable counseling agencies to expand or maintain the staff NFMC’s earlier funding levels provided for.
Home Affordable Modification Program’s Effect on Providing Foreclosure Prevention Services
All of the key informants said that the Home Affordable Modification Program (HAMP) has had an enormous impact on the industry. One of the most positive effects of the program is that the loan modification target of reducing a payment to 31 percent of an owner’s gross
income established a standard goal that is now used by all participating servicers and counselors. Moreover, key informants said that servicers are using the HAMP standards to evaluate non-HAMP eligible loan modification requests, increasing the extent to which the industry is using a common method to evaluate loan modifications. HAMP’s “waterfall” specification – that is, requiring the servicer to work through a series of required loan
modification steps to reach the overall affordability goal – provides a very helpful structure for counselors and borrowers in developing modification proposals and for servicers in considering responses and proposals.
Nonetheless, key informants pointed out several problems with HAMP. The biggest problem with the program is that, by focusing on reducing payments so that they are no more than 31 percent of an owner’s income, it addresses the problem of people having loans with interest rates that are too high. But, as discussed earlier, this is not now the major factor
creating delinquencies. HAMP does not generally provide relief for owners who have little or no income because of unemployment or under-employment. The revised HAMP guidelines
provide for forbearance if an owner is unemployed, as well as the inclusion of unemployment benefits in front-end computations; and that may be an important assist. But some key informants suggested that the forbearance period (up to six months) is too short, given the typical unemployment spell in the current recession.
HAMP loan modification requests are evaluated by a servicer by calculating the net present value (NPV) of a modified loan and comparing that NPV to the current loan’s NPV including the likelihood of foreclosure. If the modified loan’s NPV is greater than the existing loan’s NPV, then the modification is considered NPV positive, and the servicer must approve the modification request.2 Key informants said that, despite the fact that some of the
parameters in NPV calculations are public knowledge, the values used by each servicer are not known where they differ from those initially posited by the U.S. Treasury Department.
Therefore, if a client’s HAMP application is rejected because the modification is not NPV
positive, it is difficult to get information from the servicer that was used in the NPV calculation so that the results can be verified. Many key informants characterized the NPV model as a “black box” which makes it difficult for an applicant to understand why his/her application was denied
2
Home Affordable Modification Program, Base Net Present Value Modification Specifications.
or to focus adjustment of their circumstances to obtain approval. Although HAMP applicants are able to appeal a servicer’s decision, the lack of transparency in the NPV model makes it difficult to make such an appeal. Some observers faulted Freddie Mac’s oversight for being too quick to approve whatever servicers claim as reasons for rejection of HAMP modifications. Moreover, key informants said that the process used to enforce servicers’ compliance with the requirement of responding to such appeals is not in place, and so not as effective as it should be.
Despite the above problems, some of the key counseling agency informants said that they were relatively successful in getting clients trial HAMP modifications. But, these same informants said that it was difficult for trial HAMP modifications to be made permanent. They noted that some trial HAMP modification recipients are unable to remain current on their payment for three months, which is a requirement to receive a permanent HAMP modification. Nonetheless, even owners who make the required three payments under a trial HAMP
modification find it difficult to receive approval for a permanent HAMP modification. A major reason, according to key informants, is that servicers require more extensive documentation to approve a permanent HAMP modification compared to a trial HAMP modification. Because servicers do not have the required capacity to process such requests, documents are lost, and decisions take between 4 and 6 months.
The lack of principal reduction provisions in HAMP has been a problem for borrowers with underwater mortgages and deep employment problems. The new provisions, yet to be specified, may prove helpful. One further note is that some servicers have yet to join HAMP in using any of its existing provisions.
Potential Issues for Case Studies
Based on our key findings, we recommend that the following issues be addressed through additional case studies conducted with selected NFMC Grantees/Subgrantees. For each issue, we include specific questions that would be asked of NFMC Grantee/Subgrantee staff members and counselors.
1. What are counselors doing to aid clients who have major loss in income due to unemployment or underemployment? How are servicers responding?
a. What are basic strategies used by counselors for clients that have little income? b. What are basic strategies used by counselors for clients with large unpaid
medical bills and credit card balances?