It wasn't long ago, 2005 or maybe 2006, when I
was sitting in a GSE Leadership Conference with senior management and one of
the COO's challenged his leadership group. He asked, "Are we really the best
at risk management, or are we really just good at risk avoidance?"
That COO's statement was eerily prophetic.
Especially when you consider the fact that prime 30 yr fixed loan product is
the fastest growing category of seriously delinquent mortgages. With residential
delinquency and foreclosure rates hovering around 14% , the U.S. housing market finds itself in yet another sticky situation.
On the MBA's recent First Quarter Delinquency Survey conference call, it was
disclosed that 4.3 million loans are now 90 days delinquent. Compared to Q1
2009, the seriously delinquent rate increased
238 basis points for prime loans (think GSE 30 year fixed), 173 basis points
for FHA loans and 87 basis points for VA loans.
With a high number of the jobless having been unemployed for longer than 27
, the harsh reality is many of these borrowers will soon become loss mitigation
and loan workout candidates, a responsibility that will likely fall on the
shoulders of Fannie Mae and Freddie Mac as loan servicers are not properly incented to mitigate the ultimate losses.
Loan servicers give on average three times more attention to delinquent
borrower in their portfolio than they do on loans where they have no credit
exposure, i.e. GSE or other Gov backed programs.
The traditional compensation model for servicers is based on a flat percentage
of a loans outstanding in the portfolio. On conventional loans, servicers are
generally paid between 0.25 and .375% of total unpaid loan principle in their
portfolio. Every incremental dollar spent counseling borrowers and mitigating
the losses of the end investor (not their own losses) is cutting into the servicers margin. While it's
true that there are economic incentives in the MHA program intended to
cover the added expense of fulfilling HAMP requirements, the chips don't stack up from a business model perspective, otherwise you would see
servicers treating HAMP participation as a profit center and doing more -
not less - loss mitigation. Instead loss mitigation activities are
performed only to the point of meeting their minimum contractual obligation to
the investor and at the least incremental expense.
There is much more incentive for a specialty servicer to make the right loss
"Specialty servicers", who are in the business of deciding on whether it's more
cost effective to bring a borrower current or liquidate the collateral at the
smallest possible loss, are generally compensated in a way tied to how
efficiently they control losses. There is economic motivation for specialty
servicers to make the right decision for both the borrower and the bank.
While it was a wonderful thing for hundreds of thousands of homeowners and
their surrounding communities, the sun is setting on MHA and HAMP. We're hearing that servicers and borrowers should not expect to see future
announcements from the Obama Administration on a potential "son of HAMP" or
"son of HAFA" program.
The bottom line is...
We either need to modify/amend servicing contracts to properly incentivize servicers
to perform an effective level of loss mitigation or we need replace them with
the abundant supply of specialty servicers who are clamoring for a shot at the