Loss Mitigation, Subprime Loans and Loan Servicing

Mortgage lenders originated subprime loans on an increasingly frequent basis between 2001 and 2005. In order to generate business and compete in an over exuberant market, lenders became more flexible with product offerings and asset. These loans not only represented a financial opportunity, but also much higher risk for default. According to industry statistics, subprime lenders originated about one in five residential mortgage loans, yet foreclosure rates on subprime loans are ten times the average for all others. Consequently loss mitigation has become the new loan solution with government regulatory agencies now mandating that mortgage servicers offer loss mitigation programs to help borrowers avoid foreclosure.

Loss Mitigation Programs

The primary objective of loss mitigation is to reduce or minimize potential losses incurred by the servicer, investor and borrower. Make no mistake about it; the investor will take the path of least financial loss. In other words, if there is equity in the property and the investor can recover some of their loss, they will foreclose and resell the property before agreeing to a modification of terms. It should also be noted that the rise in NOD and foreclosures is a nationwide problem and reaches beyond subprime loans. Loss mitigation options are needed for the entire spectrum of asset grades -- from A, to Alt-A and subprime. Communication is Key

Borrowers are sometimes difficult for lenders and/servicers to contact after they have gone late on mortgage payments. This is because many of them are scared, embarrassed or simply don't what to do when faced with the possibility of losing their home. Services now have sophisticated modeling tools that can help them predict the likelihood of a borrower defaulting on their existing loan. The data model is a collection of credit bureau information that is used to evaluate rising consumer debt on credit cards, auto loans and other obligations and the correlation between that and recent late payments to any of those creditors. The results of the analysis will vary, but lenders must take a much more proactive course of action to prevent future foreclosures by assisting borrowers earlier in the process. The key is to stay in touch with the borrower. If a borrower expresses an interest in keeping the property and an ability to make payments, demonstrate a hardship that caused problem, verify there is no equity in the property (property is worth less then what is currently owed on the note) and that a reduction in rate and/or principle will solve the crisis, there is a strong chance that a loan modification will be successful.

Servicers proactively following up with subprime borrowers earlier can mitigate financial loss for both investors and homeowners matching borrowers with the loan modification options that offer the best chance for successful results.

Loss Mitigation Options

This is a new paradigm in the mortgage industry. Servicers must learn to shed old habits associated with collecting a debt and shape new views and strategies that will allow borrowers to remain in their homes with payment plans that fit a well documented budget. There are a number of loss mitigation options available to help keep subprime borrowers in their homes, generate cash flow and eventually bring their loans current. These include modifications, repayment plans, repayment plans that convert to modifications and special forbearance plans.

A candidate for a loan modification is generally someone who has experienced a hardship which is now over, and he or she has the ability to pay a monthly mortgage payment, but not necessarily the payment originally assigned to the note. The loan modifications often times include forgiving a portion or all of the delinquency, or restructuring it so that it is paid over time.