A survival guide: here are 37 tips and tactics used by leading servicing industry players to battle delinquencies and foreclosures in today's tough environment.

It's not completely dark and overcast out there on the delinquency front these days, but it never hurts to carry an umbrella--especially if you're servicing loans in one of the seven states where foreclosures rates remain above average. To help keep your portfolio from getting soaked, Mortgage Banking interviewed servicing experts from around the country and came up with some practical tips for riding out the current stormy conditions. [??] While not every suggestion will be right for every servicer, we hope you'll find something new and effective among this laundry list of tactics. Let's start with some suggestions for overall strategies for dealing with rising delinquencies and foreclosures.

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Strategies

What goes around comes around and boosts your performance

Sometimes, helping customers can help your bottom line. Prospect Heights, Illinois-based HSBC Finance Corporation's mortgage business (www.us.hsbc.com) has been monitoring as a separate portfolio the 9,000 customers to which it's given $100 million in foreclosure-relief assistance since the fall of 2003. Amazingly, it outperforms every other HSBC portfolio, even though there is no FICO[R] score minimum that customers must meet to be offered loss mitigation, and the company has the largest owned and serviced subprime portfolio in the business.

"They [the borrowers going through loss mitigation] already were delinquent, and you'd think they'd have a tendency for delinquency," says Thomas M. Detelich, HSBC Finance Corporation's president, consumer and mortage lending. "They're incredibly grateful that someone cared enough to make a modification, and we generally solve the problem. In our experience, if you fix the problem, customers want to pay."

Play a zone defense

Each market behaves differently, so Houston-based Litton Loan Servicing LP has been gathering market-level information by holding monthly broker roundtable discussions where the firm's top real estate partners share their observations on the local market in Florida, California and Massachusetts.

"We're trying to get a sense of what's going on [locally] so we can shape servicing strategy," says Chief Executive Officer Larry B. Litton Jr. Litton Servicing uses traditional phone-based loss-mitigation strategies in California's softening real estate market, but puts a field presence on the ground in Michigan, where many homeowners face fundamental economic challenges.

Get a head start

When is it too early to start talking with adjustable-rate mortgage (ARM) borrowers about payment resets? HSBC's Detelich has his crew running analytics six months out on the company's correspondent book of business. Using data such as automated valuation models (AVMs) and last reported income level, HSBC segments that portfolio into risk tiers. The highest-risk customers get calls three months before the reset date.

"This is not a five-minute process," says Detelich. "One of the calls I listened in on took 25 minutes. When we start out the call, we let them know the purpose--that they have an ARM and we want to talk to them about the adjustment." Mid-risk borrowers get a direct-mail piece inviting them to call HSBC if they want to talk about the upcoming reset.

Think HSBC is being too proactive? Allan Martin, chief executive officer of Tampa, Florida-based Mortgage Contracting Services (MCS), has a client calling customers a year in advance of their ARM resets to work on refinance and other strategies to minimize loss.

Start mitigating earlier

When loans go into collections, some servicers are not waiting 30, 45 or 60 days to turn the borrower over to the loss-mitigation process, says Paul J. Wright, senior vice president of sales and marketing for Newport Beach, California-based DRI Management Systems Inc.

"The key is getting the loss-mitigation process started much earlier than ever before," Wright says. "Servicers are smart enough to know when a borrower habitually pays late in the current month. But if that same borrower's ARM has adjusted and he's not making payments at all, in today's market, loss-mitigation will be more effective than a collector pounding the borrower over the head."

Don't walk--run to mitigate losses

Kevin Schlumpf, managing director of the EarlyResolution[R] Group in Dallas for El Segundo, California-based Computer Sciences Corporation (CSC), says clients are seeing solid results using CSC's EarlyResolution as early as the fifth day of default for subprime loans and on the 15th day on the prime side.

"We've also seen clients using our product to do predictive analysis on a subset of current loans that have a payment shock coming in the next three to six months," he says. "Some are looking at this as simply as if a payment reset occurs within a window of X and the payment increases more than Y, they go into the queue and get a call. Others are looking at FICO score changes, number of broken payment promises in the past, etc."

Borrower contact practices

High touch for high-loss markets

In markets with high foreclosure rates, Litton Servicing has put 20 to 30 folks on the street doing community-based loss mitigation. "They're not doing standard field collection," Litton says, "they're just delivering loss-mitigation packages and saying, 'You don't have to walk away from your house. We don't want your house, and if you can't afford the payment, we're happy to sit down with you and work it out.'"

Freddie Mac is doing outreach in cooperation with servicers and local governments, says William Merrill, director of nonperforming loans at Freddie. "We partner with our servicers to go out into areas such as the Midwest, where they need more assistance, and educate borrowers about their foreclosure-alternative options and what to expect when they call their servicer. We'll get workouts right out of those meetings, and hopefully raise the borrower contact rate," he says.

Knock, knock, who's there?

A lender recently gave Mortgage Contracting Services 500 assets and asked the firm to send someone to make three visits to each property between 6:00 p.m. and 8:00 p.m. to knock on the door and give the delinquent homeowner a package of loss-mitigation information. About 50 percent of the borrowers answered the door, and one-quarter of those filled out a financial statement. That 12.5 percent overall response rate has the client ready to expand the program to about 25,000 homes a month, says MCS' Martin.

The personal touch

When someone is facing foreclosure, it's often not the only distressing event occurring in his or her life, points out Ted Korzenski, senior vice president for servicing operations at Huntington, Connecticut-based Quantum Servicing Corporation, a Shelton, Connecticut-based Clayton Holdings Inc. company. "If you hand them a big packet and ask them to fill out paperwork, it's like asking them to file their paperwork," Korzenski says. And like the average taxpayer, the borrower will put off filling out the forms as long as possible.

Quantum has overcome some of that paperwork reluctance by having service providers including Salt Lake City-based Titanium Solutions and Yorba Linda, California-based REALServe Inc. conduct face-to-face interviews to collect workout information.

Packaging counts

Quantum recently did an experiment to evaluate different methods of contacting delinquent borrowers. The company compared the response rate by delinquent borrowers with loss-mitigation information sent one of three ways: via overnight express package, first-class metered mail with a typed address, and first-class mail with an address hand-written by clerks who added postage stamps. The response rate for the hand-written package was a phenomenal 40 percent, compared with 12 percent for the metered mail and only 5 percent for the overnight package.

While the sample size was small (Quantum sent 100 packages using each method), the results were interesting, says Korzenski, who planned to repeat the experiment on another 350 loans this summer.

Foreclosure management tips

It ain't over 'til the redemption lady sings

Have a loan that hasn't been worked out because of pooling and servicing agreement restrictions, foreclosure laws or the borrower's refusal to talk? Continue to try to do a workout even during the foreclosure redemption period. Litton Servicing has done 15 post-foreclosure workouts. Sometimes, the first time you actually talk to a borrower is the day he or she calls to ask how long until the eviction. Instead of simply telling the borrower the date or making a lawyer referral, ask if he or she still wants to work things out.

You get what you pay for

Pay a lawyer to foreclose fast, and the lawyer is going to foreclose fast. Pay a lawyer more to do a workout, and you're going to get more workouts. For years, when Litton Servicing hired a law firm to handle a foreclosure, it measured the firm's ability to stick to the Fannie Mae timeline. "We applied a lot of pressure to attorneys regarding foreclosure timelines," Litton admits. "That's a flawed business model. To be the fastest foreclosure guy in this climate is to say, 'I want to lose 50 cents on the dollar as fast as possible.'"

Litton Servicing now asks its attorneys to extend their efforts first toward contacting the borrowers to work out the loan. "We pay more for loss mitigation than foreclosure. And when I refer a loan in a judicial state, we use a two-week cooling-off period," Litton says. "If lawyers can make money doing loss mitigation, they'll do it." Des Moines, Iowa-based Wells Fargo Home Mortgage Inc. has also found that having an attorney send a loss-mitigation letter on its law firm letterhead generates a response from some of the borrowers who don't respond to letters sent on Wells Fargo letterhead.

Loss-mitigation strategies

Treat the disease, not the symptom

For customers who experience a long-term diminished ability to repay (perhaps due to illness or financial circumstances), Wells Fargo tries to help the borrower maintain homeownership. "There has to be a legitimate reason that has caused the default--once that is determined, our primary focus is on how can we help the customer," explains Patrick Carey, AMP, Wells Fargo's senior vice president of servicing operations.

"We look for [the] root cause behind the default to determine if there is a temporary or long-term issue. We tailor solutions that are responsible, based on the available loss-mitigations options. In some cases, as allowed by investors, loans can be converted from an ARM to a fixed rate to help with future affordability."

Capitalize to catch up

For borrowers who can't come up with a lump sum to cover the past-due amount, but who can afford a new payment going forward, try applying the traditional Department of Housing and Urban Development (HUD) practice of capitalizing the loss to your conventional and nonprime products. For example, a borrower who's fallen behind three payments and may be facing a payment increase associated with an upward ARM adjustment may be offered an opportunity to capitalize the late payments in exchange for making payments going forward. "We're trying to bring back affordability, and establish a pattern of performance over a longer period of time," says Carey.

Ask the loan officer to fix the problem

Studies conducted for three large servicers by Horseshoe Bay, Texas-based Mortgage Banking Solutions (MBS) found that when a loan's originator is brought into the process, 63 percent of early payment defaults are resolved. "[Among those 63 percent of cases], over 85 percent of the time, the problem is more accurately identified and a solution is reached," explains David Lykken, MBS' president. "If an originator finds out that a loan that he did three months ago went bad, he's getting quick feedback. All of a sudden there's an intelligent process."

Unfortunately, too many investors are waiting far too long before involving the originator--and when they finally do, the delinquency is so far advanced that there is little or no chance for an affordable solution. "This is a broken system that needs to be fixed for the sake of the borrower, the originator and for our industry," Lykken says.

Fill out the paperwork before you mail it

Are you sending borrowers reams of unfilled paperwork to complete? Nothing like a big pile of papers to make someone procrastinate. Auto-filling the forms with information from your servicing system can double and even triple the response rate to loss-mitigation packages.

"We had a client that had to move people into loss mitigation to be able to handle all the workout packages they started getting back when they started auto-filling forms on the three-page loss-mitigation package," says Mark H. Friedman, president of Baltimore-based MSTD Inc., producer of the BacklnTheBlack[R] default-servicing platform.

Introduce your associates

You work with community groups. You work with foreclosure attorneys. Do they work with each other? Robert Frappier, a partner in Addison, Texas-based Barrett Burke Wilson Castle Daffin & Frappier LLP, is putting together a pilot program integrating his firm's collection and foreclosure efforts with credit-counseling programs run by NeighborWorks[R] America affiliates. "We're trying to refer borrowers to NeighborWorks for credit counseling," Frappier says, "and NeighborWorks has a contact point with us to get information quickly. I don't want to hear the excuse that a borrower or a counselor couldn't get through to the law firm." As a next step, Frappier would like to find a servicer that wants to test having all delinquent borrowers sent to NeighborWorks for counseling.

Learn to share

Prior to boarding loans, scratch-and-dent subprime servicing buyer Quantum deep-dive-scrubs every piece of information about how the loan was serviced as well as any information gathered at application, and pays its due-diligence firm to put those scraps of information into a workable, electronic format. "It helps us in our skip-tracing efforts," says Korzenski. "In those due-diligence files we find work and cell phone numbers and next-of-kin phone numbers that help us get in touch with folks."

Put auctions on the table

Dean Williams, chief executive officer and president of Tulsa, Oklahoma-based Williams & Williams, offers an auction program targeting delinquent borrowers who want to sell their home. Servicers in the program offer borrowers the option of signing up for a non-absolute auction of their home by Williams & Williams. About 80 percent of borrowers referred to the auctioneer sign up for the program, Williams says. "They're typically 90 days past due, but still over 60 days pre-foreclosure," he explains.

After analyzing 300 sales during the first two quarters of 2007, Williams found the company's average marketing and sales time was 35 days, plus 8 percent of sales were full payoffs and 92 percent were short sales. "On average, we're reducing loss severity by over 10 basis points against unpaid principal balance," Williams says. To increase the number of bidders, Williams & Williams allows buyers to use personal checks, requires only 5 percent down at auction and gives the winning bidder 30 days to close.

Read the fine print

In her rounds as a consultant, Janice Ulsch, senior servicing consultant at McLean, Virginia-based Mortgage Dynamics Inc., has seen a lot of underlying pooling and servicing agreements with loss-mitigation sections that are moot or so vague that it really is not clear what servicers can do, short of making their own decisions or going back to the investor for directions. "Servicers get stuck in the middle between borrowers and investors. We need a good operating standard for loss mitigation," she says.

Built-ins

Going forward, it might make sense to negotiate workout policies in advance with secondary market partners, says Wells Fargo's Carey. If loss-mitigation policies were spelled out in detail, they could be used as a sales tool at origination. The challenge will be to find a market and to price the product accordingly. "It would make sense in the environment that we're in and that we'll see again," Carey says.

Analytics

Rate your performance

How does solid loss mitigation contribute to the bottom line, and where's the best place to invest in process improvements? In an analysis of the loss-severity and loss-frequency averages of seven subprime servicers servicing 4 million loans, Thomas Showalter, vice president of San Francisco-based First American LoanPerformance, found a more than 300-basis-point difference in the loss rates for the "best" and "worst" servicers. Knowing where you fall on that scale will tell you where you could get the best return from investments in process improvement, he says.

When Showalter divided the servicers in his study into quartiles, he found those in the third quartile or better were best served by investing solely in loss-frequency improvements (loss-mitigation and collections investments), while those in the fourth quartile need to focus on loss frequency and severity-related processes (timelines and real estate-owned [REO]).

The breaking point

Joe Loots, vice president of Ewing, New Jersey-based Cenlar FSB, has been analyzing payment shock and trying to find a bright-line amount where defaults start to rise for borrowers who are overextended. "I'm trying to find the number that's going to be the breaking point for that customer. Is it when the mortgage payment goes up $100 or $200?," he asks.

"Based on the historical information I'm seeing by state, when mortgages go up about $260 a month, that's when the defaults start to occur. Under $260, customers seem to be able to handle the increased payment." What's magic about $260? "It's not an exact science, because the reason why the loan is defaulting is a key factor," Loots says. "But, in the situations where the customer is overextended or mortgage-poor, the $260 number seems to be the critical number."

Pencils still useful

The models used to analyze default and delinquency trends tend to trail a little because they rely on economic data that may lag a month or so, such as home-price appreciation. "Sharpen your pencils ahead of the model," suggests Freddie Mac's Merrill. "You can be more nimble with analytical data that is more up-to-date and precise to a certain geographic area."

Technology

Route routine calls

Interactive voice response (IVR) has long been a fixture in the servicing world, but it also works well for loss-mitigation calls. By offering loss-mitigation borrowers a self-service option for routine questions about balances, when taxes were paid or when their last payment posted, Litton Servicing has deflected 15 percent of the calls that were going to loss-mitigation agents. "That's enabled me to shift more staff to problem loans," says Litton. "You need to maximize human interaction for the customers who have real difficulties."

Use the right analytics

As more and more servicers look to analytics to understand borrower performance during ARM adjustments, they're finding that while prime and alternative-A borrowers share many similar characteristics, the variables play out differently when one lends to borrowers at the lower end of the credit spectrum. "For instance," says Cary Burch, president and chief executive officer of Poway, California-based Lender Support Systems Inc. (LSSI), "you have more subprime borrowers who will always pay late and pay the late fee." Perhaps only 20 percent of the traditional variables used to predict prime defaults will accurately predict subprime defaults, so your default-management program must be geared specifically to the credit quality of loans you service.

Know where everything and everyone are

Cenlar has put technology into place that helps it know when the check really is in the mail, and when the borrower is being less than truthful. The technology sprays a bar code across payment envelopes that can be tracked when it comes into a post office. "We get an updated file that an envelope has been put into the mail, which we use to build loss-mitigation queues based on payment expectation," says Loots.

On the same page

Traditionally, when a servicer needed something from a third-party service provider, such as a broker price opinion (BPO), it would send an e-mail or fax. "Now, servicers are realizing the value of automating these service requests and receiving the appropriate responses electronically," says DRI's Wright.

"You can order these services online and then transfer the data manually into your default system or record, but it's more efficient to receive the data directly from a Web application. Servicers concerned about firewall issues should look for 'pull-technology,' in which exchanged data is housed in a third-party location away from the servicer's database," Wright says.

Payment shock

One step at a time

Sometimes a borrower can climb out of trouble, if he or she qualifies for a temporary period of relief--before resuming the original payment. At Wells Fargo, borrowers facing a short-term income issue (perhaps they were temporarily out of work and have recently rejoined the work force) may be offered a "step-rate" loss-mitigation option.

"If our customer can demonstrate that there was a household reduction in income but they can afford the new amount, we'll reduce the interest rate for a period of time before gradually stepping up the rate over a six- to 12-month period. By offering this option, we lessen the impact of payment shock that can often force a borrower into a long-term default situation and possibly foreclosure--we want to avoid that condition as often as possible," Carey says.

Boost their budgeting skills

In recent years, the number of borrowers who are "rolling" (consistently paying late) has risen. For some of those borrowers, particularly first-time homebuyers and emerging-market customers, broad budget counseling and financial management tools can have a positive influence, says Wells Fargo's Carey.

"Educating our customers about the value of budgeting and planning can help our homeowners become successful with maintaining their mortgage relationship. Helping our customers goes beyond calling--education and consultation is the cornerstone of our servicing philosophy," he says.

Staffing issues

Internal training

The more delinquencies rise, the more secondary market investors scrutinize servicers. "Even private investors are looking at their loss-mitigation ratios and loan losses, and reperforming delinquencies," says Mortgage Dynamics' Ulsch. In response, servicers that haven't already beefed up internal loss-mitigation training need to do so. As a weakening real estate market encourages servicers to do more modifications, staffers need more training to better handle issues that can complicate workouts, such as who owns the loan and what the underlying purchase and sales agreement says can and cannot be done to mitigate losses.

Come out of your silo

Can your collectors, loss-mitigation specialists and foreclosure attorneys all see a file at the same time? If not, your shop may have silos that lead to lower efficiency, says BacklnTheBlack's Friedman. "We're finding a lot of BackInTheBlack clients were previously using silos," he says. "Now they have one platform where all employees can see what's going on, and can hand off files and be able to deal with each customer one-on-one while they have that customer on the phone."

You can always change your name

What's in a name? For some servicers, changing the name of the loss-mitigation group to something more customer-centric has helped shift the focus from foreclosure to workouts, says Friedman. "They're changing the name of their loss-mitigation group to 'customer relations' or 'customer-help' groups," he says. "The servicers really care, and a younger generation of people in the business see we have to keep these customers." Start telling staffers and customers that they're doing customer assistance, homeowner rescues or borrower relations, and watch it change the way they act and the way customers respond.

Neutralize your judgment

HSBC Finance Corporation's Detelich lists neutrality among the best features of his company's Foreclosure Avoidance Program (FAP). FAP is self-executing, so the program--rather than a human--makes judgments about who is eligible and deserving of loss mitigation. HSBC wants its staff to offer customers every option for which they're qualified, with no incentives to hold back or modify the program. If a customer qualifies for a $300-a-month payment reduction, there's no benefit to the adjuster if he or she can get the borrower to agree to a $200-a-month payment reduction.

"These are emotional decisions, and we want our people to say, 'I can give this to any customer that qualifies,'" he says. Basing the decision to offer loss mitigation upon core analytics has the added benefit of ensuring that your firm treats all borrowers objectively and consistently.

Don't play the blame game

If you want to reduce the friction and blame-passing games between loss mitigation and origination, share this interesting tidbit with both departments: HSBC recently did a survey of its adjustable-rate mortgage customers to see how much they knew about their loan. The loans were about three to four months away from reset, and were sold via brokers. About 76 percent of the borrowers were aware they had an ARM, but only 40 percent had begun to take any action--such as looking into refinancing--in response to the pending payment adjustment.

Managing REO

Think like a flipper 

Instead of putting properties on the market as-is, many servicers are doing whatever it takes to get their REOs ready to compete in today's tough real estate market. "They're more interested in paint, carpet and drywall than they were a year ago," reports Mortgage Contracting Services' Martin.

"One client said he did repairs on 12 percent of his REOs last year, and is doubling that to 25 percent this year in an effort to move the inventory. The volume of homes we're touching, and the dollars invested in each home, seem to be rising. No one wants to be in a position where buyers will dismiss the property because of the work that needs to be done, or the buyer pool is limited to investors who buy as-is properties at a discount," Martin says.

Playing matchmaker 

You may be able to move REO homes out of inventory by setting up a matchmaking system that brings homebuyers, real estate brokers who manage REOs, and secondary market investors together. Quantum has investors that offer de minimus qualifications to subprime borrowers who purchase an REO by assuming a modification of the original loan at a fair-market price and interest rate (which sometimes requires a write-down on the home's value).

While the investor offering this program hasn't given Quantum an absolute minimum credit score for assumptions, it has entertained offers from borrowers with credit scores in the high 500s to the low 600s. Quantum's Korzenski says, "These loans are not in securities. We can show from a net-present-value perspective why this is a win for the investor. It's also a win for the housing market and the buyer."

Move online for low-end REOs

When selling vacant REO properties valued at $30,000 and less, look for buyers nationally, says auctioneer Williams. "There is a segment of the real estate market below $30,000 that's a fairly robust market, but it's not local," Williams explains. "It's buyers who are out-of-state but attracted to such a nominal real estate asset. At the end of the day, you need to deliver the auction to that market online.

"From our first online auction of these properties, we outperformed what we traditionally earn for under $30,000 properties by 9 percent over traditional sales, on average, for over 420 properties sold on this new platform since March this year," Williams says.

One final note

As foreclosure volume rises, enterprising lawyers are likely to bring class-action lawsuits on behalf of borrowers claiming they were deceived about the terms of the loan securing the house you just foreclosed upon, predicts Paul "Buddy" Warner, an attorney with San Francisco-based Jeffer, Mangels, Butler & Marmaro LLP. "It's going to be an uphill battle [for the plaintiffs], but that's not going to stop people from bringing lawsuits," he predicts.

Dona DeZube is a freelance writer based in Clarksville, Maryland. She can be reached at [e-mail].